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FTSE slides 2% as Germany attacks UK plan and World Bank warns of recession

In London, the FTSE fell. German Finance Minister Christian Lindner addresses journalists during a press conference in Berlin on September 21, 2022. (Photo by John MACDOUGALL / AFP) (Photo by JOHN MACDOUGALL/AFP via Getty Images)
German finance minister Christian Lindner said: 'Germany is showing its economic strength in an energy war. Our relief package is effective… we don’t want to follow the UK’s path.' In London, the FTSE fell. Photo: John Macdougall/AFP via Getty.

European stock markets continued their decline on Thursday as the World Bank warned of a recession in Europe, and as Germany laid into the UK's economic plans.

In London, the FTSE 100 (^FTSE) fell 2% by the end of the session, with losses across the board, while the CAC (^FCHI) tumbled 1.5% in Paris and the Frankfurt DAX (^GDAXI) was 1.7% lower.

It came as David Malpass, president of the World Bank, warned the West that it could take years for global energy production to recover from the supply crisis triggered by Russia’s invasion of Ukraine.

He added that the energy crisis would prolong the risk of a period of low growth and high inflation, or stagflation.

Read more: Bank of England: What will the emergency action actually do?

Meanwhile, German finance minister Christian Lindner said: “Germany is showing its economic strength in an energy war. Our relief package is effective… we don’t want to follow the UK’s path.”

It came as inflation in Europe's largest economy jumped to double digits at 10.7% for the first time in the era of reunification. It was the highest HICP figure since comparable data started in 1996.

The pound (GBPUSD=X) tumbled 0.9% earlier in the session before recovering, as former Bank of England (BoE) governor Mark Carney accused new prime minister Liz Truss of “undercutting” the UK’s financial institutions.

He pointed to a lack of an Office for Budget Responsibility (OBR) forecast, and a lack of detail about costing and working at “cross-purposes” with the central bank.

“I don’t understand why it seems unusual that you actually want to know the numbers in a Budget, after all that is what a Budget is, and understand the forecasts underpinning those numbers, he said.

“Then make your own judgments about whether those are plausible. It’s important to have it open to independent and dare I say expert scrutiny. That’s the system that's been put in place.”

Read more: UK property: Home buyers with mortgages face 28% hit to buying power in 2023

Yields (or interest rates) on UK government bonds are rising again, a day after the Bank of England’s emergency intervention led to a sharp drop.

The 30-year yield, which plunged by more than one percentage point on Wednesday, rose to 4.06% while the 10-year yield has climbed to 4.17%. Any rise in yields pushes up government borrowing costs.

Across the pond, the S&P 500 (^GSPC) dipped 2% by the time of the European close, and the tech-heavy Nasdaq (^IXIC) slumped 2.9% as investors fretted about the global economic outlook. The Dow Jones (^DJI) edged 1.4% lower.

It came as US GDP fell 0.6% in the second quarter, as expected, the final estimate confirmed.

William Marsters, senior sales trader at Saxo UK, said: "This paired with the decreasing initial jobless claims, out lower than expectations at 193,000 vs previous 213,000, the picture continues to give Powell little excuse to hold back on further rate rises.

"There is room in the labour market and the US consumer remains resolute. In reaction, the dollar has lifted against most pairs and the market has tipped the S&P500 futures lower before US opening.”

Watch: Inflation: There's still 'time for the Fed to change course,' strategist says

Wall Street closed higher on Wednesday as the Bank of England's intervention calmed markets, however, turmoil has returned today with the UK bond rout spreading overseas.

The yield on 10-year US Treasury notes jumped 11 basis points to 3.83%, with German gilts posting a similar move following new inflation data. Treasuries suffered their biggest fall since the COVID crash on Monday, only to rebound just as quickly.

Elsewhere, Asian markets rose on Thursday after the BoE launched the emergency bond buying programme to help shore up a falling pound.

The move offered some comfort to a fractious mood in markets, with the Nikkei (^N225) climbing almost 1% on the day in Tokyo, while the Hang Seng (^HSI) fell 0.8% in Hong Kong, and the Shanghai Composite (000001.SS) dipped 0.1%.

Watch: How does inflation affect interest rates?