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Kwasi Kwarteng wipes out UK market gains after first speech as chancellor

·Reporter
·3 min read
FTSE 100 Britain's Chancellor of the Exchequer Kwasi Kwarteng holds a folder reading
The FTSE 100 plunged in the red on Friday as investors digest Kwasi Kwarteng's mini-budget. Photo: Daniel Leal/AFP via Getty

European stocks closed in the red on Friday as investors digest the back-to-back rate hikes from the Bank of England and Federal Reserve and the dollar’s strongest rally in 20 years.

In London, the FTSE 100 (^FTSE) crashed 2% on the day after UK chancellor Kwasi Kwarteng delivered his mini-budget. London's bluechip index slid below the 7,000 threshold for the first time since March.

The CAC (^FCHI) tumbled 2.3% at the closing bell in Paris and the DAX (^GDAXI) lost 2% in Frankfurt.

"Kwasi Kwarteng’s fireworks budget has not been able to stave off a fresh slide in equity prices with the FTSE 100 dropping back below 7,000 earlier for the first time since March, soon after the invasion of Ukraine," Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said.

"By throwing Rishi Sunak’s tax raising plans on a bonfire, the government is taking a big gamble that growth will be ignited, to help the economy grow."

Kwarteng set out an array of tax cuts as part of the Liz Truss's government plans to boost growth amid a deepening cost of living crisis, but that didn't boost UK markets despite hopes of boosting growth.

Read more: Mini-budget: Kwarteng cuts income tax and stamp duty in growth push for UK economy

The mini-budget on Friday comes after the Bank of England delivered its biggest rate hike since November 2008 on Thursday, after raising rates to a 27-year high in its previous meeting.

Markets had been betting the central bank would follow its US counterpart and lift rates by a larger 75 basis points, but the Bank settled on a move dovish course.

The Monetary Policy Committee decided to raise rates to 2.25% — their highest since November 2008 — from 1.75%, in an effort to grapple big increases in prices.

Experts at the Bank also said that the UK economy is already in recession after gross domestic product (GDP) shrank for the second straight quarter.

The pound fell to the lowest level since 1985, and neared parity with the dollar. Sterling extended its losses, falling by 3% to $1.092 — inching closer to its all-time low of $1.0520. The euro also fell to a 20-year low against the greenback.

Across the Atlantic, US indices slipped after rate rises from the Fed and other central banks, adding to concerns that the battle to control rising prices could bring a recession.

Read more: Pound plunges to fresh 37-year low as Kwasi Kwarteng announces 'growth plan'

The Federal Open Market Committee raised rates by another 0.75 percentage point on Wednesday and signalled that there are more hikes to come.

Wall Street’s S&P 500 (^GSPC) fell 1.6% after the opening bell, the tech-heavy Nasdaq (^IXIC) slumped 1.5%, while the Dow Jones (^DJI) declined 1.4% at London's close.

Read more: Bank of England hikes UK interest rates by 0.5% to 14-year high

Asian stocks tracked Wall Street, closing in the red overnight.

The Nikkei (^N225) closed down 0.6% in Japan, while the Hang Seng (^HSI) drifted 0.5% lower in Hong Kong and the Shanghai Composite (000001.SS) also slipped 0.5% in mainland China.

Richard Hunter, head of markets at Interactive Investor, said: "A week dominated by further aggressive monetary tightening around the world has left equity markets bruised on a deteriorating outlook.

"Quite apart from the Federal Reserve’s expected 0.75% hike, there were also notable increases in interest rates in the likes of the UK and Switzerland, as the central bank merry-go-round continues to increase the likelihood of recession on a global scale."

Watch: How does inflation affect interest rates?