Wary investors eye turmoil in UK markets

By Vildana Hajric

Australian investors are expecting a mild rebound after shares dived to a three-month low yesterday as the UK pound plunged and hawkish central banks across the globe continued to subdue sentiment.

US stocks also fell on Monday, cutting short a brief, cautious rebound led by technology shares earlier in the session.
US stocks also fell on Monday, cutting short a brief, cautious rebound led by technology shares earlier in the session.Credit:Peter Morris

Australian shares started the week in negative territory, shedding 1.6 per cent in a broad sell-off that inflicted heavy losses on the energy and minerals sectors.

US stocks also fell on Monday, cutting short a brief, cautious rebound led by technology shares earlier in the session. The pound dropped after the Bank of England said it may not act before November to stem a rout that took the sterling to a record low.

The S&P 500 trimmed declines and the tech-heavy Nasdaq 100 climbed, after both equity gauges plunged last week. US Treasury yields continued to rise, with the 10-year rate climbing as much as 21 basis points to 3.89 per cent, its highest level since April 2010. The pound hovered around US$1.07. The dollar soared to yet another record high.

Markets are on the edge after a selloff of risk assets deepened last week as the UK’s plan to lift its economy fuelled fears that heightened inflation would push rates higher and ignite a global recession. UK markets were in focus on Monday as the pound remained volatile after crashing to an all-time low, with the Bank of England’s comments doing little to reassure traders.

Federal Reserve officials also added to the hawkish rhetoric. On Monday, Boston Fed President Susan Collins said additional tightening is needed to rein in stubbornly high inflation and cautioned the process will require some job losses. Atlanta Fed President Raphael Bostic also said the central bank still has a ways to go to control inflation.

“On the macro front, it feels like a remake of West Side Story, with a gang of central bankers going after the job market, which refuses to let go,” said Mike Bailey, director of research at FBB Capital Partners. “Powell and now Andrew Bailey at the BOE are trying to slow the economy down, but my sense is employers are keeping as many workers as they can to avoid being left out in the cold when we recover from the next recession. So we almost have an arms race with central bankers raising rates and employers holding on to workers.”

US markets will continue to remain challenged by uncertainty until companies start to report their third-quarter earnings next month, which will provide greater detail on the health of corporate revenues and profit, wrote John Stoltzfus, chief investment strategist at Oppenheimer. Any company or industry that needs lower rates could be in trouble, FBB’s Bailey says.


Investors will also be keeping an eye on the economic data stream for hints of prices cooling, Art Hogan, chief market strategist at B. Riley, wrote in a note.

“What the market will need to see now to get out of the current conundrum is for inflation inputs to start coming down noticeably,” said Hogan. “We will get a read on the Fed’s preferred inflation indicator this Thursday when the second quarter core PCE is reported. Along with that investors will keep a close eye on the economic data stream for hints of prices paid coming down.”

Trading this week will be punctuated by a number of economic reports including US initial jobless claims and gross-domestic-product data, along with PMI figures from China. Choppiness in price moves is likely with a steady stream of Federal Reserve officials speaking through the week.

UK Gilts

The plunge in UK gilts sent 10-year yields above 4% for the first time since 2010. Traders ramped up wagers on the scale of interest-rate hikes in the short term, with money markets pricing in more than 200 basis points of increases by the central bank’s next meeting in November.

Meanwhile, Christine Lagarde said the European Central Bank will consider shrinking its balance sheet only once it has completed the “normalisation” of interest rates. Raising borrowing costs is the most appropriate and effective tool for now to combat record-high euro-area inflation, the ECB President said on Monday.

Geopolitical risks from the war in Ukraine to escalating tensions over Taiwan and unrest in Iran also continue to weigh on market sentiment. The OECD cut almost all growth forecasts for the Group of 20 next year while anticipating further interest-rate hikes. And a gauge of German business confidence deteriorated.

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