The FTSE 100’s banks helped the index higher in early trade as bond yields rose on expectations of interest rates staying higher for longer amid concerns about inflation.
Barclays, which gained as much as 2.5%, was briefly the top riser before falling back, with NatWest and HSBC both up in the region of 2%. Higher interest rates are typically good for banking profit margins.
However, early gains for London’s flagship index evaporated as UK 10-year bond yields hit the highest level since 2008, dragging on the wider index.
“Inflation concerns have stoked fresh wariness on the markets, with worries that a pressure cooker of prices increases is heating up again. The FTSE 100 has opened slightly higher but gains are likely to be held back as investors assess data indicating that interest rates may have to stay higher for longer,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
Strength in the banks was offset by weakness in Shell as the session got underway after the oil major released a disappointing earnings teaser revealing lower gas production.
“Shell has revised its outlook for Liquefied Natural Gas (LNG) production in the fourth quarter, as oil and gas prices remain under pressure following a challenging year for fossil fuels,” said Mark Crouch, market analyst at investment platform eToro.
“The oil giant’s chemicals and oil products division is also expected to report a decline in Q4, signalling a broader slump in its performance as it prepares to release earnings in the coming weeks.”
As the session progressed, more companies joined Shell in trading in the red as concerns about interest rates spread through the broader index.
Utilities companies were among the top fallers. The sector is particularly exposed to interest rates and United Utilities, Severn Trent and SSE all fell more than 3%.
The threat of rates eroding consumer spending was felt among the retailers, with JD Sports’ strong start to the year stopped in its tracks by a 3% decline on Wednesday.
“Long-term dated UK government bonds are hovering near highs not seen since 1998, with 30-year gilts trading around 5.24%,” Susannah Streeter explained.
“10-year gilts have also crept higher, above levels seen in October 2023 after the Trussenomics mini-Budget. In the UK, there is also particular concern brewing about stagflation taking hold, given that inflation has been creeping up and pay growth is still hot, while the economy has been stagnating.”