Despite some harsh words from Bank of England governor Andrew Bailey towards the pensions industry last night, causing the pound to slump again, equity markets have not descended into chaos.
The FTSE 100 held firm at 6,884 as approximately three quarters of its constituents earn in foreign currencies, many in dollars, and they benefit from the translational effects of a weak pound.
Russ Mould, investment director at AJ Bell, said: “Bailey last night said the central bank would end its bond buying programme on Friday, telling pension funds they have three days to sort out their problems. However, media reports subsequently suggested that the Bank would extend its emergency support if market conditions demanded it. That helped to recover some of yesterday’s losses in the pound.
“This back and forth jostling and inconsistent messaging is becoming an unwanted trend, leaving investors scratching their heads, wondering what’s going on. It may only get worse in the coming weeks leading up to Kwasi Kwarteng’s debt-cutting plan on 31 October.
“In the meantime, it is clear investors are becoming more concerned about the state of the UK, particularly as the latest economic figures show a decline in GDP. The biggest fallers on the FTSE 100 were housebuilders, banks, pension fund operators and retailers.
“There are growing fears that property prices are going to fall as mortgage rates shoot up and fewer people can afford to buy a house or flat. That’s bad news for the housebuilding sector and not helped by a warning from Barratt Developments.
“Sentiment towards banks is weak as the benefits to their earnings from higher interest rates might be offset by a growing number of bad debts, together with the potential for mortgage activity to reduce due to affordability issues.
“Legal & General and Phoenix Group have been weak for several days as investors wonder how they’re exposed to troubles in the pensions sector. And retailers have been weak because the market fears they’re going to see a big downturn in trading as consumers tighten their belts.”