(Alliance News) - Sterling fell to an all-time low against the US dollar on Monday, before rebounding slightly, with UK housebuilders and retailers also on the receiving end of a steep sell-off.
Oanda analyst Craig Erlam said Friday's mini-budget has "gone down like a lead balloon". He feels the reaction has led to "serious questions being asked about the economic competency of the new government."
"So much so that markets are factoring in a strong chance of a substantial emergency rate hike from the BoE in order to shore up the currency and confidence in the markets, perhaps even today," Erlam continued.
"Desperate times call for desperate measures but when the wound is so self-inflicted and terms such as 'behaving like an emerging market currency' are being thrown around, I'm not sure we should be hoping the central bank will fix everything."
Against the dollar, the pound was trading at USD1.0655 on Monday evening, down from USD1.0869 at the London equities close on Friday. Despite the bleak day, the pound was able to stage a mini-rebound from the historic low it fell to earlier in the session.
IG Senior Market Analyst Joshua Mahony said: "The pound has been on a rollercoaster ride today, with GBPUSD experiencing the highest one-day volatility since the height of the Covid crisis.
"With Truss and Kwarteng in the job for less than a month, the past week has been a swift reminder that they have very little room for mistakes when seeking to implement a whole raft of fiscal policies."
Sterling fell to an intraday low of USD1.0349 earlier Monday, its worst ever level against the dollar. At the start of 2022, the pound fetched around USD1.35.
Mahony continued: "The strength of the pound may be a reaction to the anticipated emergency rate hike from the Bank of England, but the risk here is that markets begin to realise the UK's reserves make defending the pound increasingly difficult."
London's blue chip index was outperforming European peers, thanks to the bludgeoned pound, but the midcaps had a rough session.
"When the pound is weak it lifts the relative value of the overseas earnings which dominate the index. More instructive is the performance of the more domestic-facing FTSE 250 which remained under pressure and slipped to its lowest levels since 2020," AJ Bell Investment Director Russ Mould said.
The FTSE 100 index closed up just 2.35 points at 7,020.95 on Monday. The mid-cap FTSE 250 index ended down 249.86 points, or 1.4%, at 17,722.83. The AIM All-Share index closed down 5.70 points, or 0.7%, at 827.89.
The Cboe UK 100 index closed down 0.1% at 699.22. The Cboe 250 closed down 1.5% at 15,154.48, and the Cboe Small Companies closed down 1.2% at 12,874.02.
The CAC 40 stock index in Paris closed down 0.2% and the DAX 40 in Frankfurt ended down 0.5%.
"Between Russia threatening nuclear war, the pound trading like an emerging market currency in crisis, and Europe preparing for a rough winter, it is safe to say that any short-term bounce in stocks should be treated with a generous sprinkle of salt," IG's Mahony added.
Stocks in New York were mixed at the London equities close, with the DJIA down 0.6%, the S&P 500 index down 0.4%, but the Nasdaq Composite was 0.1% higher.
In London, housebuilders were being sold as the likelihood of another Bank of England interest rate hike increases. Taylor Wimpey fell 7.6%, Barratt Development 4.7%, Persimmon 6.9% and Berkeley 5.8%. In the FTSE 250, Vistry lost 6.1%, Bellway 3.2% and Redrow 4.6%.
Liberum analyst Charlie Campbell said: "The mini-budget was very helpful for the housebuilders in boosting consumer cash flows, reducing stamp duty and cutting their taxes. But, the bond market's reaction to the announcement in general has created another step up in interest rates.
"We had expected stability in the housing market next year based on energy bill support and mortgage rates peaking at 4%, but even with the boost from personal tax cuts, the outlook is more precarious with mortgage rates likely to reach 5% or more if bond yields remain at this level."
The average UK house price tag increased by 0.7% month-on-month in September, according to figures from property website Rightmove on Monday.
Rightmove said the price increase was in line with the average September rise of 0.6% over the last 10 years. Prices had fallen 1.3% in August from July.
Alongside the housebuilders, retailers suffered on Monday, with cost-of-living worries front and centre. Next lost 1.7%, JD Sports 2.9%, Frasers 2.8%, B&M European 2.2%. AO World fell 2.3%, Wickes 4.0% and Superdry 5.3%.
In the midcaps, Aston Martin ended the best performer, up 10%, after Bernstein raised the stock to 'outperform' from 'market-perform'.
In brighter news, Pendragon gained 20% after the car dealer received a takeover approach from vehicle showrooms operator Hedin Mobility Group.
Hedin has offered 29p per Pendragon share, giving it an equity valuation of around GBP405 million. Pendragon has a market capitalisation of GBP377.2 million.
RPS Group jumped 15% after the professional services firm backed a GBP636 million takeover offer from Tetra Tech and withdrew its recommendation for a bid by Toronto-listed consultancy firm WSP Global.
Consultancy and engineering services firm Tetra will pay 222p for each RPS share, a 7.8% premium to the 206p offered by WSP.
The euro slid to USD0.9626 on Monday from USD0.9691 late Friday. Against the yen, the dollar rose to JPY144.41 from JPY143.28.
Gold was quoted at USD1,639.00 an ounce Monday evening, down from USD1,643.77 at the London equities close on Friday. Brent oil was trading at USD85.30 a barrel, down from USD86.34.
In a fairly quiet international economic calendar on Tuesday, there is US durable goods orders at 1430 BST and a housing price index at 1500 BST. There is also US consumer confidence at 1600 BST.
In the local corporate calendar, there are interim results from drinks maker AG Barr, Card Factory, merchant bank Close Brothers, Mortgage Advice Bureau, while plumbing and heating products distributor Ferguson will issue annual results and United Utilities will release a trading update.
By Paul McGowan; paulmcgowan@alliancenews.com
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