European stock markets dropped at the open on Wednesday after the S&P 500 in New York fell to its lowest level since 2020 on investor concerns about the impact of interest rates on the global economy.
Sterling remained under pressure, down 0.7 per cent to $1.065, as investors continued to react to the UK government’s controversial new tax plans.
European equities opened lower after the S&P 500, the US benchmark, touched its lowest intraday level since November 2020 on investor concerns about the pace of interest rate rises to combat inflation, and their effect on global economic growth.
The FTSE 100 fell 1.1 per cent while the Dax in Germany fell 1.7 per cent.
Asian stock markets moved lower, with Hong Kong’s benchmark Hang Seng index down 2.6 per cent. China’s CSI 300 fell 2.2 per cent and Japan’s Topix was down 1 per cent.
The pound and UK government debt remained weaker following chancellor of the exchequer Kwasi Kwarteng’s plan for £45bn worth of unfunded tax cuts. Earlier in the week the pound briefly hit a record low against the dollar, and gilts across maturities sold off. Overnight, the IMF launched a withering attack on the UK’s plan and urged the government to “re-evaluate” the package.
On Wednesday the yield on 10-year gilts rose 0.04 percentage points to 4.54 per cent. The 30-year gilt yield remained steady but above the 5 per cent level.
“Demand for long-end gilts was seen as one of the most price-insensitive assets in the fixed income world for many years. The fact that even this has cracked shows the deep trouble the UK market is in at the moment,” said Jim Reid, a strategist at Deutsche Bank.
Analysts at Commerzbank said that a hesitant approach by the Bank of England to fighting inflation had contributed to the weakness in sterling.
“It is a fact that the BoE has lost some market confidence over the past months due to its hesitant approach as regards fighting inflation,” said Commerzbank.
The Bank has resisted calls for an immediate increase in interest rates, with the next move expected at its regular monthly meeting in November where a 150 basis points move is now being priced in by the market.