LONDON MARKET OPEN: Bank of England vote watch after big Fed hike

(Alliance News) - London share prices were lower and the pound gave back overnight gains early Thursday, ahead of a finely balanced interest rate decision by the Bank of England.

The central bank unveils its latest monetary policy decision at midday in London, with a quarter-point increase in the key UK interest rate expected. The announcement will follow the Federal Reserve raising US rates at triple that pace.

‘Market pricing is between a 25bp move and a larger hike, with overnight index swaps placing a 43% chance that we'll get a 50bp move instead. Indeed, last time 3 of the 9 members on the committee wanted 50bps rather than 25bps, so it'll be interesting to see what the vote breakdown looks like,’ Deutsche Bank commented ahead of the BoE decision.

The drumbeat of tightening monetary policy globally continued early Thursday, as the Swiss National Bank became the latest central bank to hike interest rates by a chunky 50 basis points in order to tame soaring inflation. The SNB raised the policy rate and the interest rate on sight deposits by half a percentage point to minus 0.25%.

Sterling was quoted at $1.2063 early Thursday ahead of the meeting, higher than $1.2050 at the London equities close on Wednesday but dropping back below the $1.2100 mark. Earlier Thursday, the pound had been trading as high as $1.2189.

The FTSE 100 index was down 82.52 points, or 1.1%, at 7,190.89 early Thursday. The mid-cap FTSE 250 index was down 249.45 points, or 1.3%, at 19,066.53. The AIM All-Share index was down 4.96 points, or 0.5%, at 912.81.

The Cboe UK 100 index was down 1.3% at 716.58. The Cboe 250 was down 1.5% at 16,761.75, and the Cboe Small Companies down 0.4% at 14,050.05.

In mainland Europe, the CAC 40 in Paris and the DAX 40 in Frankfurt were both down 0.9% early Thursday.

The Fed on Wednesday ended days of speculation as the US central bank enacted its most aggressive interest rate hike in almost 30 years - three quarters of a percentage point - in a bid to tame rampant inflation.

The Federal Open Market Committee took the level of its benchmark funds rate to a range of 1.5% to 1.75%, the highest since just before the Covid pandemic began in March 2020. It was the first 75-basis-points increase since November 1994.

According to the 'dot plot' of individual members' expectations, the Fed's benchmark rate will end the year at 3.4%, an upward revision of 1.5 percentage points from the March estimate. The committee then sees the rate rising to 3.8% in 2023.

Stocks in New York ended higher despite money becoming more expensive, but this momentum failed to flow through to Europe.

‘Most investors are still trying to digest the risk-friendly tilt when, ultimately, the Fed does need a significant economic slowdown to tame inflation,’ said Stephen Innes at SPI Asset Management.

Dragging at the bottom of London's FTSE 100 were ex-dividend stocks, with Persimmon shares down 7.2% and Intermediate Capital Group down 5.7%.

Clothing retailer Next was down 4.0% in a negative read-across from online-only peers Asos and boohoo.

boohoo shares fell 9.4% after the fast fashion retailer reported a decline in revenue and margins.

Revenue for the three months to May 31 was down 8% year-on-year at £445.7 million. Compared to the pre-pandemic period in its 2020 financial year, however, sales were up 75%. boohoo blamed the annual decline on ‘lockdowns driving prior year comparative strength’.

On an annual basis, boohoo suffered a chunky 26% decline in US sales, while UK sales were down 1%.

‘We have seen promising signs from the group's sales performance in the UK, which has improved month-on-month in the period and we are looking ahead towards our key summer trading season as holidays ramp up and customers look to the latest fashion from across our brands,’ said Chief Executive John Lyttle.

Gross margin in the period was 52.8%, down 220 basis points on a year before, but noted this ‘improved through the quarter’.

Peer Asos slumped 16% as it cut guidance, also suffering from a squeeze on margins.

In addition, the online fashion retailer promoted Chief Commercial Officer Jose Calamonte to chief executive and Non-Executive Director Jorgen Lindemann to the role of chair.

