U.S. and global equities staged a mild comeback on Wednesday as the Bank of England said it would step into the bond market to stem a damaging rise in borrowing costs, an attempt to dampen investors fears of contagion across the financial system.
The BoE said it would temporarily buy long-dated bonds - linked most closely to workers' pensions and home loans - in light of a surge in 30-year UK bond yields above 5%, their highest since 2002.
Sterling, which hit record lows against the dollar on Monday, was last down 0.1%, whipsawed in volatile trade, while gilt prices roared higher, fuelled by the central bank's commitment to postpone a planned sale aimed at reducing the bonds it bought during the depths of the pandemic.
European government bonds got a lift from the surge in gilts.
Investors have been rattled in the last week in particular by soaring bond yields, as central bankers have raced to raise interest rates to contain red-hot inflation before it tips the global economy into recession.
The dollar, the ultimate safe-haven in times of market turmoil, was down 0.33%, still near its highest in two decades, spurred on by yields on the benchmark 10-year Treasury approaching 4.0% for the first time since 2008.
The pound briefly fell by as much as 1% after the BoE's announcement, while UK stocks cut losses to rise about 0.2%, which in turn helped the broader European equity market avoid deeper falls.
"The surge in bond yields threatens the housing market and broader economy. But the BoE still has to raise the policy rate," Kenneth Broux, Societe Generale currency strategist, said.
"You also have the contagion element. The IMF and the U.S. Treasury waded in yesterday in fear of global contagion from gilts to other markets," he said.
The International Monetary Fund (IMF) and ratings agency Moody's criticised Britain's new economic strategy announced on Friday, which has sparked a collapse in the value of British assets.
The MSCI All-World index was last up about 0.5%, having pulled off a session trough that marked its lowest since November 2020. It is heading for a nearly 9% drop in September - its biggest monthly decline since March 2020's 13% fall.
In Europe, the STOXX 600 and FTSE 100 both pared losses to trade flat on the day.
Wall Street opened higher, with the S&P 500 Index up about 1% after it fell to a two year low on Tuesday. The Dow Jones Industrial Average and the Nasdaq Composite also gained around 1%.
Weighing on growth stocks was Apple Inc, which was down about 3% on a report the tech giant was dropping its plans to boost production of the latest model of its flagship iPhone.
Scott Wren, Senior Global Market Strategist at Wells Fargo Investment Institute, said markets may already be pricing in future pain.
"Should the economy slow and eventually fall into recession and inflation stays higher for longer, we believe financial asset prices have adjusted to reflect this likely reality," Wren wrote in a client not released Wednesday. "Eventually, brighter skies will be on the horizon."
KEEP CALM AND DON'T BUY STERLING
At the heart of this week's sell-off across global markets is the British government's so-called "mini-budget" last week that announced a raft of tax cuts and little in the way of detail as to how those would be funded.
Gilt prices have plunged and the pound has hit record lows as a result.
Sterling was little changed at $1.073, still above Monday's record trough of $1.0327 but set for its biggest monthly slide since the Brexit vote in June 2016.
Strategists at Amundi, Europe's largest asset manager, said earlier on Wednesday they believed UK assets were in for more losses, as the UK's fiscal credibility remained on the line.
"We believe risks remain tilted to the downside given how much is already priced-in, less aggressive signalling from the BoE will accelerate the move to below parity (for sterling/dollar), in our view," strategists led by Laurent Crosnier, global head of FX, wrote, recommending investors avoid pounds.
The safe-haven dollar has been a major beneficiary from the rout in sterling, falling 0.3% on Wednesday but still near a 20-year peak at $113.8 against a basket of currencies.
The euro snapped a five-day losing streak, gaining 0.3% to $0.96255,, narrowly off last week's 20-year low of $0.9528.
Oil prices rose on Wednesday in U.S. trading hours as production cuts caused by Hurricane Ian outweighed downward pressure from a strengthening dollar and expected U.S. crude stockpile builds. U.S. crude rose 2.7% to $80.61 per barrel and Brent was at $88.03, up 2% on the day.
Spot gold added 1.3% to $1,650.59 an ounce. U.S. gold futures fell 0.30% to $1,621.80 an ounce.
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