The FTSE 100 fell sharply on Friday as investors mulled the implications of this week’s central bank action and the possibility of additional rate hikes.
Both the UK and US central banks hiked interest rates by 25bps this week and left the door open for further increases in interest rates to fight high levels of inflation.
New concerns about additional rate hikes added to lingering worries about the health of the global banking system.
Declines in US stocks overnight led to a weaker start for European indices on Friday.
“Markets across the pond are still trying to iron out the full impact of the banking situation, as well as what tightening monetary conditions mean for future earnings,” said Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown.
“For the main indices, things moved from gains to losses throughout trading as Treasury Secretary Janet Yellen said authorities are prepared to take more action if needed to stabilise US banks.”
The FTSE 100 was down nearly 2% to 7,354 at the time of writing.
Bank woes
The selling of European bank shares picked after the price of Deutsche Bank credit default swaps (CDS) soared.
Credit default swaps are an insurance against default and the rising price indicates investors about the health of Deutsche Bank.
Deutsche Bank were down as much as 14% on Friday and dragged the European banking sector with them.
FTSE 100 banks hits
The FTSE 100 had started the week on the front foot, but rate hikes and fresh banking concerns quickly halted a recovery in London’s leading index.
All of the gains in banks earlier in the week evaporated on Friday. Barclays was down over 6% to 130p, the lowest level since the pandemic.
NatWest was 5% lower while Standard Chartered shed over 5%.
There were few gainers on Friday. Endeavour Mining was again enjoying the safe haven trade and investors sought safety in defensive names such as Diageo and Reckitt Benckiser.