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LONDON MARKET MIDDAY: China goes it own way with interest rate cut

Stock markets were trading higher on Friday, with the FTSE 100 index in London edging into the green for the week as a whole, after China bucked the global trend for monetary policy tightening with much-needed interest rate cut.

The FTSE 100 was up 139.36 points, or 1.9%, at 7,442.10 on Friday - at this level on track for a week-to-date gain of 0.3%.

The mid-cap FTSE 250 index was up 328.08 points, or 1.7%, at 20,017.10 at midday. The AIM All-Share index was up 14.26 points, or 1.5%, at 961.43.

The Cboe UK 100 index was up 2.0% at 741.49. The Cboe 250 was up 1.9% at 17,699.10, and the Cboe Small Companies up 0.5% at 14,687.79.

In mainland Europe, the CAC 40 in Paris was up 1.4%, while the DAX 40 in Frankfurt was up 1.9% on Friday. Wall Street was called higher, with major indices pointed to open 0.8% to 1.3% higher.

Sentiment was boosted at the end of the week after China announced it would cut a key interest rate in a boost to home buyers and debt-mired developers as the country's economy is slowed by Covid-19 restrictions.

The five-year loan prime rate – on which many lenders base their mortgage rates – was trimmed to 4.45% from 4.6%, China's central bank said on Friday. The haircut to the LPR was greater than the market expected, analysts said, as China's planners try to inject life into a slowing economy.

‘The 'risk-on' trading mood has registered a solid rebound during the last couple of hours as traders cheered the significantly dovish monetary decision from China,’ said Pierre Veyret, technical analyst at ActivTrades.

‘This move significantly contrasts with the lingering inflation and recession risks in Western economies, where an increasing number of market operators and analysts are questioning the policies of central banks.’

China's decision came the same day as, in the UK, the Bank of England's chief economist said interest rates might need to rise further as the economy suffers high price inflation.

Huw Pill said the current 9% inflation rate – the highest in 40 years – is a ‘very uncomfortable situation’ for decision-makers at the bank.

In a speech to the Association of Chartered Certified Accountants in Wales, he said the tightening of monetary policy – which means higher interest rates – ‘still has further to run’. Pill is a member of the Bank's Monetary Policy Committee, which sets the base rate used to decide the interest rates charged on mortgages and other loans.

Against a backdrop of soaring inflation, data on Friday showed UK retail sales fared better than hoped in April, but consumer confidence has weakened considerably.

Retail sales volumes rose 1.4% in April on a month before, figures from the Office for National Statistics showed, reversing a month-on-month fall of 1.2% in March. This was driven by food store sales, which rose 2.8%, largely due to higher spending on alcohol, tobacco and confectionery in supermarkets.

Heather Bovill, deputy director for Surveys & Economic Indicators at the ONS, noted that along with an uplift for supermarkets, off-licenses also reported a boost, ‘possibly due to people staying in more to save money’.

While retail sales picked up in April, she cautioned that the figures ‘still show a continued longer term downward trend’.

Separately, GfK said its long-running UK consumer confidence monitor dropped by two points to minus 40 in May, the lowest score since records began in 1974.

‘Declining consumer sentiment reflects the uncertain economic backdrop and pressure household budgets are under,’ commented Emma Wilks, UK economist at Lloyds Bank. ‘The higher cost of living has so far been concentrated within essential goods – food, energy and fuel – which weighs on discretionary spending while also disproportionately impacting lower income households.’

Added Maxim Syn, head of desk at financial services firm Ebury: ‘Evidently the Bank of England will have to weigh up the gloomier economic outlook as the war in Ukraine and surging inflation weighs on growth with the need to counter these inflationary pressures by raising interest rates. While the bank is stuck between a rock and a hard place, with the MPC expecting inflation to peak in excess of 10% in the coming months, we think further rate hikes are inevitable.’

Sterling was quoted at $1.2480 in midday dealings, slipping from $1.2503 at the London equities close on Thursday.

The euro traded at $1.0588, essentially unchanged against $1.0590 late Thursday. Against the yen, the dollar was quoted at JP¥128.06, up from JP¥127.40.

Gold was priced at $1,844.76 an ounce on Friday in London, down from $1,848.44 late on Thursday. Brent oil was trading at $112.17 a barrel, firming on $110.05 late Thursday.

In London, Royal Mail topped the FTSE 100, up 5.5%, as the stock rebounded from Thursday's 12% drop. The postal operator on Thursday reported a drop in annual profit and warned of a ‘downside risk’ to consensus expectations for the year ahead.

Croda rose 3.6% after backing its full-year forecasts following a strong start to 2022 which saw the firm ‘successfully’ mitigate inflation pressures.

The Yorkshire, England-based chemicals maker recorded continued sales and profit growth across the business and said it has continued to recover significant input cost inflation. Demand was particularly strong in North America and Asia, the FTSE 100-listed firm noted.

‘Notably, April sales in China were ahead of the prior year despite local Covid-19 lockdowns,’ it said.

Elsewhere, THG jumped 21% to 139.59 pence after late Thursday confirming it has received and rejected a third non-binding takeover proposal from Belerion Capital Group and King Street Capital Management, on the grounds that the offer ‘significantly undervalues’ the company.

The Belerion consortium made a proposal of 170p per share for the online beauty products seller, and has until 1700 BST on June 16 to make a firm offer or pull out. Belerion is an e-commerce and technology focused private equity firm, while King Street Capital is an alternative asset manager.

Also on Thursday, Luxembourg-based venture capital firm Candy Ventures owned by Nick Candy said that it is in ‘very early stages’ of considering a possible offer for THG.

On AIM, shares in ad agency M&C Saatchi also were boosted by M&A, soaring 34% to 220.52p. Next Fifteen Communications has waded into M&C Saatchi's takeover drama by making a £310.1 million cash-and-shares offer.

The company is offering 0.1637 of a Next Fifteen share and 40 pence in cash for each M&C Saatchi share, valuing M&C Saatchi shares at 247.2p each.

This deal represents a 48% premium to M&C Saatchi's closing price of 167.5p on January 4, the last business day before London-listed acquisition vehicle AdvancedAdvT said it had taken a minority stake.

M&C Saatchi was already the target of a hostile takeover attempt by AdvancedAdvT. Under AdvancedAdvT's most recent offer, shareholders in M&C Saatchi will for each share held either receive 2.043 new shares in AdvancedAdvT and 40 pence in cash, or receive 2.530 new AdvancedAdvT shares.

At the time the offer was made, this valued each share of M&C Saatchi at 207.5 pence and £253.6 million in total. However, M&C Saatchi rejected the offer, calling it ‘derisory’. Instead, the board's independent directors are recommending Next Fifteen's takeover offer and urged shareholders to take no action in respect of AdvancedAdvT's offer.

AdvancedAdvT, in response to the Next Fifteen offer, said it is ‘considering its options’. The company added that it and Executive Chair Vin Murria together own just over 22% of M&C Saatchi's share capital. Murria also is a director of M&C Saatchi.

AdvancedAdvT shares were up 4.4%. Next Fifteen was up 1.0%.

Friday's economic calendar has a flash eurozone consumer confidence report at 1500 BST.

By Lucy Heming; lucyheming@alliancenews.com

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