Market update: Dismal session as pound slides, gilt yields shoot up and FTSE 100 falls

Susannah Streeter, head of money and markets, Hargreaves Lansdown:”’It’s turning out to be a dismal session with a rising pressure cooker of concern about the impact of high interest rates and geo-political turmoil. As painful borrowing costs weigh down on households, UK consumer confidence has taken a big knock and sharply slowing sales in September signal a deep downturn for retail.  The pound has been sideswiped by the bleaker prospects for the UK, falling to five-month lows against the euro.

Although bets may recede on another rate hike, given the increased fragility of the economy, it looks highly likely that policymakers are going to keep the screws tight on monetary policy. Comments from Andrew Bailey, the governor of the Bank of England, that wage growth was still far too high has reinforced expectations that we’re going to have to get used to this era of painful borrowing costs. The realisation that interest rates are going to have to stay higher for longer, has pushed up 30-year gilt yields to levels not seen since 1998. It shows just how sensitive sentiment is amid the global bond rout. There had been hopes that inflation would come down much more quickly, but it has stayed stubbornly at 6.7% and the recent strength of the oil price, pushed up by fears of supply repercussions from the Israel Hamas conflict, has added to concerns that the headline rate will be slow to come down. Brent Crude jumped above $93 dollars a barrel as tensions remain high ahead of an expected ground invasion of Gaza, and concerns more countries will be drawn into the violence.

As geo-political worries swirl, the FTSE 100 is down by more than 1%, marking a third session of declines. The current turbulence may be unsettling, but long-term investing takes endurance and patience and rather than switching and ditching stocks, riding out the storm is almost always a good strategy when things look rocky. This is the time when the priority should be ensuring investors have a diversified portfolio with a wide range of holdings across different asset classes, sectors and geographies.”

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:  “sharp increase in UK gilt yields and the global bond rout could cause nervousness for members of defined contribution schemes who are close to retirement and are invested in so-called lifestyling funds that move you from equities to bonds in the years before retirement. Significant falls in pension values so close to retirement can undermine the best laid retirement plans and leave people needing to work longer than they would have liked. However, those looking to purchase an annuity for their retirement income could find they are compensated for any falls in their retirement pot as higher gilt yields tend to push up annuity incomes so could give them a better retirement income than they were expecting.”