Europe midday: Shares lower as Russia hits Ukraine again; BoE acts on gilts

by | Oct 11, 2022

European shares were still lower on Tuesday as Russia fired more missiles at Ukrainian cities and the Bank of England stepped in again to head off another sell-off of UK government bonds in response to Finance Minister Kwasi Kwarteng’s poorly-received mini-budget.
The pan-European Stoxx 600 index was off more than 0.7% in with all major regional bourses in the red. Weak sessions in the US and Asia also dampened sentiment.

Air raid sirens were sounded again in cities across Ukraine after Monday’s random attacks which had so far killed 19 people. Moscow has increased its use of missiles in retaliation for a bomb attack on a key bridge linking Russia to the annexed territory of Crimea.

In the UK, the Bank of England has been forced to intervene again to shore up the bond market as investors dump government gilts after Kwarteng announced a raft of unfunded tax cuts almost two weeks ago. The Institute for Fiscal Studies think tank said his plan would require a £60bn reduction in public spending.

Citing a “material risk” to financial stability, the BoE said it would buy up to £5bn of index-linked debt per day, starting on Tuesday and expiring on Friday. It also widened its emergency bond-buying programme to include index-linked bonds, which are linked to inflation.

“Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” it said.

London stocks extended losses, with the FTSE 100 down 1.1%, while the pound was 0.1% firmer against the dollar at 1.1061.

The announcement followed another selloff in UK debt markets, particularly in the index-linked market, and came just a day after the BoE said it would double the size of its daily purchases to £10bn.

Russ Mould, investment director at AJ Bell, said the latest move from the BoE “will only serve to worry investors even more”.

“So far, its support measures haven’t kept a lid on gilt yields as they have continued to creep up in recent sessions, thereby increasing the cost of borrowing for the government. And today’s news only triggers a very small retreat in yields,” he said.

“The key sticking point is that the support measures are only scheduled to last until Friday. Will that be long enough, or will the Bank of England extend the support scheme? Extending it could go one of two ways – the market either applauds the move and breathes a sigh of relief or it gets even more worried, thinking that the extra time suggests the crisis is more severe than originally thought.”

Adding pressure to markets was news that the UK unemployment rate edged down to 3.5% in the three months to August from 3.6% in the previous quarter.

Data also showed that after inflation total pay fell by 2.4% and regular pay fell by 2.9%.

In equity news, Swiss fragrance and flavour maker Givaudan fell 6% as the company said it it was on track to implement price increases to offset higher input costs.

Aviva, Legal & General and Prudential all fell after the BoE warned over dysfunction in the government debt market.

PureTech Health slid after it said that it and US-based Nektar Therapeutics had terminated merger talks only four days after they announced a potential tie-up.

Irish convenience food group Greencore lost ground after it said full-year adjusted operating profit and earnings per share were set to be at the lower end of the expected range, partly due to the impact of rail strikes.

Ferrexpo tumbled as the iron ore pellet maker said it had suspended operations in Ukraine after Monday’s Russian missile strikes on the country damaged electrical power infrastructure.

Reporting by Frank Prenesti for Sharecast.com

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