FTSE 100 falters as traders eye UK borrowing and Davos conference

·Business Reporter, Yahoo Finance UK
·4 min read
Davos meeting 2022. The FTSE fell on Tuesday.
The FTSE fell on Tuesday as the Davos annual meeting had its second day. Photo: Fabrice Coffrini/AFP via Getty

European stock markets retreated on Tuesday, reversing Monday's gains, as investors turned their focus to UK public finances and the second day of the Davos conference.

In London, the FTSE 100 (^FTSE) fell 0.4% on the day, recovering some of the earlier losses after energy firms dragged the index. The CAC (^FCHI) tumbled 1.5% in Paris, and the Frankfurt DAX (^GDAXI) was 1.6% lower.

It came as the Office for National Statistics (ONS) revealed that government borrowing last month fell £5.6bn ($7.05bn) from a year earlier to £18.6bn. April saw the first contributions to government revenues of the increase to national insurance.

As a result the Treasury received £13.4bn in compulsory social contributions during the period, a rise of £1.4bn, or more than 11%, on the year.

“These figures are only likely to get worse as the cost-of-living crisis intensifies," Paul Craig, portfolio manager at Quilter Investors, said. "While the Bank of England is on a monetary policy tightening path, the calls for fiscal easing are only going to grow louder.

"The UK economy has the potential to fall into recession later this year and the government will want to try and avoid that at all costs. Should it see borrowing as the way out, these interest payments are going to grow at a significant rate and place additional strain on the treasury, at a time when GDP is also falling."

Elsewhere, there were warnings from UK transport secretary Grant Shapps over the potential fallout from the food crisis.

He said the world could suffer "a lot of hunger and even famine" as a result of shortages sparked by Putin's war in Ukraine.

Traders will also have their eyes on comments from European Central Bank (ECB) president Christine Lagarde.

This comes after she published a blog post that pointed to near-term market pricing for future hikes.

Lagarde said that she expected net purchases under the APP “to end very early in the third quarter”, which would enable rates to begin lift-off at the July meeting in just over eight weeks.

This helped the euro to strengthen against other major currencies and led to a rise in sovereign bond yields.

Read more: Bank of England prepared to raise interest rates again, says Bailey

Across the pond, the S&P 500 (^GSPC) dipped 2.2% and the tech-heavy Nasdaq (^IXIC) slumped 3.4% by the time of the European close. The Dow Jones (^DJI) edged 1.4% lower.

The sour mood came as after weak forecasts from a slew of firms, including Snapchat owner Snap (SNAP), which added to nerves about the economy.

Shares in the social media giant fell as much as 40% on Tuesday after it issued a warning to investors that it would not meet its own targets for revenue and adjusted earnings in the current quarter. It is on track for its worst trading day ever.

US markets had a strong day on Monday, building on Friday’s rebound from previous 18-month lows.

“Having fallen for seven weeks in a row US markets are overdue a bit of a bounce, and unlike the declines of the last few weeks, the Nasdaq 100 rally yesterday lagged that of the Dow and S&P 500, which led yesterday’s move higher,” Michael Hewson of CMC Markets said.

“We could well see further gains in the days ahead, however as with any bear market rally we need to see a move above previous reaction highs to gain confidence that a short-term low is in.”

Asian stocks dipped overnight despite the potential easing of tensions between the world’s two largest economies, China and the US.

Read more: Davos: Oil prices may rise further, warns IEA chief

The Nikkei (^N225) fell 0.9% in Japan, while the Hang Seng (^HSI) slumped 2% in Hong Kong, and the Shanghai Composite (000001.SS) was 2.4% lower.

Richard Hunter, head of markets at Interactive Investor, said: “It appears that the effects of lockdowns in China have already tainted the country’s shorter term economic prospects, with growth expected to slow once more in the current quarter as the impact of a lingering virus damage both sentiment and consumer habits.”

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