Bond sell-off spooks markets; Tesco predicts food inflation will keep falling – business live | Business

European stock markets have opened lower, as the bond market selloff continues to worry investors.

In London, the FTSE 100 index has dropped by 28 points, or 0.4%, to 7442 points, the lowest since 8 September.

The pan-European Stoxx 600 is down 0.5%, with Germany’s DAX index losing 0.7% at the open.

Equity markest are also being hit by fears that the Federal Reserve will keep rates higher for longer to tame inflation.

Last night, the US Dow Jones industrial average shed 430 points, or 1.29%, in its worst day since March. The Dow is now in the red for 2023.

And in Tokyo today, Japan’s Nikkei 225 index has tumbled by over 2%.

Mark Haefele, chief investment officer at UBS Global Wealth Management, says investors had been too confidence that US interest rates would start to fall – and are now rethinking that idea:

“Recent developments support our view that markets had become overly confident in pricing a rapid easing of the Fed’s monetary policy. While we expect equity and bond market conditions to improve, we forecast choppy and range-bound trading in equity markets in the near term, as well as a reverse in the recent rise in longer duration yields.”

Germany’s government bonds are also caught up in the selloff, as trading begins in the markets this morning.

The yield (interest rate) on German 10-year bunds has risen above 3%, for the first time since 2011 [reminder, yields rise when prices fall].

Germany’s 30-year bund yields are also at a 12-year high, Reuters reports, rising by 5 basis points to 3.245%.

Supermarket giant Tesco has predicted that food inflation will continue to fall, as it raises its profit guidance after a strong start to the year.

In its interim financial results, just released, Tesco signalled that the cost of living squeeze was easing.

Ken Murphy, Tesco chief executive, says:

Food inflation fell across the half and while external pressures remain, we expect that it will continue to do so in the second half of the year.

Yesterday, the British Retail Consortum reported that food prices in the UK fell on a monthly basis in September, for the first time in two years.

Tesco cites price cuts to items such as milk, pasta and cooking oil in June, and says that around 2,500 products were on average 12% cheaper than at the start of the year.

Tesco also reported an 8.9% rise in group sales, and a 13.5% rise in underlying earnings.

The group, which has a 27% share of Britain’s grocery market, now expected to make a retail adjusted operating profit of between £2.6bn and £2.7bn, up from a previous forecst of around £2.5bn.

On a pre-tax basis, profits are up 207%, rising from £396m to £1.217bn in the 26 weeks ended 26 August 2023.

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An accelerating bond selloff is driving up the cost of government borrowing, as the financial markets fret about high interest rates.

The yield, or interest rate, on 30-year UK government bonds has hit 5% for the first time since the panic after the mini-budget a year ago.

Across the Atlantic, the yield on 30-year US Treasuries hit a 16-year high last night, as the bond selloff rocked currencies such as the yen and the rouble.

Jim Reid, strategist at Deutsche Bank, explains:

The last 24 hours saw the relentless bond sell-off continue, with yields rising to fresh multi-year highs on both sides of the Atlantic.

Bond prices are sliding, pushing up yields, because investors fear that interest rates will remain high as central banks try to push down inflation. The selloff appears to have been triggered by stronger-than-expected economic data from the US, which showed a surprise rise in job vacancies in August.

That may force the US Federal Reserve to push borrowing costs even higher, as it tries to squeeze out inflationary pressures.

These high yields in the bond market indicate how much it will cost governments to issue new debt to pay for current spending needs. Two years ago, the UK’s 30-year gilt yield was just 1.5% – a great opportunity to borrow cheaply to fund long-term investment.

Also coming up today

The criminal trial of the former cryptocurrency mogul Sam Bankman-Fried will continue; it began yesterday with jury selection.

UK rail passengers face fresh disruption today, as train drivers hold another strike in a bitter, long-running dispute over pay and conditions.

Members of the drivers’ union Aslef at 16 train operators in England will walk out, coinciding with the final day of the annual conference of the Conservative Party in Manchester.

Railways will be high on the agenda in Manchester, with Rishi Sunak expected to confirm today that the northern leg of HS2 has been cancelled.

According to overnight reports, Sunak will say that the rail line will reach Manchester, but from Birmingham it will switch to use existing West Coast Mainline track.

The agenda

• 9am BST: Eurozone services PMI rreport for September

• 9.30am BST: UK services PMI report for September

• 11am BST: UN annual flagship report on the global economy published

• 1.15pm BST: ADP survey of US private sector payrolls

• 3pm BST: US services PMI report for September