London Close: FTSE sinks to March lows

London’s FTSE 100 index plunged to a three-month low today as concerns over rising interest rates triggered a global sell-off in the stock market. The blue-chip index dropped by 2.24%, marking its largest single-day decline since March, closing at 7,275.60 points. The FTSE 250 index, which reflects the health of the UK economy, also slumped by over 2%, falling below the 17,000-point threshold.

For weeks, shares of the UK’s largest companies have been on a downward spiral, driven by growing apprehensions of a possible recession. The higher interest rates implemented to curb skyrocketing inflation are expected to tighten the financial conditions for households and businesses, raising concerns about the ability of companies to thrive amid reduced economic activity.

Analysts at JP Morgan predict that the Bank of England may be compelled to raise rates to as high as 7% if price pressures persist. Their base case scenario is for rates to reach 5.75%. Traders have increasingly bet on the possibility of a peak Bank Rate, speculating it could climb to 6.75%. The last time borrowing costs in Britain were at that level was in 1998, and this increase will inevitably affect mortgage rates, which have already surpassed 6%.

In the United States, recent economic data has indicated that additional rate hikes are on their way, forcing traders to retreat from riskier markets. The minutes from the US Federal Reserve’s most recent interest rate meeting, where they temporarily paused their tightening campaign after ten consecutive hikes, revealed that officials plan to resume tightening this month. Moreover, today’s numbers unveiled that the American job market remains robust despite the Fed’s efforts to rein it in, thereby increasing the likelihood of the central bank maintaining higher rates for an extended period.

Wall Street reacted negatively to this news, with the S&P Global, Dow Jones, and Nasdaq all opening approximately 1% lower. Concerns surrounding China’s economic recovery from the Covid-19 pandemic have also weighed on the FTSE 100 due to the index’s significant exposure to industrial giants. Since China is a major consumer of raw materials, any decline in demand from the world’s second-largest economy would directly impact commodity producers’ earnings. Consequently, mining companies such as Glencore, Antofagasta, Anglo American, and Fresnillo experienced sharp declines in the City.

In the currency markets the risk aversion sentiment prevailing in equity markets has supported the Japanese yen, pushing it to its highest levels in over a week. Conversely, the US dollar initially weakened against the pound and the euro following a positive ADP employment report, primarily due to heightened expectations of interest rate hikes from the Bank of England and the European Central Bank. However, the greenback rebounded after the release of solid ISM services numbers, as traders began pricing in additional rate hikes from the Federal Reserve beyond July and September.

The pound has gained some support from UK gilt yields, which have reached their highest levels since 2008. Traders have intensified their wagers on a Bank of England rate hike, anticipating stickier inflation. Speculation suggests that UK rates could peak at 6.5% in early 2024.