Europe open: Shares down as BoE sends mixed signals on bond purchases

European shares slipped at the open on Wednesday as investors monitored the continuing turmoil in the UK bond market caused by the ill-received government plan for unfunded tax cuts.

The pan-European Stoxx 600 index was down 0.78% in early deals with most regional markets lower. Britain’s FTSE 100 bucked the trend, rising 0.04% despite official data showing the economy unexpectedly shrank in August.

“European markets are trading mostly lower with the DAX in Germany leading the declines after the IMF warned that inflation, higher interest rates and the Ukraine war were sending the global economy towards a recession,” said Victoria Scholar, head of investment at Interactive Investor.

Data from the Office for National Statistics showed a 0.3% contraction in the UK economy unexpectedly against expectations for 0% growth and following a positive reading of 0.1% in July.

“After this morning’s disappointing GDP figures, the Bank of England may need to tread even more carefully in terms of how aggressive it can be on interest rates to curtail inflation, given the growing risk of recession,” Scholar said.

Investors were also trying to decipher signals from Bank of England Governor Andrew Bailey, who on Tuesday said emergency bond purchases would end on Friday, but officials appeared to contradict this position, telling the Financial Times the bank was prepared to extend its deadline.

“Carry on up Threadneedle Street: The Bank of England is suffering a form of communication breakdown that’s left everyone in the market a bit dazed and confused,” said Markets.com analyst Neil Wilson.

“It was an unhelpful remark likely to lead to more, not less, instability in the immediate term, even if Bailey is confident that the market will function fine without the backstop.”

“This morning the expected has happened and sources at the Bank are ‘privately’ briefing that of course the Bank would extend the intervention if financial stability were again at risk. Gilts were, predictably, sold at the market open, with the 30yr yield up 8bps at 4.89% before easing back. The problem is the market is still working on mixed messaging from the Bank and this will need to be resolved soon.”

In equity news, shares in UK housebuilder Barratt Developments fell sharply after the company said private reservations had fallen due to a lack of mortgage availability. The news hit fellow builders Persimmon, Vistry and Bellway.

Philips fell 10% as the Dutch health technology company said its quarterly core profit would drop around 60%, and it signalled a huge charge on the value of its plagued sleep and respiratory care business.

Credit Suisse fell after Bloomberg reported the US Justice Department was investigating whether the Swiss lender continued helping US clients hide assets from authorities, eight years after it paid a $2.6bn tax evasion settlement.

Reporting by Frank Prenesti for Sharecast.com