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Wall Street bounces off lows as UK steps in to calm bonds

09/28/2022 | 01:57pm EST

(Updates to U.S. afternoon trading, adds analyst comments)

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U.S. stocks rebound after hitting new lows on Tuesday

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UK gilts roar higher as Bank of England intervenes

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U.S. dollar pauses record gains as UK pound stabilizes

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Oil prices jump on Hurricane Ian cuts

Sept 28 (Reuters) - U.S. and global equities staged a partial comeback on Wednesday as the Bank of England said it would step in to 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 UK bond yields to their highest level in years.

Sterling, which hit record lows against the dollar on Monday, was last up about 1.37% in volatile trading, 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 also 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 1.25%, off two-decade highs, spurred on by yields on the benchmark 10-year Treasury approaching 4.0% for the first time since 2008.

The MSCI All-World index was last up about 1.1%, having pulled off a session trough that marked its lowest level since November 2020. It is heading for a nearly 8% drop in September - its biggest monthly decline since March 2020's fall of 13%.

In Europe, the STOXX 600 and FTSE 100 both pared losses to gain about 0.3% on the day.

Wall Street's rebound gained momentum over the day, with the S&P 500 Index up about 1.6% after it fell to a two year low on Tuesday. The Dow Jones Industrial Average gained 1.6% and the Nasdaq Composite was up 1.5%.

Weighing on growth stocks was Apple Inc, which was down about 3% on a report the tech company was dropping its plans to boost production of the latest model of its flagship iPhone.

Bryce Doty, senior portfolio manager for Sit Fixed Income Advisors LLC in Minneapolis, said the UK intervention had helped calm U.S. markets, but that the "temporary stability is something of an illusion."

Doty cited the widening gap between 10-year treasury yields and 30-year mortgage rates, which he attributed to the Fed reducing its mortgage securities and the sharp inversion of the yield curve resulting from the Fed’s "aggressive determination to damage economic activity."

UK MARKETS STORM

At the heart of this week's sell-off across global markets is the British government's so-called mini-budget last week which announced a raft of tax cuts and little in the way of detail as to how those would be funded.

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.

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.

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 3.66% to $81.37 per barrel and Brent was at $88.83, up 2.97% on the day.

Spot gold added 2.0% to $1,661.49 an ounce. U.S. gold futures fell 0.30% to $1,621.80 an ounce.

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 note released on Wednesday. "Eventually, brighter skies will be on the horizon."

(Reporting by Lawrence Delevingne in Boston and Amanada Cooper in London Additional reporting by Wayne Cole in Sydney Editing by Mark Potter and Matthew Lewis)


ę Reuters 2022
Stocks mentioned in the article
ChangeLast1st jan.
AMUNDI 0.65% 54.55 Real-time Quote.-24.81%
APPLE INC. -0.34% 147.81 Delayed Quote.-16.48%
AUSTRALIAN DOLLAR / BRITISH POUND (AUD/GBP) -0.05% 0.5521 Delayed Quote.3.59%
BRENT OIL -1.49% 85.9 Delayed Quote.11.95%
BRITISH POUND / US DOLLAR (GBP/USD) 0.03% 1.229 Delayed Quote.-9.40%
CANADIAN DOLLAR / BRITISH POUND (CAD/GBP) -0.02% 0.60412 Delayed Quote.3.81%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.01% 0.742 Delayed Quote.-5.91%
DOW JONES INDUSTRIAL 0.10% 34429.88 Real-time Quote.-5.25%
EURO / BRITISH POUND (EUR/GBP) 0.03% 0.85757 Delayed Quote.2.21%
EURO / US DOLLAR (EUR/USD) 0.07% 1.054 Delayed Quote.-7.41%
FTSE 100 -0.03% 7556.23 Delayed Quote.2.33%
INDIAN RUPEE / BRITISH POUND (INR/GBP) 0.07% 0.010006 Delayed Quote.1.42%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.11% 0.012297 Delayed Quote.-8.26%
NASDAQ COMPOSITE -0.18% 11461.5 Real-time Quote.-26.74%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.63% 0.64084 Delayed Quote.-6.84%
STOXX EUROPE 600(EUR)(TR) -0.15% 1023.82 Delayed Quote.-6.81%
UK 10Y CASH -0.01% 3.1562 Delayed Quote.249.70%
US DOLLAR / BRITISH POUND (USD/GBP) -0.03% 0.81367 Delayed Quote.10.37%
WTI -1.34% 80.208 Delayed Quote.6.45%
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