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(Alliance News) - It was another less-than-stellar open for European equities on Wednesday, amid fears of a UK bond market cliff-edge, with the Bank of England due to pull its support later this week.
The evening's Federal Reserve meeting minutes, and upcoming US inflation data, have given investors reason to trade with caution.
The FTSE 100 index fell 24.26 points, or 0.4%, to 6,860.97. The FTSE 250 lost 302.92 points, or 1.9%, to 16,601.14 and the AIM All-Share fell 4.79 points, 0.6%, at 782.91.
The Cboe UK 100 opened down 0.4% at 685.28, the Cboe UK 250 dropped 1.9% at 14,248.66, and the Cboe Small Companies traded fractionally higher at 12,531.32.
In European equities on Wednesday morning, the CAC 40 in Paris fell 0.5%, while the DAX 40 in Frankfurt opened down 0.7%.
The Bank of England has privately signalled that it may be willing to extend an emergency UK government bond buying programme beyond this week, the Financial Times reported on Wednesday.
The newspaper, citing people briefed on the talks, said some bankers have been told officials are closely watching pension funds and their managers.
Specifically, they are eyeing whether some liability-driven investment managers have amassed enough liquidity to meet margin calls. These types of investment managers assist pension funds in managing risk.
One banker quoted by the FT said: "They told us they were watching the LDI managers closely to see whether they had managed to generate enough liquidity for their clients to cope with margin calls and would decide whether to extend the facility on Thursday or Friday."
The BoE had on Tuesday had affirmed its emergency gilt buying will end on Friday. The move came despite bond market volatility that has put pensions and the UK's "financial stability" at risk.
Governor Andrew Bailey in Washington said: "My message to the [pension] funds involved – you've got three days left now. You have got to get this done. "Part of the essence of a financial stability intervention is that it is clearly temporary."
The BoE last month announced plans to buy up long-dated gilts amid market turmoil following poorly received UK fiscal plans.
Eyes remained on the UK government bond market early Wednesday. The yield on the 30-year gilt stood at 4.89% shortly after 0830 BST, stretching from 4.79% around 1700 BST on Tuesday.
The latest US Federal Reserve meeting minutes are released at 1900 BST. Stocks have been pummelled by the central bank's stubbornly hawkish stance and hopes that the minutes will have something for the doves may be optimistic at best.
"Any hope of a helping hand from the Fed minutes may not be forthcoming, with the commentary to an extent outdated at this point and policymakers seemingly unified in their goal of defeating inflation. Even a good [consumer price index] number tomorrow may do little to change that in the near-term," Oanda analyst Craig Erlam commented.
The pound fell to USD1.0977 early Wednesday in London, down from USD1.1097 late Tuesday.
The UK economy registered a surprise decline in August, during what was a poor month for the consumer-facing sector, according to the Office for National Statistics.
The UK economy shrank by 0.3% in August from July, following a downwardly revised 0.1% climb in July from June. Month-on-month growth in July was initially forecast at 0.2%. August's gross domestic product was expected to have remained unchanged from July.
Still to come on Wednesday's economic calendar is a eurozone industrial production reading at 1000 BST and the US producer price index at 1330 BST.
The euro traded at USD0.9713 early Wednesday, down from USD0.9719 at the European equities close on Tuesday.
Against the yen, the dollar rose to JPY146.12 from JPY145.70. This means the dollar is trading around the levels seen just before the Japanese government intervened in the foreign exchange market last month.
Japan's Chief Cabinet Secretary Hirokazu Matsuno said the government is closely watching foreign exchange moves and is ready to take "appropriate steps", Reuters reported.
In London, Barratt Development shares fell 6.9%. It is still seeing strong demand, though private reservations are down from a year earlier, as the housebuilding sector fights rising interest rates and falling consumer confidence.
Total forward sales as of October 9 stood at 13,314 homes, down from 15,393 a year earlier. Barratt blamed this on a "slower reservation rate".
However, it is on track to deliver an adjusted pretax profit in line with consensus for the financial year ending June 30, 2023. The adjusted pretax profit consensus stands at GBP972.5 million, which would represent a 7.8% decline from GBP1.05 billion in financial 2022.
Drax shares rose 2.0%. The power generator, which uses biomass, noted possible new UK revenue capping measures on renewable energy generators.
Renewable energy generators and nuclear power plants could have their revenues capped under a new UK government plan to ensure they are not benefiting from record-high energy prices.
Without releasing much detail, the government said it would try to break the link between high gas prices and the amount made by electricity producers.
The government said the price of gas decides the price of electricity, so as gas prices soared over the last year, many of Britain's wind farms and solar farms were paid a lot more than normal for their products, even though their costs had not increased very much.
Drax said in response: "Drax will continue to work with government and industry on the detail of the proposal."
Frankfurt-listed RWE was somewhat more scathing. The energy company warned the measures may disincentivise renewables investment.
"Effectively, a cap is a de-facto 'windfall tax' on low-carbon generators that, if not designed and implemented correctly, could have severe negative consequences for investment in the renewable and wider energy market and so for the energy transition," RWE said.
RWE shares were 0.5% higher in Frankfurt.
Back in London, Hostelworld climbed 4.6%. It said revenue topped pre-virus levels in September, and the online travel agent now expects to end the year in a "stronger cash position than originally expected".
Gross merchandise value, net of cancellations, also topped 2019 levels in September, Hostelworld said.
Hostelworld now expects to report "modestly positive" earnings before interest, tax, depreciation and amortisation for 2022.
Brent oil was quoted at USD94.09 a barrel early Tuesday, falling from USD96.99 at the London equities close on Monday. Gold traded at USD1,668.31 an ounce, flat from USD1,668.45.
By Eric Cunha; ericcunha@alliancenews.com
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