The FTSE 100 ended Tuesday’s session in the red, dragged down by soaring bond yields, elevated oil prices, and mounting fears over persistent inflation.
London’s benchmark index closed down 39.44 points, or 0.4%, finishing the session at 10,658.13, having earlier fallen as low as 10,586.39 during intraday trading.
The FTSE 250 slipped 15.74 points, or 0.1%, to 23,818.74, while the AIM all-share declined 1.89 points, or 0.2%, to 783.15.
Susannah Streeter, chief investment strategist at Wealth Club, said: “There’s no let-up in the volatility rippling through financial markets, with energy prices staying painfully elevated and worries swirling about the knock-on effect for inflation and interest rates.”
Brent crude oil remained stubbornly elevated, quoted at 108.48 dollars a barrel in London, up from 108.30 dollars late on Monday, with no signs of relief from the ongoing US-Iran conflict.
Streeter warned the conflict has “become more entrenched, with Iran clearly in this fight for the long haul, and it’s led to fresh worries that higher energy costs will become embedded in economies, leaving companies with little choice but to hike prices on a vast range of goods.”
The yield on the US 10-year Treasury widened to 5.01% from 4.96%, having earlier struck a 19-year high of 5.02%, while the 30-year Treasury yield stretched to 5.37% from 5.34%.
Yields on 10-year UK gilts also hit a 19-year high of 5.41%, up from 5.38% at the same time on Monday, adding further pressure to equity markets ahead of central bank decisions this week.
Ahead of the Federal Reserve’s Wednesday meeting, Morgan Stanley shifted its stance and now expects a quarter-point rate increase, along with a same-size rise in December, having previously anticipated no moves this year.
Morgan Stanley stated in a research note: “While inflation continues to decelerate, recent upside surprises mean the pace of disinflation has been slower and less convincing than the committee likely requires.”
The bank added: “When the Fed goes into action, it rarely moves once. We expect one more hike in December, but the Fed then pauses as inflation moderates.”
Peel Hunt analyst Kallum Pickering expects the Bank of England to deliver a “cautious hold” on Thursday, though his view diverges sharply from broader market pricing.
“Whereas I see the BoE holding for the rest of this year before cutting twice next year once inflation risks fade, money markets price in about four hikes by spring 2027, with a hold this week and the first hike coming in November,” Pickering said.
UK labour market data added another layer of complexity, with the unemployment rate holding steady at 4.9% in the three months to July, though more timely payroll figures told a weaker story.
Payrolled employee numbers fell by 101,000, or 0.3%, in July from a year earlier, and an early August estimate indicated further weakness, with payrolls down 145,000, or 0.5%, annually.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The UK jobs market still appears to be stuck in a slump.”
On a more positive note for the Bank of England, average total earnings growth cooled to 3.9% in the three months to July, down from 4.2% previously, while Barclays described wage pressures as remaining “benign.”
Defence stocks provided a bright spot on the FTSE 100, with Babcock International and BAE Systems both rising 3.4%, and oil major Shell advancing 2.0% as the Middle East conflict continued.
Trustpilot shares slid 19% on the FTSE 250 after the Copenhagen-based consumer review platform disclosed accounting discrepancies, including a one million dollar provision related to unpaid US sales tax on certain customer invoices in previous years.
Panmure Liberum analyst Sean Kealy described the announcements as “a couple of missteps,” but added: “This is undoubtedly a speed bump on the company’s maturation journey, but it is firmly on that journey.”