European shares had slipped into the red by lunchtime on Monday as markets continued to hammer Britain’s pound in response to the UK government’s mini-budget last week, while Italian shares rose after the hard right Georgia Meloni looked set for electoral victory.
The pan-European Stoxx 600 had edged into positive territory in early deals. The pound fell sharply against the dollar, heading towards parity, and wasn’t faring much better against the euro.
However, Italy’s FTSE Mib index made strong gains after the centre-right coalition led by Meloni won a clear majority in both houses of parliament in Italy’s general elections.
Oil, gas and mining stocks were all lower on the back of weaker crude and metal prices and a strengthening dollar.
“Sterling plunged to an all-time low against the US dollar in Asian trading before paring some losses as confidence in the UK’s fiscal policy went up in smoke,” said Markets.com analyst Neil Wilson.
“GBP-USD slipped almost 5% to $1.035 in a brutal 20-minute selloff in the early hours, extending its run lower from Friday after the chancellor announced sweeping tax cuts.”
“The judgment of the market to the new fiscal policies is obvious enough; the bond vigilantes have returned with a vengeance. Following the initial sell-off we’ve seen cable bounce back to above $1.07 but it’s clear there is no love for the pound.”
Sterling was being battered by concerns that the so-called mini-budget announced on Friday will pile further pressure on an already-heavily indebted economy. At the same time, UK gilt yields surged, with the 10-year moving past 4%.
Russ Mould, investment director at AJ Bell, said: “The sceptre of parity against the dollar, which felt far off just a week ago, now feels dangerously close.”
“The problem for the new Government is the growth it hopes to engineer through tax cuts is unlikely to come through that quickly while the reduction in the buying power of the pound will effectively import more inflation at a time of already acute inflationary pressures.”
In equity news, UK housebuilders all fell over fears of higher interest rates, with Travis Perkins, Vistry, Persimmon, and Taylor Wimpey in the red.
Virgin Money was also under pressure as Berenberg re-established coverage of the shares at ‘hold’ from ‘under review’, saying the bank will struggle to re-rate given potential revenue headwinds and a sector-lagging return on tangible equity.
Uniper shares were up 20% after the German government last week agreed to privatise the troubled energy provider.
Reporting by Frank Prenesti at Sharecast.com
