Global stocks and government bonds fell as the boost from the Bank of England’s intervention on Wednesday to support UK government debt markets faded.
Wall Street’s benchmark S&P 500 index fell 3%, hitting its lowest level since November 2020, before recovering to close down 2.1% on Thursday. The Nasdaq Composite, which is dominated by technology groups seen by investors as particularly sensitive to higher interest rates, fell 2.8%.
Investors have become increasingly concerned about the impact of high rates and the outlook for global economic growth since the US Federal Reserve and a host of other central banks raised rates last week. Thursday’s data showed the number of Americans applying for unemployment benefits in the past week fell to its lowest level since April. This weighed on Wall Street from the opening bell, as a tight labor market carries risks of entrenched inflation.
A poorly received ‘mini’ budget from the British government last Friday added to the volatility and sent the pound to a record high against the dollar earlier this week. The BoE’s announcement on Wednesday of a £65bn bond-buying program initially helped calm gilt markets, which had been in turmoil since the ‘mini’ budget. The central bank’s intervention sparked a rally in UK assets that spilled over to other global markets.
However, the favorable effects of the BoE’s response dissipated on Thursday as government bond prices fell again. The yield on Britain’s 30-year gilt, which was the focus of Wednesday’s intervention, rose 0.14 percentage points to 4.03%, according to Tradeweb data. Yields rise when prices fall.
In Treasury markets, the policy-sensitive two-year yield jumped 0.08 percentage points to 4.18%, while the benchmark 10-year rose 0.05 percentage points to 3.76%.
Mark Haefele, chief investment officer at UBS Global Wealth Management, said he was skeptical that Wednesday’s rally would “mark the end of the recent period of high volatility or risk aversion sentiment”.
“For a more sustained rally, investors will need to see compelling evidence that inflation is under control, allowing central banks to become less hawkish,” he said.
The European regional Stoxx 600 fell 1.7% on Thursday after ending Wednesday up 0.3%. London’s FTSE 100 lost 1.8%.
In currencies, the pound gained 1.7% against the dollar to trade at $1.1078. An index measuring the dollar against six peers slid 0.4%, reversing earlier gains.
The dollar has hit new 20-year highs in recent months, supported by relative weakness in other currencies, the Fed’s aggressive monetary policy tightening and the greenback’s traditional status as a safe haven in times of economic stress and stock market.
ING analysts said the BoE action represented “the first major intervention by a G10 central bank in this cycle to avert a financial crisis. It may not be the last.”
“This reminds policymakers around the world that any market perception of a policy misstep will be heavily punished,” they added. “With the Fed to keep walking in a downturn. . . these conditions could well be with us for the next six to nine months.
