Hand holding US treasury note
US bond yields over 5% as conflict in Middle East heats up: Image source: Adobe

The FTSE 100 ended lower on Monday, as investors kept a wary eye on continuing tensions in the Middle East, as well as the surging yield on the 10-year US Treasury note.

The FTSE 100 index closed down 27.31 points, 0.4%, at 7,374.83. The FTSE 250 ended up 26.26 points, 0.2%, at 17,058.99, and the AIM All-Share closed down 2.52 points, or 0.4%, at 680.41.

The Cboe UK 100 ended down 0.4% at 736.03, the Cboe UK 250 closed up 0.3% at 14,819.12, and the Cboe Small Companies ended down 0.9% at 12,713.20.

In European equities, the CAC 40 in Paris closed up 0.5%, while the DAX 40 in Frankfurt closed marginally lower.

Investor sentiment remained clouded by events in the Middle East on Monday, though they have improved since Friday last week as tensions did not escalate ‘as much as feared’ during the weekend, according to Swissquote Bank analyst Ipek Ozkardeskaya.

Meanwhile, the yield on 10-year US government bonds rose above 5.0% for the first time since 2007 during the height of the subprime mortgage crisis.

The yield on the US 10-year Treasury spiked as high as 5.02% around 1040 BST on Monday, as investors worried that the US Federal Reserve will need to keep interest rates higher for longer in the face of stubborn inflation and a resilient economy.

Around the time of the close in London, it cooled to around 4.87%.

‘Even a war in the Middle East is not persuading investors to buy US treasuries, or government bonds, an asset class that is usually seen as the ultimate haven because they are priced in the world’s reserve currency and come with the backing of America, the world’s leading economic and military power,’ said AJ Bell analyst Russ Mould.

Mould said that this was due to uncertainty on whether inflation is actually cooling, prompting recent comments from the US Federal Reserve Chair Jerome Powell that interest rates could stay higher for longer, alongside concerns that federal debt ‘continues to mushroom’.

‘This is a painful combination. Any signs of these trends going into reverse could therefore put a lid on the benchmark ten-year yield, and, at some stage, investors will presumably decide yields have reached such a level that they are just too tempting to ignore, as they more than compensate for the evident risks on offer,’ said Mould.

Oil prices weakened on the absence of a dramatic escalation in the Middle East over the weekend. Safe haven gold also returned recent progress, sending mining stocks in London lower at the close. Endeavour Mining closed down 2.4%, Antofagasta down 2.0% and Glencore down 1.5%.

Gold was quoted at $1,977.60 an ounce on Monday around the close in London, lower against $1,996.01 on Friday. Brent oil was quoted at $91.05, down from $93.20 late Friday.

Israel has delayed a ground invasion of Gaza and has allowed humanitarian aid into the enclave.

The war started when Hamas militants in the Gaza Strip stormed Israel on October 7, taking more than 200 hostages and killing at least 1,400 people, according to Israeli officials.

Israel has vowed to destroy Hamas, and says around 1,500 of the group’s fighters were killed in clashes before its army regained control of the area initially under attack.

Israel has hit back with a relentless bombing campaign which has so far killed more than 4,600 Palestinians, mainly civilians, according to Gaza’s health ministry. Officials said the central town of Deir al-Balah had been particularly badly hit overnight Saturday to Sunday.

In the FTSE 100, AstraZeneca fell 2.6%. The Cambridge-based pharmaceutical firm said its Enhertu treatment has been approved by the European Commission to treat adult lung cancer patients.

AstraZeneca said the approval of the drug is based on Destiny-Lung02 trial results, in which the drug showed a 49% objective response rate and median duration of response of 16.8 months.

The approval is to treat patients with non-small cell lung cancer whose tumours have an activating HER2 mutation following chemotherapy. Enhertu is being jointly developed alongside Daiichi Sankyo.

AstraZeneca also noted that datopotamab deruxtecan improved progression-free survival compared to chemotherapy in patients with previously treated non-small cell lung cancer, as identified in positive results from its Tropin-Lung01 phase 3 trial.

In the FTSE 250, Keller surged 16%, after the geotechnical engineering firm said ‘positive trading momentum’ in the first half of 2023 continued in the third quarter.

‘Given our trading performance to date and the continued momentum in the business, we now expect full-year underlying operating profit to be materially ahead of current market expectations,’ Keller said.

According to the company-compiled consensus forecasts as of July 12, an underlying operating profit of £132 million is expected for 2023. This would be a 22% rise from the £108.6 million achieved in 2022.

Indivior rose 5.2%. The Virginia-headquartered pharmaceutical company agreed to settle a US multi-district Suboxone litigation case, forking out $385 million in the process.

The litigation was centred on the claim that the pharmaceutical company stymied generic competition for the opioid addiction treatment Suboxone, in order to preserve its dominance.

Indivior will pay $385 million and book a charge of $228 million in the third quarter, which will be excluded from adjusted earnings.

Vistry lost 5.8%. The Kent-based housebuilder said it will cut up to 200 jobs and slim its number of regional units to 27 from 32 as part of this shift in strategy. The firm expects to deliver around £25 million of annualised cost savings as a result of the restructuring.

Looking forward, Vistry expects adjusted pretax profit in 2023 of £450 million, excluding the impact of transitioning the Housebuilding business to Partnerships, up from £418.4 million in adjusted profit in 2022.

Rival housebuilders were mixed in the wake of Vistry’s news. Persimmon lost 0.3% and Taylor Wimpey lost 0.2%, while Barratt Developments gained 1.5%.

Among London’s small-caps, Tirupati Graphite shares surged 25%.

Tirupati hailed itself as ‘one of very few’ graphite producers outside of China, after the country announced new export curbs on the substance last week.

China on Friday announced new curbs on exports of certain types of graphite, key to making batteries for electric vehicles, days after the US slapped fresh restrictions on outflows of high-tech microchips.

China was the world’s leading graphite producer last year, accounting for an estimated 65% of total production, according to the US Geological Survey.

On AIM, Northern Bear surged 28%, after the building services firm said it plans to return £3.1 million through a tender offer of up to 27% of it shares, with its chair set to sell his shares as he plans to retire after a general meeting in mid-November.

Non-Executive Chair Jeff Baryshinik will sell all his 4.7 million shares, either owned directly by himself or via his company Cedarvale, in the tender officer. This is before retiring after the general meeting on November 15, in which shareholders will vote on the tender offer resolution.

Northern Bear also reiterated positive guidance on its current trading, saying it was strong in the period from April 1 to August 31 compared to the equivalent period a year earlier.

Stocks in New York were mostly higher at the London equities close, with the DJIA marginally down, the S&P 500 index up 0.3%, and the Nasdaq Composite up 0.6%.

Chevron was down 2.2% in New York around the time of the London close, after the San Ramon, California-based oil and gas company said it agreed to acquire shale producer Hess Corp in a $60 billion all-stock deal.

The deal will add the Stabroek block in Guyana to Chevron’s portfolio. Hess also operates in the Gulf of Mexico.

The pound was quoted higher at $1.2226 at the close on Monday in London from $1.2156 on Friday, while the euro rose to $1.0639 from $1.0594. Against the yen, the dollar was trading at JP¥149.79, lower compared to JP¥149.84.

In Tuesday’s UK corporate calendar, Barclays releases its third quarter results, while Anglo American and Bunzl both post trading statements.

The economic calendar has flash purchasing managers’ index releases coming out for the EU, Germany, Japan, the UK and the US.

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Issue Date: 23 Oct 2023