FTSE 100 sharply higher, bond market calmer as BoE operation nears end

FTSE 100 surges higher, on U-turn hopes, up 49 points
Chancellor heads home early from Washington for crisis talks
Shares in Royal Mail (LON:IDSI)’s parent company slide as losses mount
10.10am: Bond markets in calmer mood

There are just a few hours to go before the end of the Bank of England’s emergency bond-buying programme and the bond markets have settled down, for now, with a further drop in yields today following the sharp falls yesterday.

Sky’s Ed Conway pointed out the fall in yields can be clearly linked to the first reports of a government U-turn yesterday and the later news that the chancellor was heading home to the UK from Washington for crisis talks.

Certainly true that financial markets respond to all sorts of imponderables.
But there’s been a definite pattern in past 24 hours.

When news of u-turn came, interest rates on govt bonds fell sharply.

Russ Mould, investment director at AJ Bell said: “Always look at the bond market if you want to know what the smart investors are thinking, and a drop in gilt yields on Friday tells you one of two things.”

“Either the Bank of England is hoovering up gilts sold by pension funds (pushing up the price and pulling down the yield) before the end of its support measures today, or markets believe the chancellor is going to rip up his mini-budget and start again. The smart money is probably on the latter” he said.

9.40am: Credit Suisses warns of deeper UK recession

Credit Suisse’s head of UK economics, Sonali Punhani, has warned that the UK’s recession could be worse than expected because of the recent market turmoil.

“Owing to the market turmoil that has followed the announcement of the mini-budget, risks are rising that the recession in the UK is deeper than we forecast.”

“If the market moves are sustained or worsened, they can offset the impact of the tax cuts and increase the depth of the recession through much higher mortgage costs and currency-led inflation.”

“Real incomes could be squeezed further by 1-1.5% in 2023 if the recent market moves are sustained, which is likely to add downside risks to our growth forecast of -0.2% in 2023” the investment bank said.

“For the moves to stabilise, the Bank of England would need to restore credibility by hiking aggressively in the near term. We expect the BoE to hike 100bps in November and raise rates to 4.5% by early 2023.”

“More importantly, the markets would need to see a credible fiscal plan on October 31 to reverse these moves” Credit Suisse (SIX:CSGN) said.

“We calculate that fiscal tightening of 2.5% of GDP (£60billion in 2026-27) would likely be needed to stabilize the debt to GDP in the medium term.

“This is possible via a combination of a U-turn on tax cuts as well as spending cuts.”

“It would be challenging to deliver the scale of these cuts, but for them to be credible, these need to be delivered sooner rather than in the latter part of the forecast.”

9.12am: Union slams Royal Mail management, calls for urgent meeting

The CWU union has called for an urgent meeting with the management of Royal Mail owner International Distributions Services PLC (LSE:IDS) after the company announced plans to cut up to 10,000 jobs.

Its general secretary Dave Ward said: “The announcement is the result of gross mismanagement and a failed business agenda of ending daily deliveries, a wholesale levelling-down of the terms, pay and conditions of postal workers, and turning Royal Mail into a gig economy style parcel courier.”

“What the company should be doing is abandoning its asset-stripping strategy and building the future based on utilising the competitive edge it already has in its deliveries to 32 mln addresses across the country.”

“The CWU is calling for an urgent meeting with the Board and will put forward an alternative business plan at that meeting.”

“This announcement is holding postal workers to ransom for taking legal industrial action against a business approach that is not in the interests of workers, customers or the future of Royal Mail. This is no way to build a company.”

9.00am: FTSE 100 higher, bond yields fall

Equity markets remained upbeat but off earlier highs as speculation that the government could be set to scrap all or parts of the mini-budget, which included £45bn of tax cuts, gathered pace.

FTSE 100 is up 70 points led by financials with Barclays PLC (LON:BARC) (up 2.4%) and Lloyds Banking Group PLC (LON:LLOY) (up 2%) leading the way.

Bond yields dropped further today, after hefty falls yesterday, as chancellor Kwasi Kwarteng cut short his visit to the International Monetary Fund in Washington.

It is understood that Kwarteng is travelling home ahead of schedule for emergency talks with prime minister Liz Truss and other Conservative MPs, with the expectations that changes to the mini-budget will be made.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown (LON:HRGV) commented: “There is a sense of urgency in this move and it would seem the market is optimistic that Kwarteng’s romcom-worthy dash through the airport suggests a dramatic reconciliation between stubborn existing policy and the U-turn investors have been waiting for.”

But she cautioned: “It’s worth keeping in mind that the FTSE will remain over-sensitive to any changes from here, if U-turns fail to materialise, or are deemed too small, we’re likely to see an adverse reaction.”

Shares in Royal Mail owner International Distributions Services PLC (LSE:IDS), slumped 15% after it disclosed the full financial impact of industrial action at its UK parcels and letters business and told the market it would be cutting 10,000 jobs.

In a downbeat update on trading, the company said just three days of industrial action had cost the business £70mln as warned the market it expects the Royal Mail delivery arm to make an operating loss of £219mln.

8..39am: Bond yields fall further

Speculation on a change to government policy has helped push yields on UK government bonds down further today, lowering the cost of government borrowing.

