LONDON MARKET MIDDAY: Split decision on rates as some want bigger hike

(Alliance News) - Markets remained steady on Thursday after the Bank of England, as expected, decided to raise UK interest rates by a quarter-point, but a third of policy makers wanted the central bank to move faster, after the US Federal Reserve announced a hike triple the size.

The 25-basis-point hike in the Bank Rate to 1.25% was in line with most market forecasts. In the nine-member Monetary Policy Committee, six members voted for the 25-point rise, while three would have preferred a more aggressive 50-point increase.

Those who wanted a larger rate hike believed ‘faster policy tightening now would help to bring inflation back to the target sustainably in the medium term, and reduce the risks of a more extended and costly tightening cycle later.’

The BoE warned that UK inflation is likely to breach 11% this autumn.

Sterling was quoted at $1.2053 following the UK monetary policy announcement, unchanged from $1.2050 at the London equities close on Wednesday. Earlier Thursday, however, the pound had been trading as high as $1.2189.

The FTSE 100 index was down 171.11 points, or 2.4%, at 7,102.30 midday Thursday. The mid-cap FTSE 250 index was down 565.38 points, or 2.9%, at 18,750.60. The AIM All-Share index was down 16.66 points, or 1.8%, at 901.11.

The Cboe UK 100 index was down 2.6% at 706.98. The Cboe 250 was down 3.1% at 16492.39, and the Cboe Small Companies down 1.1% at 16492.39.

In mainland Europe, the CAC 40 in Paris and the DAX 40 in Frankfurt were both down 2.2% and 2.8% respectively in early afternoon trade.

Relief that the US Fed on Wednesday had refrained from a 100-basis-point interest rate hike was soon replaced by concern over the growth outlook.

The US central bank ended days of speculation to enact its most aggressive interest rate hike in almost 30 years, 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.

Turning to its projections, the Fed cut its outlook for US economic growth, now anticipating just a 1.7% rise in gross domestic product in 2022, revised down from 2.8% in March.

However, ‘we are not trying to induce a recession now’, Powell said, stressing the goal is to get back to 2% inflation, although that will include higher unemployment.

Wall Street is on track for a lower open, erasing Wednesday's relief-driven gains in New York. The Dow Jones is called down 1.6%, the S&P 500 down 2.1% and the Nasdaq Composite down 2.4%.

‘Most of the current sell-off seems to be coming from major worries that the Fed is willing to accept worsening economic conditions, in the shape of an upcoming recession alongside higher unemployment (like four decades ago), in its fight against the pressure brought by rising prices,’ said Pierre Veyret, technical analyst at ActivTrades.

Meanwhile, markets also had to grapple with an unexpectedly hawkish Swiss central bank.

The Swiss National Bank raised the policy rate and the interest rate on sight deposits by half a percentage point to minus 0.25% as it tries to get ahead of accelerating inflation.

The Swiss central bank's new inflation forecast for the next three years stands at 2.8% for 2022, softening to 1.9% in 2023 and 1.6% in 2024. ‘Without today's SNB policy rate increase, the inflation forecast would be significantly higher,’ it noted.

Following the decision, the dollar slipped against the Swiss franc, to fr.0.9809 from fr.0.9982 on Wednesday afternoon.

The euro traded at $1.0397 on Thursday, largely unchanged against $1.0395 late Wednesday. Against the yen, the dollar was quoted at JP¥133.18, down from JP¥134.60 as the mood turned more risk-off.

Gold was quoted at $1,820.43 an ounce on Thursday, lower than $1,821.35 on Wednesday. Brent oil was trading at $117.90 a barrel, lower than $120.95 late Wednesday.

In London, ex-dividend stock Persimmon was weighing on the FTSE 100. The housebuilder was down 9.4% at midday.

UK retailers were lower on a brutal day for the sector, filled with worrying updates from the industry.

Asos shares were trading a sharp 27% lower. The online clothing seller cut annual guidance after its third quarter was hit by inflationary pressures and a high product return rate.

In the three months to May 31, Asos said revenue declined 0.5% to £983.4 million from £987.9 million a year earlier. Gross margin narrowed 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.

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

Peer boohoo tumbled 13% after registering a decline in revenue and pressure on margins.

In the three months to May 31, its first quarter, revenue declined 8.3% to £445.7 million from £486.1 million a year earlier. Gross margin in the period was 52.8%, down 220 basis points on a year before, but noted this ‘improved through the quarter’.

Unlike Asos, however, boohoo held its guidance. It still expects revenue for the year to February 28, 2023 to grow in the ‘low-single digits’ range. Its adjusted earnings before interest, tax, depreciation and amortisation margin is expected between 4% to 7%. In financial 2022, the margin fell to 6.3% from 10.0% a year prior and 10.2% in the pre-lockdown financial 2020.

Halfords slumped 20% after the motor and cycling products retailer offered disappointing guidance for the year ahead.

Revenue improved to £1.37 billion in the financial year to March 31 from £1.29 billion the year before, and increased from £1.14 billion two years ago. Underlying pretax profit dropped to £89.8 million from £99.5 million, but was up from £56.9 million two years ago.

Looking to financial 2023, Halfords is guiding for underlying pretax profit between £65 million and £75 million - which at worst would be a 28% plunge from the recently ended financial year.

In the FTSE 100, athleisurewear retailer JD Sports and clothing and homewares retailer Next fell 8.0% and 6.3% respectively, as sentiment towards the sector soured. FTSE 250-listed Frasers Group, owner of House of Fraser and Sports Direct, dropped 10%.

Outside of retail, Informa shares rose 2.6%. The business information publisher and events organiser more than doubled the scope of its share buyback programme following ‘robust’ trading, which is expected to deliver at the upper end of full-year guidance.

Informa 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.

Shaftesbury fell 10% after agreeing the terms of its all-share merger with fellow London-listed Capital & Counties.

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. This is ‘close to its major cultural and entertainment attractions, employment locations and transport hubs,’ the companies said.

Still to come in the economic events calendar on Thursday are latest US jobless claims numbers at 1330 BST.

By Lucy Heming; lucyheming@alliancenews.com

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