Market speculation about a possible emergency interest rate hike by the Bank of England this week gave the pound some support by midday Monday, but hurt share prices.
Earlier in the day, sterling fell to its lowest ever price against the dollar, as traders responded to the tax and borrowing plans that the new UK government unveiled on Friday.
‘The market's continuing verdict on the mini-budget, which turned out to be anything but mini, couldn't really have been any more savage,’ AJ Bell analyst Russ Mould commented.
‘The sceptre of parity against the dollar, which felt far off just a week ago, now feels dangerously close.’
There is, however, a growing conviction at the start of the week that the Bank of England could enact an unscheduled rate rise in order to steady the beleaguered UK currency.
The FTSE 100 index was down 61.07 points, or 0.9%, at 6,957.53 midday Monday. The mid-cap FTSE 250 index was down 285.51 points, or 1.6%, at 17,687.18. The AIM All-Share index was down 5.98 points, or 0.7%, at 827.61.
Both the FTSE 250 and AIM All-Share sat at roughly two-year lows.
The Cboe UK 100 index was down 0.8% at 694.51. The Cboe 250 was down 1.8% at 15,101.96, and the Cboe Small Companies was down 0.2% at 13,008.25.
The CAC 40 stock index in Paris and the DAX 40 in Frankfurt were down 0.2%.
London's FTSE 100 initially had moved higher on Monday, due to the pound weakness, but succumbed to speculation that we may hear from Threadneedle Street before the week is out.
Sterling fell to an intraday low of $1.0349 earlier Monday, its worst ever level against the dollar. It regained poise as the morning progressed to fetch $1.0713 at midday, though that is still down from $1.0869 at the London equities close on Friday.
Ebury analyst Matthew Ryan commented: ‘Sterling has been the talk of the town in the foreign exchange market so far this morning, with the fallout from Friday's budget announcement sending the pound briefly crashing to a record low on the US dollar.
‘Since hitting its lows, the pound has bounced back rather quickly as investors ramp up speculation that the Bank of England could intervene either by announcing an inter-meeting rate hike or by selling its foreign currency holdings. We think that the latter is unlikely, although an emergency rate hike cannot be ruled out. In any case, markets now see the bank's base rate rising to almost 6% in 2023 - a policy move at odds with the government's attempts to support UK growth.’
Last week, the BoE enacted its second-successive 50 basis point hike, lifting rates to 2.25%.
The prospect of another rate rise this week hurt London-listed housebuilders.
Taylor Wimpey fell 7.6%, Persimmon 6.9% and Berkeley 5.8%.
There have been concerns that the red-hot UK housing market will cool after a succession of rate hikes by the BoE. However, UK Chancellor Kwasi Kwarteng last Friday said the threshold for stamp duty on home purchases will be lifted to £250,000 from £125,000, potentially offering some respite for the housing sector in the face of interest rate hikes.
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.
It added that price growth this month is being driven predominantly by the middle and high-end market sectors.
On an annual basis, UK house price growth quickened to 8.7% in September from 8.2% in August.
Retailer stocks also struggled, with the possibility of more interest rate hikes adding to concern about dwindling consumer discretionary spend. B&M European lost 5.1%, Dunelm fell 4.8%, and AO World was 3.8% lower.
Elsewhere in London, RPS Group rose 12% to 232.05 pence as it backed a £636 million takeover offer from Tetra Tech and withdrew its recommendation for a bid by Toronto-listed consultancy firm WSP Global
Nasdaq-listed consultancy and engineering services firm Tetra will pay 222 pence in cash for each RPS share, a 7.8% premium to the 206p offered by WSP. The WSP deal valued RPS at £591.1 million.
WSP urged RPS shareholders to take no action.
RPS currently has a market capitalisation of £644.0 million.
Pendragon shares rose 19% to 26.93p at midday. It has a market value of £376.1 million.
Pendragon is mulling a takeover proposal. The car dealer said it has received an approach from vehicle showrooms operator Hedin Mobility Group.
Hedin has offered 29p per Pendragon share, giving it an equity valuation of around £405 million.
Hedin has a 'put up or shut up' deadline of October 24.
musicMagpie plunged 70% as it warned growth will be weaker than expected.
The used-technology reseller said it still expects that second half profitability will be a ‘substantial improvement’ on the first, but warned its Consumer Technology division has performed weaker than anticipated.
It also warned that October and November, featuring the key Black Friday trading stretch, are expected to be hampered by worsening economic outlook and increasing cost of living pressures in the UK.
The euro inched up to $0.9652 by midday Monday, though still down from $0.9691 late Friday. Against the yen, the dollar rose to JP¥144.12 from JP¥143.28.
Gold was quoted at $1,639.57 an ounce midday Monday, down from $1,643.77 at the London equities close on Friday. Brent oil was trading at $85.65 a barrel, down from $86.34.
Stocks in New York were called lower on Monday. Both the Dow Jones Industrial Average and S&P 500 were called down 1.0%. The Nasdaq Composite was called 0.6% lower.
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