Today's markets: Gilt chaos fails to hit the FTSE

It feels like the bond chaos is all somewhat of investors’ own making. Bond yields are rising across the world, in part because inflation (remember that?) hasn’t gone away. It never did actually, but markets, as they often do, got carried away with the prospect rate cuts and thought everything was fine. This is despite central bankers saying for months on end that the battle was far from over. Add the fact that we’re on the precipice of a global trade war, complete with tariffs, and inflation could soon become the buzz word for 2025.

This is part of the reason why bond yields, particularly in the US, are rising. But oh my the UK is a special case. Yields on 10-year gilts are now the highest they have been since 2008 at 4.8 per cent, having risen another 14 basis points yesterday. And I don’t know about you, but in my experience, the phrase “since 2008” is rarely ever used as a positive. To the reason above you can add a lack of economic growth, a further round enforced price growth approaching due to tax rises, and then a vicious circle of already higher borrowing costs meaning chancellor Rachel Reeves could miss her self-imposed borrowing targets and be forced to raise taxes again, which would hurt growth etc etc. Stagflation is a word perhaps being used too loosely at the moment, but it’s becoming more relevant. The spike in yields, and subsequent intervention from the Treasury to try and calm market nerves, has Liz Truss-vibes. That may sound a little harsh, but we’re not far away from it being a relevant comparison.

The chaos has spread to sterling, which has again weakened against the dollar, although this was a two-way streak with the greenback strengthening on its own accord following positive economic data from across the pond. Cable is now $1.22, the lowest since September 2023, and has been falling again this morning. 

The domestically focused FTSE 250 has also struggled in recent days. But the fact the FTSE 100 isn’t representative of the UK economy (and often benefits from sterling weakness) is aiding investors at the moment. The index was up 0.5 per cent in early trading, as mining stocks dominate the risers charts, overpowering some mixed figures from retailers. 

Shares in Paris are a touch in the green but Frankfurt has gone the other way. Overnight, the S&P 500 rose 0.16 per cent, but tech struggled as the Nasdaq underperformed with a 0.1 per cent drop. Yesterday saw the minutes from the last Federal Reserve meeting in December published, which didn’t do much to dissuage traders from the thinking cemented earlier this week: as it stands, the next rate cut won’t be until July. Tomorrow brings the non-farm payrolls report, which will give traders a clearer view on the state of the US employment (and what that means for interest rates) so expect some volatility.

In Asia overnight, shares fell across the board. Japan took the biggest hit despite yen weakening against the dollar, with the Topix falling 1.2 per cent. Shares in Shanghai and Hong Kong also fell, as the Chinese government moved to shore up the currency as traders bet against the renminbi on the back of tariff fears.

By Taha Lokhandwala