European stocks drop, pound recovers

LONDON — European equities sank on Thursday on fears that rising interest rates will spark a global recession, while the pound clawed back ground one day after emergency bond-market intervention from the Bank of England.

German inflation accelerated sharply in September, official data showed on Thursday in the latest indication that Europe's biggest economy is buckling under the pressure from soaring energy prices.

Consumer prices spiked 10 per cent compared to the same month a year earlier.

German Chancellor Olaf Scholz announced that the nation would plough 200 billion euros ($194 billion) into shielding households and businesses from skyrocketing energy costs in the wake of Russia's invasion of Ukraine.

However, Frankfurt stocks accelerated losses to shed 1.6 per cent in value, while Paris showed a similar drop.

London equities fell as the pound rebounded somewhat from earlier falls, one day after the Bank of England (BoE) snapped up UK bonds to avert a risk to UK financial stability.

The BoE, the European Central Bank, the US Federal Reserve and many other counterparts are ratcheting up interest rates to fight decades-high inflation.

Oil prices dropped on the strong dollar, which makes US-priced commodities more expensive for buyers using weaker units.

"There's a growing list of reasons why investors are pessimistic right now, with the prospect of an interest-rate recession being right up there," Craig Erlam, analyst at trading platform OANDA, said.

"But we are increasingly seeing pressures mounting and forcing responses from policymakers that are not normal. That started out as super-sized rate hikes, and now includes Japanese foreign-exchange interventions and the BoE intervening in bond markets."

Stocks had also rallied on Wednesday partly after the BoE's surprise purchase, which came after Britain's recent tax-cutting budget sparked soaring bond yields and sent the pound to a record dollar low on Monday. 

The BoE launched a two-week programme to buy long-term UK bonds, capped initially at £65 billion ($71 billion), as UK pension funds scrambled to sell investments to remain solvent.

Despite falling equities, the UK bond market was further soothed on Thursday.

The UK government's 30-year sovereign bond yield retreated further to 3.97 per cent, having briefly surged Wednesday to a 1998 peak at 5.14 per cent.

Meanwhile, sentiment was also dented this week by leaks from the undersea Nord Stream pipelines running from Russia to Europe.

That sparked accusations of sabotage amid strained relations between the West and sanctions-hit Russia over the latter's war on Ukraine.