Bank of England pumps £3bn into lenders to steady the ship
Global markets bounced back yesterday from one of the worst sell-offs in history as investors took reassurance from central banks’ efforts to stabilise the system.
The pound climbed 0.8 per cent against the dollar, having tumbled by 11 per cent in the two days after Britain voted for Brexit. The FTSE 100 finished 2.6 per cent higher, recovering some of the near-£100 billion of losses incurred as it dropped 5 per cent between Friday morning and Monday evening.
Global markets, which had a record $3 trillion wiped off valuations in two days, also steadied, with the German, French and Spanish markets each about 2 per cent stronger. On Wall Street the Dow Jones closed 1.5 per cent up at 17,409.72. The rebound came as the Bank of England pumped £3.1 billion of liquidity into Britain’s banks under a special operation arranged months in advance. Banks bid for £6.3 billion, the highest request since the auctions began in February 2014, but were not willing to pay up for the full amount in a sign that they were not desperate.
The central bank has other liquidity arrangements that may have been used, but the take-up will not be disclosed until September 2017. Hedge funds claim they also have been active in currency markets to stabilise the pound.
Richard Gnodde, co-chief executive of Goldman Sachs International, told The Times CEO Summit that markets had functioned well since Friday but were likely to drop further. “There is no panic. Markets are functioning normally. We need to find new levels. The period of price discovery is going to go on for some time,” he said.
Others echoed his warning that markets may resume their slide. Joe Rundle, head of trading at the spread-betting firm ETX Capital, said: “This is a dead-cat bounce because I can’t see what has changed. What you will get this week is the big fund managers, the pension funds, repositioning their portfolios.
“They weren’t in the market on Friday because it was too volatile. If I was a fund manager, I would be taking advantage of this strength and selling into it.”
Markets also found solace in an upward revision to US first-quarter growth, from 0.8 per cent to 1.1 per cent, and a jump in consumer confidence. Traders said that the Federal Reserve was unlikely to raise rates for some time after the Brexit vote, giving the global economy some support.
Mario Draghi, president of the European Central Bank, called for central banks to align their policies to prevent “destabilising spillovers”, without mentioning the referendum vote directly.
The UK’s market rebound came despite a two-notch credit rating downgrade by Standard & Poor’s and a single-notch downgrade by Fitch late on Monday. The move caused government borrowing costs on ten-year debt to rise from a record low 0.93 per cent to 1 per cent before they tracked lower again to 0.95 per cent.
The pound was 0.8 per cent higher against the dollar at $1.3327, still at a level not seen since 1985. The FTSE 100 jumped as bank stocks recovered, up 158.19 points to 6,140.39. The FTSE 250 recovered 535.20 points to 15,503.06.
The rally contined in London on Wednesday. The index of leading shares added 143 points by lunchtime and major markets in Europe were also trading higher. Wall Street is also expected open higher.