LONDON MARKET OPEN: UK inflation exceeds 9%; US Fed testimony ahead

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The market stability with which the week began was looking fragile early Wednesday, with European equities following Asia lower on renewed worries about the familiar trifecta of accelerating price inflation, slowing economic growth, and tightening central bank policy.

All three were in focus again on Wednesday, following confirmation that UK inflation intensified to a fresh 40-year high, spurring expectations for further tightening from the Bank of England.

The annual inflation rate hit 9.1%, ticking up from 9.0% in April.

This was the highest 12-month inflation rate in the National Statistic series, which began in January 1997, the Office for National Statistics said. Indicative modelled consumer price index inflation estimates suggest that it would last have been higher around 1982.

‘UK inflation remains above 9% and the recent rise in energy costs will probably help the headline rate go slightly into double-digits from October. The chances of a 50bp Bank of England rate hike in August are rising, though we think there's only so much further it can hike in the current fragile growth environment,’ said ING.

Giles Coghlan, chief analyst at HYCM, agreed. ‘If today's CPI print tells us one thing, it is that the UK's economic outlook looks very bleak indeed,’ he said. ‘With forecasts suggesting that GDP will head into negative territory for 2023, the Bank of England has an impossible task on its hands. Ultimately, policymakers have very little choice other than to hike interest rates to bring down inflation.’

Sterling was quoted at $1.2168 early Wednesday, down from $1.2276 at the London equities close on Tuesday.

The FTSE 100 index was down 96.64 points, or 1.4%, at 7,055.41 early Wednesday.

The mid-cap FTSE 250 index was down 261.76 points, or 1.4%, at 18,687.29. The AIM All-Share index was down 7.88 points, or 0.9%, at 890.52.

The Cboe UK 100 index was down 1.4% at 702.91. The Cboe 250 was down 1.7% at 16,378.25, and the Cboe Small Companies down 0.3% at 13,690.71.

In mainland Europe, the CAC 40 in Paris was down 2.0%, while the DAX 40 in Frankfurt was down 2.2% early Wednesday.

European markets slipped back ahead of testimony from US Federal Reserve Chair Jerome Powell in front of Congress on Wednesday.

His remarks could ‘turn the market mood sour again’, said Swissquote Bank's Ipek Ozkardeskaya.

‘Therefore, yesterday's rally in stocks could be another dead cat bounce, and we may see the market painted in red in the following sessions. The US futures are already in the red this morning,’ she commented.

The Dow 30 was pointed to open down 1.3% and the Nasdaq Composite down 1.7%.

In Asia on Wednesday, the Nikkei 225 index closed down 0.4% in Tokyo. The Shanghai Composite ended down 1.2%, and the Hang Seng index in Hong Kong was down 2.3%. The S&P/ASX 200 in Sydney closed down 0.2%.

At the bottom of the FTSE 100 in early trade was Melrose Industries, down 5.6% after Goldman Sachs reinitiated the industrial turnaround specialist with a Neutral rating.

Shell fell 4.2%, tracking oil prices lower. Brent oil was trading at $110.29 a barrel, dropping from $114.71 late Tuesday.

BP was down 3.3% and Harbour Energy shed 3.7%.

At the top of the large-caps was NatWest, rising 2.6% to 227.00 pence, after the UK government extended its stake sell-down under the trading plan unveiled last July.

The trading plan will be extended for a further 12-month term, and will now terminate no later than August 11, 2023. It will continue to be managed by Morgan Stanley.

Since the plan was established, the UK Treasury has sold 703.5 million shares for £1.6 billion, it said. This implies an average sale price per share of around 227p, well below the 502p paid to bail out NatWest, then Royal Bank of Scotland, in 2008.

The Treasury currently owns 5.09 billion shares, representing a 48.5% stake. When it set out the trading plan last July, the UK state had a 54.7% stake.

‘UKGI and HM Treasury will keep other disposal options open, including by way of directed buybacks and/or accelerated bookbuilds. The decision to extend the trading plan does not preclude HM Treasury from executing such other disposals that achieve value for money for taxpayers, including during the term of the trading plan,’ the UK government added.

In the FTSE 250, Micro Focus fell 7.3% after posting a fall in half-year revenue.

Sales slid to $1.27 billion from $1.43 billion a year before. Its pretax loss did narrow to $42.9 million from $280.0 million, on reduced costs, but adjusted earnings before interest, tax, depreciation and amortisation fell to $449 million from a constant-currency year-earlier figure of $511 million.

As a result, Micro Focus cut its interim dividend to 8 cents per share from 8.8 cents.

‘Looking forward, based on our year-to-date performance our expectations for revenue, costs and cash for FY22 remain unchanged. We are working to mitigate the increased risks arising from the macro-economic environment wherever possible,’ said Micro Focus.

The euro traded at $1.0493 early Wednesday in London, lower than $1.0568 late Tuesday. Against the yen, the dollar was quoted at JP¥136.32, up versus JP¥136.18.

Gold was quoted at $1,828.67 an ounce early Wednesday, lower than $1,839.99 on Tuesday.

By Lucy Heming; lucyheming@alliancenews.com

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