LONDON MARKETS: FTSE 100 Erases 2018 Gain As U.S. Bond Selloff Spooks Investors

Pound briefly dips below $1.40

U.K. stocks dropped for the first time in three days on Tuesday, tracking an equity selloff in the U.S. and Asia that came as investors got nervous about a rally in U.S. bond yields.

What are markets doing?

The FTSE 100 index dropped 1.1% to end at 7,587.98, its lowest close since Dec. 20, according to FactSet data.

The pound rose to $1.4120 from $1.4075 late Monday in New York. The pound rebounded after briefly falling below $1.40 earlier in the session on concerns about the Brexit negotiations.

What is driving the market?

The losses in London came as part of a global selloff, in which the Dow Jones Industrial Average fell more than 300 points on Tuesday, as investors continued to fret about a rally in bond yields. Higher returns on debt securities typically make stocks and other assets perceived as risky less attractive to investors.

The yield on 10-year U.S. Treasury notes rose to its highest level since April 2014 on Monday and continued higher on Tuesday to 2.71%. In the U.K., 10-year benchmark yields also rose on Monday, and were marginally higher at 1.461% on Monday.

What are strategists saying?

"The rise in the yield available from government bonds has not happened overnight but it has finally started to draw investors' attention in a classic case of 'boiling frog' syndrome: the water has been getting slowly hotter (bond yields going slowly higher), with the frog (or in this case investors) barely noticing at first, but the heat is now reaching a level whereby the first signs of discomfort are perhaps becoming evident," said Russ Mould, investment director at AJ Bell, in a note.

"Bond prices may be going down and bond yields higher either because markets are pricing in higher global growth and inflation, with low unemployment and higher oil playing a role here, or they are accepting that central banks are starting to tighten policy, or a combination of the two," he added.

What else is new?

Brexit was back in the headlines on Tuesday, after a BuzzFeed report that a leaked document on the government's analysis (https://www.buzzfeed.com/albertonardelli/the-governments-own-brexit-analysis-says-the-uk-will-be?utm_term=.mq5xYoyaD#.ldxlJezVx) of the European Union divorce shows the U.K. will be significantly worse off outside the EU, regardless of what deal is struck.

At the time of the European market close, Bank of England Governor Mark Carney was being quizzed by the House of Lords Economic Affairs Committee, whose questioning included the BOE's Brexit forecasts.

Which stocks are in focus?

Banks were among the biggest losers on Tuesday after the Financial Conduct Authority urged U.K. lenders (https://www.fca.org.uk/news/press-releases/fca-urges-action-on-interest-only-mortgages) to check up on customers with interest-only mortgages. The FCA said it is concerned that shortfalls in repayment plans could lead to people losing their homes. Shares of Standard Chartered PLC (STAN.LN) fell 2.9%, Barclays PLC (BCS) (BCS) dropped 2.8% and Royal Bank of Scotland Group PLC (RBS.LN) (RBS.LN) gave up 2.7%.

Shares of Anglo American PLC (AAL.LN) fell 2.3% even as its majority-owned De Beers Group said diamond sales jumped in the first sales cycle of 2018.

In Ireland, shares of Ryanair Holdings PLC (RYAAY) fell 2.2% after the discount airline and the British Airline Pilots' Association said they have struck an agreement (http://www.marketwatch.com/story/ryanair-makes-breakthrough-in-pilot-union-talks-2018-01-30) for the representation of cockpit crew. The deal is seen as a major breakthrough in Ryanair's talks with labor groups.

UBM PLC (UBM.LN) rose 4.3% on news of a 3.9 billion-pound ($5.47 billion) takeover offer (http://www.marketwatch.com/story/ubm-agrees-to-39-bln-takeover-offer-from-informa-2018-01-30)from Informa PLC (INF.LN) . Informa shares rose 0.9%.

(END) Dow Jones Newswires

January 30, 2018 12:22 ET (17:22 GMT)