European stocks were off their lows by midday on Wednesday after the Bank of England stepped in to stabilise gilt markets, although recession fears and a disappointing reading on German consumer confidence continued to weigh on the mood.
The benchmark Stoxx 600 index was down 0.6%, while Germany’s DAX and France’s CAC 40 were both 0.5% lower.
Oanda market analyst Craig Erlam said: “Fear of tightening-induced recessions has wiped out the recovery we saw in stock markets over the bulk of the summer as investors were once again burned by an over-eagerness to catch the bottom in the market despite there being little evidence of it being justified.”
Stocks came off their earlier lows after the BoE was forced to intervene in bond markets following the recent selloff.
The BOE said it will halt the start of its gilt selling next week and will carry out temporary purchases of long-dated governments bonds from Wednesday in order to restore orderly market conditions.
“The purchases will be carried out on whatever scale is necessary to effect this outcome,” it said in a statement.
“As the Governor said in his statement on Monday, the Bank is monitoring developments in financial markets very closely in light of the significant repricing of UK and global financial assets.
“This repricing has become more significant in the past day – and it is particularly affecting long-dated UK government debt. Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”
The Bank added that it “stands ready to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses”.
The announcement from the BoE caused a rally in UK bonds, which have taken a battering since chancellor Kwasi Kwarteng announced a swathe of tax cuts in his so-called mini-budget last week.
On the macro front, the latest survey from GfK showed that German consumer sentiment was set to slide further in October amid a drop in purchasing power.
GfK’s forward-looking consumer sentiment index for October is forecast to come in at -42.5, down from 5.7 points from September.
GfK said the main reason for the sharp decline is that the index for income expectations has fallen 22.4 points to -67.7 – a record low. Meanwhile, the propensity to buy index fell 3.8 points to 19.5 in October, marking the worst reading since the global financial crisis in October 2008.
“The current very high inflation rates of almost eight% are leading to large real income losses among consumers and thus to significantly reduced purchasing power,” said Rolf Bürkl, GfK consumer expert.
“Many households are currently forced to spend significantly more money on energy or to set money aside for significantly higher heating bills. Accordingly, they need to cut back on other expenses, such as new purchases. This is sending consumer sentiment plummeting to a new record low.”
In corporate news, luxury fashion brand Burberry pushed higher as it said that chief creative officer Riccardo Tisci will be stepping down at the end of the month. Tisci has decided to leave after almost five years, during which he spearheaded Burberry’s creative transformation.
Tisci will be succeeded by Daniel Lee, who will join the group on 3 October.
