European bond and share prices fell on Monday as investors worried about the impact on the global economy of a strong interest rate hike, as policymakers tried to quell rising inflation. leap.
Yields on UK and Italian sovereign debt rise as traders react to UK tax cuts designed to boost the economy and win Italian elections for a union far-right parties.
Europe’s Stoxx 600 fell 0.3% in morning trades. London’s FTSE 100 index trades more consistently as more UK-listed companies earn profits overseas and in dollars, benefiting from a stronger dollar against the pound.
The moves come after a miserable day for stocks on Friday as traders worried that high interest rates would stifle economic growth. The Stoxx 600 has officially entered “bear market” territory – usually defined as having fallen 20% or more from its recent peak.
Britain’s currency and bond markets on Monday continued to react to the government’s plan to pursue more tax cuts. Borrowing costs for the UK 10-year gold-plated rose 0.24 percentage points to 4.1% while the yield on the more monetary-sensitive two-year gold-plated grade rose by 0 .3 percentage points to 4.3%. Bond yields increase when prices fall.
Sterling falls 1.7% against the dollar, reaching $1.0674. The pound hit a record low of $1.035 overnight in Asian trading and fell 1.1% against the euro to €1.1068.
Traders weighed last week’s historic tax cut package with the prospect of continued fiscal stimulus amid rising interest rates and record inflation.
“The UK is currently in the midst of a currency crisis,” said Vasileios Gkionakis, Emea, head of G10 forex strategy at Citi.
“It seems increasingly likely that the Bank of England will have to resort to an intra-meeting rally to support the pound,” he said, adding that “the UK cannot rely on into ‘kindness of strangers’ too; sterling will have to depreciate further to offset the higher UK risk premium”.
In Italy, a coalition of far-right Italian parties won the country’s elections, led by the ultra-conservative Brotherhood of Italy party of Giorgia Meloni. The results have been widely expected and the parties now have to form a government, which usually takes a month.
Yields on Italy’s benchmark 10-year bond rose 0.1 percentage point to 4.45 percent.
Ludovico Sapio, macro research associate at Barclays, said in the short term, “stress risks are modest” but in the medium term “a centre-right government would offer a looser and riskier fiscal stance friction with the EU is higher”.
