European stocks fall and bond prices slide on interest rate fears

European stock and bond prices fell on Monday as investors fretted over the impact on the global economy of aggressive interest rate rises, as policymakers try to stamp out soaring inflation.

The yields on UK and Italian sovereign debt rose as traders reacted to the UK’s package of tax cuts designed to boost the economy and an election victory in Italy for a coalition of rightwing parties.

Europe’s Stoxx 600 fell 0.3 per cent in morning dealings. London’s FTSE 100 index traded more steadily as many UK-listed companies earn profits abroad and in dollars, benefiting from a stronger dollar against the pound.

The moves come after a miserable day for equities on Friday as traders worried that high interest rates would curb economic growth. The Stoxx 600 officially entered “bear market” territory — typically defined as having declined 20 per cent or more from a recent peak.

UK currency and bond markets on Monday continued to react to the government’s plans to pursue more tax cuts. Borrowing costs on the UK’s 10-year gilt rose 0.24 percentage points to 4.1 per cent while yield on the two-year gilt, which is more sensitive to monetary policy, rose 0.3 percentage points to reach 4.3 per cent. Bond yields rise when prices fall.

Sterling fell 1.7 per cent against the dollar, hitting $1.0674. The pound hit a record low of $1.035 overnight in Asian trading and fell 1.1 per cent against the euro to €1.1068.

Traders weighed last week’s historic package of tax cuts with the prospect of further fiscal stimulus in the face of rising interest rates and record inflation.

Vasileios Gkionakis, Emea head of G10 foreign exchange strategy at Citi, said: “The UK is now in the midst of a currency crisis.”

“It looks increasingly likely that the Bank of England will have to resort to an intra-meeting hike to support sterling,” he said, adding that “the UK cannot rely on the ‘kindness of strangers’ anymore; sterling will have to depreciate further to compensate for the higher UK risk premium”.

In Italy, a coalition of Italy’s rightwing parties won the country’s election, led by Giorgia Meloni’s ultra-conservative Brothers of Italy party. The results were widely expected and the parties must now form a government, which typically takes a month.

The yield on Italy’s benchmark 10-year bond rose 0.1 percentage point to hit 4.45 per cent.

Ludovico Sapio, macro research associate at Barclays, said that in the short term, “risks of tensions are modest” but in the medium term “a centre-right government would bring a looser fiscal stance and a higher risk of frictions with the EU”.

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