The FTSE 100 tumbled on Monday as US recession fears gripped markets, sending global equities into freefall as some investors called for an emergency US rate cut to reinstate the so-called ‘Fed put’.

The FTSE 100 was down 3.2% at the time of writing and was relatively unscathed when you consider the Japanese Nikkei was down a whopping 12% overnight as traders piled into the Yen. US futures pointed to a 4% decline for the S&P 500, while NASDAQ 100 futures were down around 6%.

A stronger Yen has a far-reaching impact as worries about the Yen carry trade sapped the life out of risk assets.

“Friday’s brutal sell off has continued into the new week as investors mull the prospect that the much-touted US soft landing looks like being a whole lot bumpier than markets had hoped,” said AJ Bell head of financial analysis, Danni Hewson.

“Circuit breakers have been firing on Asian markets as stocks tumbled, with investors scurrying to price the impact a stalling US economy is likely to have.

“Friday’s jobs figures dropped like a bucket of cold water on markets already chilled by mixed earnings updates and concern about levels of spending by big tech companies on AI plans.

The VIX volatility index hit the highest level in over a year on Friday as traders reacted to the potential for a deeper selloff in equities if a US recession takes hold. Signalling further fear among traders, the VIX, which tracks short-term S&P 500 options trading activity and is a renowned measure of investor sentiment, spiked higher again on Monday.

The global equity selloff was sparked by a poor Non-Farm Payrolls jobs report suggesting the US economy is heading toward a recession. After fretting about when major central banks will cut interest rates, traders appear to have forgotten why central banks tend to cut rates in the first place: economic growth concerns and slowing inflation.

Speculation about an emergency Federal Reserve rate cut was rife over the weekend, although there is no formal suggestion they will move to cut rates before the next meeting. Some analysts expect the Fed to signal sharp rate cuts in the coming months as opposed to making them before the September meeting to help provide confidence.

“This is precisely the point where we’d expect the Fed to affirm it’s ‘Put’, one way or another,” said George Lagarias, chief economist at Forvis Mazars.

Bond yields sank at the end of last week, and the rally continued into Monday’s session. In June, we highlighted three Bond Funds to consider for a shift in interest rate expectations. Needless to say, all had a very good week last week.

All but three FTSE 100 stocks were down at the time of writing on Monday with tech-focused Scottish Mortgage the biggest faller with a drop of 8%.

Banks were heavily hit, as were miners and the oil majors. There is no stock-specific reason for the declines, and the selloffs were a result of a broad risk-off trade.

Lloyds’ share price has declined quickly and violently amid a global equity rout sparked by US growth concerns and a collapse of Japanese equities.

With shares trading around 54p—significantly below recent highs of 60p—investors may have their eyes on the FTSE 100 bank. However, headwinds are building that investors should consider.

Notwithstanding the global equity selloff rocking equity markets, Lloyds shares face several factors limiting income and eroding profit. Some argue that they aren’t fully priced at current levels and that investors may find better value at lower levels.

Lower interest rates

Although Lloyds shares rose steadily on the day after the release of half-year results, the update offered few positives over the coming 12-24 months. The declines in the last few days are more representative of Lloyds’s macro challenges in the short and medium term, which are likley to lead to weaker metrics than those reported last week.

The hammer blow to Lloyds shares came with the Bank of England interest rate cut and the firing of the starting gun on a series of rate decreases, which will ravage Lloyd’s all-important net interest margins (NIM). 

Lloyds NIM was down 10% in the first half, and it’s very difficult to see how the bank doesn’t post an equally disappointing NIM for the second half of the year. 

Net Interest Margin (NIM) is a key banking profitability metric that measures the income derived from the difference between interest earned on lending activities and that paid out for deposits. Lower interest rates are rarely good for banking NIMs, and this threatens Lloyd’s profitability in the coming periods.

Lloyds is the UK’s largest mortgage provider, and the recent rate cut has already started to affect mortgage rates, signalling lower income for banks across the board.

Rising unemployment

There are a range of economic data points which will present challenges to Lloyds and other UK banks. However, none threatens profitability more than the UK’s rising unemployment rate. Since hitting a low of 3.8% in December 2023, the UK unemployment rate has increased to 4.4%.

