FTSE 100 takes £75bn hit as Europe becomes new focus of Silicon Valley Bank fallout
The FTSE 100 and other major European stock markets have taken a beating as concern over the health of US banks crosses the Atlantic.
London’s blue chip index lost £75bn in combined market value by the close after suffering its deepest fall, on a points basis, since the early days of the COVID crisis.
Sentiment soured across the continent when the top shareholder at troubled Credit Suisse declared that it could not provide the Swiss bank with more financial assistance.
That sent its shares down by almost a third at one stage to new record lows and prompted a hit to wider financial stocks, market analysts said.
Switzerland’s second-largest bank, no stranger to crisis over the past few years, like others has seen concerns for its financial health come into sharper focus since the collapse of Silicon Valley Bank last week.
The attention of investors has mostly been on the ability of lenders to absorb the aggressive tightening of interest rates since last year which has made it more difficult to service their debts.
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Adding to the early selling mood was speculation that the European Central Bank (ECB) planned to raise its core deposit rate by 0.5 percentage points this Thursday as part of its continued efforts to tackle inflation.
A source close to the ECB Governing Council said the ECB was unlikely to ditch plans for a big rate move this week because that would damage its credibility, the Reuters news agency reported.
Markets on Wednesday morning were pricing in a 90% chance of a 0.5 percentage point hike.
However, given the scale of the market mayhem facing financial services firms, the probability had dropped to 20% by late Wednesday afternoon.
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Markets react to SVB collapse
Read more:
How Silicon Valley Bank chaos has had a bearing on us all
Credit Suisse shares closed the day 24% lower. It appealed for a statement of support from the Swiss National Bank, the Financial Times reported.
Other European banking stocks also fell sharply, albeit not as badly.
Spain’s IBEX and the Italian MIB were more than 4% down.
Market Mayhem has no link to budget day
While the chancellor was speaking in the Commons, the stock market fell out of bed.
But it is important to note that it had nothing to do with Mr Hunt’s announcements and everything to do with events elsewhere around the world.
Markets have fallen right across Europe and, once again, it is the accident-prone Swiss lender Credit Suisse which is at the eye of the hurricane.
The concerns centre on the problems that have afflicted regional banks in the US over recent days – concerns that are now also cropping up in Europe.
Credit Suisse had already rattled the markets by admitting on Tuesday that it had found “material weaknesses” in its financial reporting processes for 2021 and 2022.
Its shares took another leg down, by up to 30%, when its biggest shareholder, Saudi National Bank, said on Wednesday it would not provide any further financial assistance because rules prevent it raising its equity stake above 10% – close to where it currently sits.
For financial markets, the debacle in Credit Suisse shares may well be the more important story of the day.
In London, the FTSE 100 closed the day 3.8% lower at 7,344, leaving it more than 1% down on where it had started the year.
Insurers and asset managers were all big losers.
Barclays, the worst of the UK bank performers, ended the day 9% lower.
US equity markets also opened lower with financial stocks leading the way. The Dow Jones Industrial Average was 2% down.
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Silicon Valley Bank – what happened?
Other significant market moves caught the eye as Brent crude oil tumbled to its lowest level in more than a year, falling 6% to $72 dollars a barrel, with market analysts citing the uncertainty gripping financial stocks.
Attention, however, was firmly focused on Credit Suisse.
Its largest shareholder, Saudi National Bank (SNB), said it would not buy more shares on regulatory grounds as it would take its stake above 10%.
A string of scandals have undermined the confidence of its investors and clients, with Credit Suisse customer outflows in the fourth quarter rising to more than 110 billion Swiss francs (£100bn)
SNB said it was happy with Credit Suisse’s turnaround plan and did not think it would need more money.
That was despite its annual report for 2022, released earlier this week, admitting that “material weaknesses” in controls over financial reporting had been identified and customer outflows had not yet been stemmed.
The UK economy grew by 0.1% between July and September, according to the Office for National Statistics (ONS).
However, despite the small positive GDP growth recorded in the third quarter, the economy shrank by 0.1% in September, dragging down overall growth for the quarter.
The growth was also slower than what had been expected by experts and a drop from the 0.5% growth between April and June, the ONS said.
Economists polled by Reuters and the Bank of England had forecast an expansion of 0.2%, slowing from the rapid growth seen over the first half of 2024 when the economy was rebounding from last year’s shallow recession.
And the metric that Labour has said it is most focused on – the GDP per capita, or the economic output divided by the number of people in the country – also fell by 0.1%.
Reacting to the figures, Chancellor of the Exchequer Rachel Reeves said: “Improving economic growth is at the heart of everything I am seeking to achieve, which is why I am not satisfied with these numbers,” she said in response to the figures.
“At my budget, I took the difficult choices to fix the foundations and stabilise our public finances.
“Now we are going to deliver growth through investment and reform to create more jobs and more money in people’s pockets, get the NHS back on its feet, rebuild Britain and secure our borders in a decade of national renewal,” Ms Reeves added.
The sluggish services sector – which makes up the bulk of the British economy – was a particular drag on growth over the past three months. It expanded by 0.1%, cancelling out the 0.8% growth in the construction sector
The UK’s GDP for the the most recent quarter is lower than the 0.7% growth in the US and 0.4% in the Eurozone.
The figures have pushed the UK towards the bottom of the G7 growth table for the third quarter of the year.
It was expected to meet the same 0.2% growth figures reported in Germany and Japan – but fell below that after a slow September.
