European stocks struggle for direction, sterling recovers after BoE warning

By Elizabeth Howcroft

LONDON (Reuters) - European stocks held steady in early trading on Wednesday, while sterling recovered after hitting a 13-day low overnight as the Bank of England reiterated that it would end its emergency bond-buying at the end of the week.

Global equity markets have fallen sharply in recent days, hurt by heightened fears about an economic slowdown amid warnings from the IMF and World Bank.

Asian stocks were stuck near two-year lows, weighed down by signs that China will persist with its strict COVID-19 policies.

The MSCI world equity index, which tracks shares in 47 countries, was flat on the day at 0846 GMT, holding near the previous session's two-year low.

Europe's STOXX 600 was down 0.1%, having declined in the last four consecutive sessions.

"We've had a really fast decline in equity markets over the last few days, obviously to do with the heightened recession fears," said Axel Rudolph, a market analyst at IG Group.

"I think we're seeing some short-covering and I wouldn't be surprised if that also feeds into U.S. markets later today, whereby people position themselves more neutrally ahead of the CPI data on Thursday."

U.S. producer price data due at 1230 GMT is expected to keep the Fed on the path of rate hikes. Consumer price data (CPI) is due on Thursday.

The British pound hit a 13-day low overnight, after Bank of England Governor Andrew Bailey said that pension funds and other investors hit by a spike in UK gilt yields had just three days left to fix their problems before the central bank would end its emergency bond-buying scheme. Sterling fell by more than a cent against the dollar after the remarks.

But the BoE has also signalled privately to lenders that it was prepared to extend the support beyond Friday's deadline if necessary, the Financial Times reported.

At 0849 GMT, the pound was up 0.8% on the day at $1.1045.

MARKET STRAIN

Britain's economy unexpectedly shrank in August, GDP data showed.

IG's Rudolph said that the strain in UK markets - which began when the British government announced its "mini-budget" fiscal plans on Sept. 23 - is contributing to broader negative market sentiment.

"It's just another nail in the coffin with regards to sentiment and market sentiment has really taken a hit over the last few days," he said.

Former U.S. Treasury Secretary Larry Summers criticised the British government's policy and communications, speaking at an investment conference in Sydney.

UK gilt yields were up across a range of maturities, with 2-year yields seeing the sharpest increase.

The euro was steady at $0.97075. Euro zone government bond yields were also up, tracking the weakness in the UK gilts market.

The U.S. dollar index was down around 0.1%. Overnight, the dollar passed the 146-per-yen level for the first time in 24 years, prompting Tokyo authorities to pledge to step in if needed.

The minutes from the Fed's latest policy meeting are also due to be released later in the session.

The International Monetary Fund's chief economist said on Tuesday that central banks' fight against inflation may take another two years to play out, increasing unemployment and lowering living standards for many in the world.

On Monday, the president of the World Bank and the managing director of the IMF warned of a growing risk of recession.

The war in Ukraine also weighed on market sentiment. The G7 vowed to support Kyiv for "as long as it takes".

Oil prices recouped some of their losses, having dropped 2% in the previous session.

 

(Reporting by Elizabeth Howcroft; Editing by Alex Richardson)