There is a strong correlation between the unemployment rate and the UK housing market—one that investors should be acutely aware of. When the unemployment rate increases, defaults and repossessions rise, leading to higher provisions by banks for bad debts. Should Lloyds be forced to make such provisions, it will erode already-pressured income caused by lower interest rates.

You may think the rate cut last week will provide a boost to mortgage holders and the UK housing market. And to some extent, it will. However, if a greater number of people start losing their jobs, saving a couple hundred pounds on a mortgage will be of little consequence if they lose their income entirely. Such a scenario is not guaranteed, but the probability of more people finding themselves in difficult situations is rising.

In addition to provisions for bad debts amid rising default rates, Lloyds investors will be conscious the group is facing potential litigation costs from a car finance probe.

Lloyds share price

With the bank’s headwinds building, some investors will wait for the Lloyds share price to hit 50p before buying, while others will keep their eyes on the low 40s before wading back in. 

The Lloyds dividend will provide some compensation for waiting for any capital appreciation. However, the potential yields to be locked in at lower levels may give some reason for pause.

David Beckham-backed Guild Esports (LSE: GILD) has announced the signing of a letter of intent (LOI) with DCB Sports LLC to dispose of all Guild assets and liabilities.

Guild Esports was listed at 8p in 2020 in the midst of the pandemic and a spike in interest in virtual gaming. However, the buzz has died down as gamers returned to the real world and shares now trade at just 0.2p.

Last week, Guild Esports shares plunged after announcing cash constraints, leaving them with just £25,000 in cash and relatively large receivables and liabilities.

With the company on the ropes financially, management has opted to throw in the towel and dispose of all its assets effectively ending its time as a London-listed company. The potential amount has not been disclosed.

DCB Sports intends to maintain and elevate the Guild brand and has pledged to provide robust financial backing, including backing up future working capital needs and supplying ongoing capital.

DCB Sports’ ventures span from a stake in Ice Cube’s Big3 basketball league to co-ownership of The Bay Golf Club alongside NBA stars Steph Curry and Klay Thompson. With investments in Venezia FC, the National Thoroughbred League, and TMRW Sports (co-founded by Tiger Woods and Rory McIlroy), DCB Sports has demonstrated a knack for identifying unique opportunities in the sports and entertainment sectors.

The deal remains subject to the successful negotiation of a definitive legal agreement and the completion of due diligence. Furthermore, Guild’s directors have made it clear that they are still in discussions with other potential suitors, leaving the door open for a rival bid for the assets

Guild’s shares were 66% higher at the time of writing.

In a move to advance its recently announced hydrogen storage projects, UK Oil & Gas PLC (LON:UKOG) has successfully raised £1 million through a share placing. The AIM-listed company announced the conditional placement of 2 billion new ordinary shares at 0.05p each, a 37% discount to the closing price on 2nd August 2024.

UKOG has also revealed plans for a separate Retail Offer in addition to the £1 million placing. The company intends to release further details regarding this offer in a separate announcement.

Although all investors have had the opportunity to participate in the round, the shareholder base may be a little perturbed that the company used a recent rally to secure a placing.

This fundraising effort’s primary purpose is to finance crucial activities that will significantly progress UKOG’s hydrogen storage projects, including initiating essential environmental surveys, engineering studies, and other necessary works.

Furthermore, the newly acquired funds will enable UKOG to advance negotiations with potential strategic joint venture partners and finalise a land option agreement for an additional hydrogen storage site. The company plans to bolster recognition of its hydrogen projects after already receiving from major industry players such as RWE, Sumitomo, and SGN.

CMC Markets UK Plc, operating under the name CapX, served as the sole placing agent for this significant funding round.

“The funding, together with the support from leading UK energy and hydrogen-space infrastructure players, RWE, Sumitomo and SGN, means we can now materially advance our nationally significant projects towards the goal of a competitive Revenue Support application,” said Stephen Sanderson UKOG’s Chief Executive.

“It will also greatly help us to secure at least one major strategic partner as a joint venture participant and to enhance our lobbying efforts with our new Labour government, who to date seem motivated and committed to making hydrogen and its storage a fundamental part of Britain’s renewable superpower ambition.”