The pound remained stable following the news, hovering around $1.267. The FTSE 100, meanwhile, opened the day down by 0.4%.
The Bank of England last week predicted that Ms Reeves’s first budget as chancellor will increase inflation by up to half a percentage point over the next two years, contributing to a slower decline in interest rates than previously thought.
Announcing a widely anticipated 0.25 percentage point cut in the base rate to 4.75%, the Bank’s Monetary Policy Committee (MPC) forecast that inflation will return “sustainably” to its target of 2% in the first half of 2027, a year later than at its last meeting.
The Bank’s quarterly report found Ms Reeves’s £70bn package of tax and borrowing measures will place upward pressure on prices, as well as delivering a three-quarter point increase to GDP next year.
Business
Chancellor’s Mansion House speech vows to rip up red tape – saying post-financial crash rules went ‘too far’
Chancellor Rachel Reeves has criticised post-financial crash regulation, saying it has “gone too far” – setting a course for cutting red tape in her first speech to Britain’s most important gathering of financiers and business leaders.
Increased rules on lenders that followed the 2008 crisis have had “unintended consequences”, Ms Reeves will say in her Mansion House address to industry and the City of London’s lord mayor.
“The UK has been regulating for risk, but not regulating for growth,” she will say.
It cannot be taken for granted that the UK will remain a global financial centre, she is expected to add.
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It’s anticipated Ms Reeves will on Thursday announce “growth-focused remits” for financial regulators and next year publish the first strategy for financial services growth and competitiveness.
Rachel Reeves
Bank governor to point out ‘consequences’ of Brexit
Also at the Mansion House dinner the governor of the Bank of England Andrew Bailey will say the UK economy is bigger than we think because we’re not measuring it properly.
A new measure to be used by the Office for National Statistics (ONS) – which will include the value of data – will probably be “worth a per cent or two on GDP”. GDP is a key way of tracking economic growth and counts the value of everything produced.
Brexit has reduced the level of goods coming into the UK, Mr Bailey will also say, and the government must be alert to and welcome opportunities to rebuild relations.
Mr Bailey will caveat he takes no position on “Brexit per se” but does have to point out its consequences.
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Bailey: Inflation expected to rise
In what appears to be a reference to the debate around UK immigration policy, Mr Bailey will also say the UK’s ageing population means there are fewer workers, which should be included in the discussion.
The greying labour force “makes the productivity and investment issue all the more important”.
“I will also say this: when we think about broad policy on labour supply, the economic arguments must feature in the debate,” he’s due to add.
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The exact numbers of people at work are unknown in part due to fewer people answering the phone when the ONS call.
Mr Bailey described this as “a substantial problem”.
He will say: “I do struggle to explain when my fellow [central bank] governors ask me why the British are particularly bad at this. The Bank, alongside other users, including the Treasury, continue to engage with the ONS on efforts to tackle these problems and improve the quality of UK labour market data.”
Business
Reeves has welcome support from Bank’s governor as she goes for growth and seeks to woo City
When Gordon Brown delivered his first Mansion House speech as chancellor he caused a stir by doing so in a lounge suit, rather than the white tie and tails demanded by convention.
Some 27 years later Rachel Reeves is the first chancellor who would have not drawn a second glance had they addressed the City establishment in a dress.
As the first woman in the 800-year history of her office, Ms Reeves’s tenure will be littered with reminders of her significance, but few will be as symbolic as a dinner that is a fixture of the financial calendar.
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Her host at Mansion House, asset manager Alastair King, is the 694th man out of 696 Lord Mayors of London. The other guest speaker, Bank of England governor Andrew Bailey, leads an institution that is yet to be entrusted to a woman.
Ms Reeves’s speech indicates she wants to lean away from convention in policy as well as in person.
By committing to tilting financial regulation in favour of growth rather than risk aversion, she is going against the grain of the post-financial crash environment.
“This sector is the crown jewel in our economy,” she will tell her audience – many of whom will have been central players in the 2007-08 collapse.
Sending a message that they will be less tightly bound in future is not natural territory for a Labour chancellor.
Her motivation may be more practical than political. A tax-and-spend budget that hit business harder than forewarned has put her economic program on notice and she badly needs the growth elements to deliver.
Rachel Reeves on budget day. Pic: PA
Her plans to consolidate local authority pension schemes so they might match the investing power of their Canadian and Australian counterparts is part of the same theme.
Infrastructure investment is central to Reeves’s plan and these steps, universally welcomed, could unlock the private sector funding required to make it happen.
Bank governor frank on Brexit and growth
If the jury is out in a business financial community absorbing £25bn in tax rises, she has welcome support from Mr Bailey.
He is expected to deliver some home truths about the economic inheritance in plainer language than central bankers sometimes manage.
Britain’s growth potential, he says, “is not a good story”. He describes the labour market as “running against us” in the face of an ageing population.
With investment levels “particularly weak by G7 standards”, he will thank the chancellor for the pension reforms intended to unlock capital investment.
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Governor warns inflation expected to rise
He is frank about Brexit too, more so than the chancellor has dared.
While studiously offering no view on the central issue, Mr Bailey says leaving the EU had slowed the UK’s potential for growth, and that the government should “welcome opportunities to rebuild relations”.
There is a more coded warning too about the risks of protectionism, which is perhaps more likely with Donald Trump in the White House.
“Amid threats to economic security, let’s please remember the importance of openness,” the Bank governor will say.
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All that is welcome for Ms Reeves.
Already a groundbreaking chancellor, she is aiming for a political and economic legacy that extends beyond her gender and the dress code.
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