The yield on the two-year gilt has fallen 16 basis points to 3.69%, the lowest since the mini-budget, the 30-year yield has also fallen further, by 14 basis points to 4.4% while the 20-year yield is at 4.6%.

NEW
BIG fall in benchmark 10yr UK govt bond yield this morning.

Was 4.3% yday.

8.13am: FTSE 100 soars at the open

FTSE 100 made a strong start on Friday reflecting gains in the US and Asia, and as talk of a U-turn in government policy intensified.

At 8.10am the FTSE 100 had surged 94 points to 6,944, while the FTSE 250 soared 294 points to 17,223.

Chancellor Kwasi Kwarteng has left the IMF conference in Washington on reports that he is set for crisis talks with prime minister Liz Truss regarding changes to the mini budget.

Various reports have suggested that corporation tax may be increased, rather than left unchanged, as the chancellor planned, in a bid to boost the financial credibility of the government’s fiscal measures.

Reports suggested that Kwarteng’s tenure as chancellor is also under threat, while there is also mounting speculation of a challenge to the prime minister herself, with reports that conservative MPs are plotting to oust her as polls show support for the government now below 20%.

The pound rose sharply yesterday on speculation of the U-turn and held most of those gains today, trading at $1.1308.

Packaging firm Mondi PLC (LSE:LON:MNDI) said volume and price growth is more than offsetting inflationary pressure sending shares higher.

In the third quarter of 2022, underlying earnings before interest, tax, depreciation and amortisation surged 55% year-on-year to EUR450mln from EUR290mln.

“Higher average selling prices and overall volume growth more than offset significant cost pressures,” it said. “While significant geopolitical and macroeconomic uncertainties remain and we anticipate continued inflationary pressures on our cost base as we enter the fourth quarter, we are confident that the group will continue to demonstrate its resilience and deliver a year of good progress” the company said.

Shares rose 2.43% to 1,409.50p.

7.52am: Senior Tory MP calls on chancellor to act swiftly

Chancellor Kwasi Kwarteng should change course on his budget policy within 48 hours in order to regain the confidence of financial markets and the public, a senior conservative MP, Mel Stride, said today.

Stride – who chairs the House of Commons’ treasury committee and is an ally of prime minister Liz Truss’s leadership rival Rishi Sunak – said it was important that Kwarteng reversed his plans on corporation tax and avoided piecemeal measures.

“I think we have reached a point now where we need this very powerful, significant signalling to the market that fiscal credibility is now firmly back on the table. And I think that means doing something right now,” Stride told the BBC’s Today programme.

“He has got to really get out there emphatically and nail it. And I think he has to start in the next 48 hours,” he added.

7.30am: Royal Mail looks to axe 10,000 jobs

Royal Mail said it was looking to cut 10,000 jobs by the end of August 2023 as it warned of financial losses due to industrial action and lower parcel volumes.

Parent company, the newly renamed International Distribution Services, said the job loss figure could include up to 6,000 redundancies.

For the current fiscal year, Royal Mail forecast an adjusted operating loss of around £350mln, including the direct, immediate impact of eight days of industrial action which have taken place or been notified to Royal Mail, but excluding any charges for voluntary redundancy costs.

“This may increase to around a £450mln loss if customers move volume away for longer periods following the initial disruption,” it added.

The group forecast first half 2022-23 adjusted operating losses of £219mln including around £70mln of direct negative impacts from 3 days of industrial action.

7.20am: Chancellor heads home early from Washington

Kwasi Kwarteng has dramatically cut short his visit to the International Monetary Fund, flying home early from Washington in response to the mounting political crisis over his tax-cutting budget.

Adding to signs that the government is preparing to announce a U-turn over its plan to scrap a rise in corporation tax, the chancellor left the US capital a day earlier than planned.

Treasury sources said the chancellor had two constructive days in Washington but was keen to get back to London to engage with colleagues over his medium-term fiscal plan, due to be announced on 31 October.

But his unscheduled departure on a late-night flight from Washington capped a day of drama for the Truss government and prompted comparisons with the sterling crisis suffered by the Labour government in 1976.

In Sep 1976, following a slide in the pound, Denis Healey abandoned his plans to travel to a summit of finance ministers.

Then, the chancellor Denis Healey turned around at Heathrow rather than fly out to an IMF meeting in Manila after pressure mounted on the pound.

Expectations of a change to government policy pushed sterling higher yesterday.

7.00am: FTSE set for strong gains

FTSE 100 set to make a bright start on Friiday following strong gains in the US where markets shrugged aside stronger than expected CPI figures.

Spread betting companies are calling the lead index up by 70 points.

US markets recovered from some hefty early losses to post some startling gains by the close with the Dow Jones Industrial Average rising 823 points, or 2.83%, to 30,039, a 1,400 point swing from its earlier lows.

The S&P 500 advanced 93 points, or 2.60%, to 3,670 and the Nasdaq Composite jumped 232 points, or 2.23%, to 10,649.

These gains were also reflected in Asia with the Nikkei 225 and Hang Seng both sharply higher.

The gains were also helped by talk of a u-turn on government policy in the UK with speculation that some of the measures in the mini-budget will be scrapped.