The FTSE 100 suffered a break through 7,000 on Monday as shares in UK banks and the country’s leading house builders plunged on concerns about the outlook for the UK economy.
The FTSE 100 was down 0.85% to 6,961 at the time of writing.
Friday’s mini-budget has been met with extreme selling of the pound and soaring government bond yields as investors panicked about a plethora of tax cuts that will be funded by government borrowing.
“Markets are raising alarm bells as the Chancellor signalled a doubling down of tax cuts over the weekend,” said Janet Mui, head of market analysis at wealth manager Brewin Dolphin.
“The new borrowing will be financed at a much higher rate of interest which could put the UK onto a fiscally unsustainable path. Sterling and gilts are the quickest and most liquid pressure valves for markets to express these concerns.”
Higher rates
Markets are now pricing in a 1% increase rise in UK rates at the next Bank of England meeting, and rates hitting 6% in early 2023.
£ touches record low & investors now betting on UK interest rates topping 6% by 1st half 2023.
— Beth Rigby (@BethRigby) September 26, 2022
Senior Tory MP: ‘What are the fiscal rules? How can markets be expected to come to a settled view if no framework for size of borrowing/timeframe on growth is set out by HMT’ 1/
The crashing pound is also raising the question of an emergency rate hike to help support the currency. Such a sharp trajectory higher in UK interest rates has unnerved equity investors who have been dumping their holdings in housebuilders and UK banks.
A move to anywhere near 6% will send a tsunami through the UK housing market and could see banks forced to set aside provisions for bad debts as households are put under pressure.
Taylor Wimpey was down 7.3% at the time of writing while Persimmon shed 6.5% and Berkeley Group 5%.
Banks – typically beneficiaries of higher rates – are now facing the prospect of mortgage defaults as homeowners struggle to meet higher payments.
The UK’s largest mortgage provider Lloyds fell 4% and NatWest fell 3.6%.
Although the banks and housebuilders are suffering today from the wider implications of a weaker pound, the FTSE 100 is typically supported by a weaker pound and may provide some outperformance for the index compared overseas equity indices.
“Overall, the FTSE 100 tends to benefit from a weak pound, because most big companies listed in London actually earn most of their money overseas, which will be worth more when it’s converted back into pounds,” said Sarah Coles, senior personal finance analyst, Hargreaves Lansdown.
Stronger Dollar
While many headlines will focus on the pound, the stronger dollar was causing issues across the globe with EUR/USD falling ever further past parity to 0.9645.
Emerging markets also felt the pain of a strong dollar and even US futures fell as investors shunned riskier assets.