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U.K. debt concerns spark late-day swoon; S&P, Nasdaq lower, Dow near flat line

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Stocks suffered a sudden afternoon retreat on Tuesday, leaving the S&P 500 and Nasdaq deep in negative territory. The drop came as a Bank of England governor cast doubt on whether the U.K. central bank would continue its support of the country’s fixed-income market.

The Nasdaq (NDX:IND) is -1.4%, the S&P (SP500) is -0.8% and the Dow (DJI) is basically flat.

Stocks had shown signs of strength earlier in the day. Although they stumbled out of the gate following the recent downturn, the major averages all posted gains at times during the day, generally building strength into the afternoon.

The Dow especially had boasted solid gains throughout most of the session, outperforming the other major indices thanks to a big point surge in Amgen following an upgrade to Overweight from Morgan Stanley.

However, comments from a Bank of England governor prompted a sudden downdraft late in the session. Investors worried that the fragile market for U.K. government bonds, known as gilts, could become the epicenter of broader financial disruption.

With the decline, the S&P pushed below its 200-week moving average around 3,594 — a level it tested during in the previous session. The index has also now touched a new low for the year.

The late slide came amid worries about the U.K. fixed-income market. According to Reuters, pension managers in the U.K. were informed by Bank of England Governor Andrew Bailey that they had to finish rebalancing their positions by Friday. His remarks came as the Bank of England is scheduled to end its emergency support of the gilt market at the end of the week.

“My message to the funds involved and all the firms involved managing those funds: You’ve got three days left now,” Bailey said at an event sponsored by the Institute of International Finance, per Reuters. “You’ve got to get this done.”

This followed news earlier in the day that the U.K. central bank was forced to intervene in the debt market for the third time, in this instance looking to quell the surge in inflation-linked gilt yields.

“The monthly RSI for UK Gilts is now 84.80, which is a record high,” BTIG’s Jonathan Krinsky said prior to Bailey’s comments. “Oversold markets that can’t bounce, however, are often ones to be avoided.”

The market had been hoping that the BoE would extend its support of the long-term debt prices with yields still climbing. However, Bailey appeared to cement the original Oct. 14 deadline to end purchases, giving leveraged pension fund managers just a few sessions to balance portfolios. Traders expressed surprise that Bailey would suddenly disrupt the very markets BoE action was meant to stabilize.

Turning to the U.S. fixed-income market, he 10-year Treasury yield (US10Y) is up 4 basis points to 3.92% after having topped 4% overnight. The 2-year yield (US2Y) is basically flat at 4.30%.

“There is no easy formula for central banks in managing both the ‘real economy’ and the ‘financial economy’, the latter has grown considerably larger since 2009 but will undoubtedly have second round effects on the former,” Jefferies equity strategist Sean Darby said.

“Of course, the difficulties facing the UK are not unique,” ING said. “The Fed’s tightening cycle and the rising dollar are thorns in the side of many central banks already grappling with inflation, including the ECB.”

ING added: “In that context, Bloomberg reporting that Germany is dropping its opposition to joint EU borrowing to finance the energy support package is unlikely to be greeted kindly by bond investors. If confirmed, it would mean more issuance in already nervous markets … but investors would also worry about the inflationary impact and the ECB’s reaction.”

Among active issues, casino stocks are slumping after China backed its zero COVID policy.

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