European shares reverse losses as BoE intervenes to cool bond markets

European shares gained on Wednesday, with the UK’s blue-chip index reversing losses after the Bank of England said it would purchase bonds to cool a turmoil in markets stemming from the British government’s fiscal plans.

The continent-wide STOXX 600 index was up 0.3% after falling nearly 2% earlier in the session as an intensifying energy crisis in the region and the relentless surge in global bond yields fuelled worries about a recession.

The BoE said it would buy as many long-dated government bonds as needed between now and Oct. 14 to stabilise financial markets, adding that it would postpone next week’s start of its gilt sale programme.

The pound rose and UK gilt prices rocketed. London’s FTSE 100 closed up 0.3% after falling as much as 2%.

“I don’t think the markets view this as an all clear. They view this as very necessary first aid,” said Steve Sosnick, chief strategist at Interactive Brokers.

The BoE move came after the International Monetary Fund and ratings agency Moody’s ramped up pressure on Britain to reverse a new economic strategy revealed last week which proposed unfunded tax cuts, prompting a surge in bond yields and a searing drop in the pound.

“We’re still going to have to see over the coming days and weeks whether this was a temporary measure. We’re going to have to see if the UK government backs off its fiscal plans after the disastrous response that they received in the marketplace,” Sosnick said.

Euro zone borrowing costs fell, reversing an earlier rise to multi-year highs.

Heightening jitters about rising interest rates hitting economic growth, the European Central Bank may need to hike rates by another 75 basis points at its October meeting and move again in December to a level that no longer stimulates the economy, policymakers said on Wednesday.

The ECB lifted interest rates by a combined 125 basis points at its past two meetings.

On the STOXX 600, energy, healthcare and miners rose between 0.4% and 2% but were countered by a sharp fall in bank stocks and consumer staples.

Meanwhile, geopolitical tensions intensified as Europe investigated what Germany, Denmark and Sweden said were attacks on two Nord Stream pipelines at the centre of an energy standoff.

Shares of fish farmers such as Mowi, Leroy Seafood and SalMar dropped between 18% and 30% after the Norwegian government proposed a resource tax on salmon and trout farming of 40% from the tax year 2023.