Sales in the three months to May 31 were marginally lower at £983.4 million versus £987.9 million a year before. UK sales rose 4%. US sales were up 21%, contrasting with boohoo's worse results there. EU sales slipped 5%, and rest-of-world declined 20%.

Gross margin declined by 310 basis points to 44.0%.

Looking ahead, Asos said full-year sales are now expected to grow in a range of 4% to 7%, ‘reflecting market volatility and an increased returns rate’. It expects to take a gross margin hit of between 150 basis points and 200 basis points amid elevated returns. Adjusted pretax profit was given in a new range of £20 million to £60 million.

In January, and before the outbreak of war in Ukraine, Asos had guided to revenue growth around 10% to 15% and adjusted pretax profit of £110 million to £140 million.

‘It is too early to tell for how long the current pattern of customer behaviour will continue but we are taking swift and decisive steps to minimise the impacts whilst continuing to deliver against the strategic initiatives we laid out in November that will ensure that ASOS builds for the long-term,’ said Chief Operating Officer Mat Dunn.

Asos, freshly moved from AIM to the London Main Market, is set to join the FTSE 250 index on Monday next week.

At the top of the FTSE 100 was Informa, rising 3.7%, after more than doubling the scope of its share buyback programme following ‘robust’ trading.

It has scaled up its buyback programme to £725 million from £300 million, saying this is expected to see the company maintain the current level of buybacks through to year-end.

The move on shareholder returns came as the events organiser and business information publisher said trading through the first five months of 2022 has been ‘robust’, with underlying revenue growth of more than 40%. Informa is on track to deliver at the upper end of full-year guidance for both revenue and adjusted operating profit, it said.

Inchcape topped London mid-caps, rising 5.1% after the car dealership said recent trading has exceeded expectations, primarily driven by its Distribution business.

‘We also have greater confidence in relation to our second half performance based on the strength of order books in our markets and an improved outlook for supply,’ it added.

As a result, Inchcape expects to deliver full-year pretax profit from continuing operations of between £350 million and £370 million, well above a company-cited consensus figure of £301 million.

Shaftesbury fell 8.8% after agreeing the terms of its all-share merger with Capital & Counties Properties, to create a central London-focused property investor with a combined portfolio value of £5.0 billion.

Shaftesbury shareholders will receive 3.356 new Capco shares for each Shaftesbury share held, giving Shaftesbury shareholders a 53% stake in the combined company and Capco shareholders 47%. The pair had first confirmed they were in merger talks back in May, and those percentages haven't changed. Capco itself already holds a 25% stake in Shaftesbury.

The combined company will be called Shaftesbury Capital PLC and will own property in the West End of London, including in Covent Garden, Carnaby Street and Chinatown.

Capital & Counties was flat in the FTSE 250.

THG dropped 14% after suitor Belerion confirmed that it, together with King Street Capital Management LP, does not intend to make a takeover offer for the online beauty products seller.

THG, in its own statement, noted that all recent approaches have been unsolicited. These were also ‘unacceptable and significantly undervalued the company’. THG said it did not consider it appropriate to provide due diligence access to any of these parties.

‘While THG is clearly aware of the macro-economic challenges, the company continues to perform well, and in line with its own expectations,’ said THG.

The euro traded at $1.0392 early Thursday, higher than $1.0395 late Wednesday. Against the yen, the dollar was quoted at JP¥134.28, down from JP¥134.60.

In Asia on Thursday, the Nikkei 225 index in Tokyo closed up 0.4%. In China, the Shanghai Composite ended down 0.6%, while the Hang Seng index in Hong Kong was down 2.7%. The S&P/ASX 200 in Sydney ended down 0.2%.

Gold was quoted at $1,828.66 an ounce early Thursday, higher than $1,821.35 on Wednesday. Brent oil was trading at $119.12 a barrel, lower than $120.95 late Wednesday.

Besides the BoE, the economic events calendar on Thursday has the latest US jobless claims numbers at 1330 BST.

By Lucy Heming; lucyheming@alliancenews.com

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