UK Gilt Yields Spike to 2008 High Amid Fiscal Woes

UK gilt yields surged 20 basis points this week, reaching their highest level since 2008, as investor concerns mount over Britain's fiscal outlook. German bund yields hit a five-month high amid inflation worries, while US Treasury yields climbed to 4.73% before stabilising ahead of a US market holiday. Central bank speeches and eurozone economic data are in focus as markets prepare for the US non-farm payrolls report on Friday.

Equities

The FTSE 100 closed flat on Wednesday, with a decline in sterling providing support for internationally focused companies on the index.

Bond market turbulence continued, with 30-year gilt yields reaching their highest level since 1998. Rising yields have pressured stocks reliant on stable cash flows, while concerns about limited future rate cuts from the Bank of England kept inflation-sensitive sectors in focus.

Shell dropped 1.4% after the energy company reduced its Q4 liquefied natural gas production outlook and warned that oil and gas trading results would be significantly lower than the previous quarter. Utilities fell 1.8% as rising bond yields impacted this traditionally stable sector.

Aerospace and defence companies, including BAE Systems, rose between 3% and 5.1%, bolstered by comments from US President-elect Donald Trump calling for increased NATO spending. Meanwhile, the domestically focused FTSE 250 mid-cap index slid 2%, hitting its lowest point in five months, as surging gilt yields spooked investors.

In the US, the S&P 500 gained 0.16%, supported by an uplift in healthcare stocks, which rose 0.53%. Quantum-computing companies faced significant sell-offs, with Rigetti Computing and IonQ plummeting over 40%, and Quantum Computing dropping 39%, after Nvidia’s CEO suggested the technology could take decades to reach maturity. The Nasdaq ended down 0.66%, weighed by tech weakness, while the Dow Jones rose 0.25%, closing at 42,635.20.

EBay surged nearly 10% after Meta Platforms announced plans to display its listings on Facebook Marketplace, marking a boost for the e-commerce company.

On the macroeconomic front, US private payrolls data showed slower growth in December, while jobless claims fell.

Forex & Commodities

The US dollar strengthened, driven by rising Treasury yields, which hit 4.73% before easing slightly. The dollar index stood at 109.11, close to a two-year high, as investors adjusted expectations for a slower pace of US interest rate cuts in 2025.

Sterling weakened by 0.5%, reaching $1.2303, its lowest since April, as concerns about UK borrowing levels and soaring gilt yields weighed on sentiment. The euro hovered near a two-year low at $1.0305, with investors wary of further declines amid tariff uncertainty from incoming US President Donald Trump. The Japanese yen strengthened slightly to 158.10 per dollar, though it remained close to levels that triggered intervention in July.

Gold prices edged higher, with spot gold rising 0.1% to $2,664.30 per ounce and US gold futures up 0.4% at $2,681.80. The metal reached a four-week high earlier in the week after weaker-than-expected US private employment data raised hopes for more dovish Federal Reserve policy. The Fed’s December meeting minutes highlighted new inflation concerns and the potential for slower rate cuts, keeping gold in focus as an inflation hedge.

Oil prices remained steady, with Brent crude at $76.10 per barrel and WTI crude at $73.27, after falling over 1% on Wednesday. Saudi Arabia’s crude oil supply to China is expected to decline in February following price hikes for Asia, adding to supply concerns.