Stocks in London fell sharply on Tuesday and the pound sank, unnerved by a renewed spike in bond yields.

“Warning lights are flashing about increasingly tricky economic conditions and geopolitical risk,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

“As concerns collide about the global outlook, inflationary pressures and worrisome public finances, the FTSE 100 remains on the back foot, with other European indices also largely in the red.”

The FTSE 100 index closed down 79.65 points, or 0.9%, at 9,116.69. The FTSE 250 ended 470.80 points lower, or 2.2%, at 21,162.89 and the AIM All-Share finished down 3.07 points, or 0.4%, at 765.57.

In Europe, the Cac 40 in Paris ended down 0.7%, while the Dax 40 in Frankfurt closed 2.3% lower.

“Investors are finding little reason to chase stocks higher when bond markets continue to promote the need for caution,” said Rostro analyst Joshua Mahony.

The yield on UK 30-year government bonds – also known as gilts – jumped to the highest level since 1998, at 5.71% on Tuesday, up seven points from Monday, while the yield on the 10-year bond stretched to 4.81%, up six points.

Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise.

Bond yields also soared across Europe. In Germany, the 10-year bond climbed four points to 2.79%, while in France, the 10-year bond yield widened to 3.59%, up five points. The yield on 30-year government bonds hit 4.50% in France, a 14-year high. In Italy, the 10-year bond yield increased seven points to 3.71%.

The latest gains came amid political instability in France and concerns over rising government debt across Europe.

Kathleen Brooks at XTB Research said a driver of weakness in the UK bond market could be a delayed reaction to the Government reshuffle on Monday.

“The Prime Minister beefed up his economic team in the lead-up to the budget. This has not gone down too well, with concerns that there is still a strategy void when it comes to the economy, as the Government struggles to deliver the growth that it promised,” she said.

The shake-up saw the chancellor’s deputy Darren Jones move into a new role as Chief Secretary to the Prime Minister.

Sir Keir Starmer also brought in Minouche Shafik, a former Bank of England deputy governor, as his chief economic adviser.

Treasury minister James Murray replaced Mr Jones as Treasury chief secretary, while Chipping Barnet MP Dan Tomlinson replaced Mr Murray as Treasury exchequer secretary.

Simon French, head of economics at Panmure Liberum, said Mr Jones and Ms Shafik were a “sensible” duo of appointments and “long overdue” given the lack of economic expertise in the Prime Minister’s team.

But he noted gilts were sold off partly because Mr Murray and Mr Tomlinson “are seen as more left wing than Darren.”

Ms Brooks said the UK was not an “outlier” as European bond yields were also moving higher.

“A rise in UK yields always garner more attention, because our yields are at a higher level to begin with. However, if UK yields continue to rise, and if they start to rise at a faster rate than elsewhere, then it could be a sign the market is pricing in a growing probability that Rachel Reeves will throw away her fiscal rules and borrow more at the budget to fund spending, rather than increase taxes and stymie growth.”

Deutsche Bank thinks the autumn budget will be a “defining moment” for the UK as the Chancellor looks to fill a fiscal hole worth around £20 billion to £25 billion.

“How the Chancellor decides to fill the fiscal hole will be important,” Deutsche said.

“While we expect fiscal headroom to be restored, we expect the Chancellor to adopt a slightly looser fiscal policy path in the near term, compared to March, with a good chunk of fiscal consolidation likely to be backloaded,” the bank said.

The pound dropped to 1.3389 dollars late on Tuesday afternoon in London, compared with 1.3548 at the equities close on Monday. The euro fell to 1.1659 dollars, against 1.1705 dollars. Against the yen, the dollar was trading higher at 148.20 compared with 147.27.

On the FTSE 100, insurer Legal & General fell 4.5%, while wealth management firms Phoenix Group and St James’s Place declined 4.2% and 3.6% respectively.

Rate sensitive housebuilders Persimmon and Taylor Wimpey fell 3.4% and 3.2%, with the latter not helped by a rating downgrade by Bank of America to “neutral” from “buy”.

Retailer Marks & Spencer tumbled 4.0% on fears consumer spending could stall amid slowing economic growth, and as house broker Shore Capital lowered earnings forecasts.

Electricity generator SSE fell 3.7%, which JPMorgan attributed to “rising UK bond yields and concerns around the company’s balance sheet”. However, JPM sees the weakness as a “buying opportunity”.

On the FTSE 250, Ithaca Energy tumbled 13% as its two leading shareholders sold a 3% stake.

Peel Hunt confirmed DKL Energy, a wholly owned subsidiary of Delek Group, and Eni UK, an indirect wholly owned subsidiary of Eni, offloaded 49.6 million shares. They were placed by Peel Hunt with institutional investors at a price of 213.75p per share for a value of £106.0 million.

Gold hit another record high, climbing to 3,511.91 dollars an ounce on Tuesday against 3,476.94 on Monday.

UBS said elevated political and geopolitical risks underline the appeal of gold, which tends to benefit from uncertainty.

“Gold’s status as a durable long-term portfolio diversifier is strengthening amid higher government debts, persistent inflation, geopolitical risks, and the desire of ex-G10 central banks to raise their longer-term holdings as a percentage of total reserves,” the Swiss bank said.

A barrel of Brent traded at 68.81 dollars late on Tuesday afternoon, up from 68.63 on Monday.

The biggest risers on the FTSE 100 were Fresnillo, up 94.0p at 1,919.0p, Endeavour Mining, up 40.0p at 2,664.0p, Unilever, up 64.0p at 4,728.0p, BP, up 3.1p at 434.2p and Haleon, up 2.5p at 363.2p.

The biggest fallers were Whitbread, down 142.0p at 2,983.0p, Legal & General, down 11.0p at 236.1p, Unite Group, down 30.5p at 674.5p, Phoenix Group, down 28.5p at 653.0p and Land Securities, down 23.0p at 529.0p.

Contributed by Alliance News