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(Alliance News) - Stocks in London ended mostly lower on Wednesday ahead of the US Federal Reserve's interest rate decision, as investors were spooked by a pessimistic warning from the OECD on the outlook for the global economy.
The global economy is expected to contract 6% this year, even if a second wave of Covid-19 infections is avoided, with the UK set for the hardest hit, according to the Organisation for Economic Co-Operation & Development.
Global economic activity is expected to fall by 6% in 2020 and unemployment to climb to 9.2% from 5.4% in 2019. If a second outbreak of Covid-19 emerges, gross domestic product could plummet 7.6% before rebounding just 2.8% in 2021.
In a single-hit Covid-19 scenario, UK GDP is expected to shrink 11.5% in 2020 - the worst of any single country covered by the OECD's forecasts for such a scenario. This would beat out Spain, Italy and France with forecast declines of 11.1%, 11.3% and 11.4% respectively.
Eurozone GDP is expected to plunge over 9% this year and could fall 11.5% if there is a second hit.
The FTSE 100 index closed down 6.59 points, or 0.1%, at 6,329.13. The FTSE 250 ended down 149.79 points, or 0.8%, at 17,605.46. The AIM All-Share closed up 3.73 points, or 0.4%, at 887.22.
The Cboe UK 100 ended down 0.1% at 10,714.65, the Cboe UK 250 closed down 1.1% at 15,203.07, and the Cboe Small Companies ended up 0.3% at 9,904.55.
In Paris the CAC 40 ended down 0.6%, while the DAX 30 in Frankfurt ended down 0.5%.
"Volatility has been low as many traders are playing the wait and see game. On Monday the World Bank warned the global economy might contract by 5.2% this year. The OECD hold an even bleaker view as they foresee a 6% contraction. In addition to that, the group warned the world economy could shrink by 7.2% should there be a second wave of infections. The pessimistic outlook has weighed on market sentiment as the major indices [ended] in the red," said CMC Markets analyst David Madden.
On the London Stock Exchange, Just Eat Takeaway.com ended the worst blue-chip performer, down 13% after the online takeaway platform confirmed it is advanced discussions regarding an all-share combination with US peer Grubhub.
The Wall Street Journal newspaper, citing people familiar with the matter, reported that Grubhub was working on an all-share deal with Just Eat Takeaway.com.
Earlier on Wednesday, CNBC reported US rival Uber Technologies, which operates Uber Eats, was likely to pull out of its merger talks with Grubhub over antitrust concerns.
Uber shares were down 3.9% in New York.
In addition, travel stocks - which had appreciated recently as investors grew more optimistic over an economic recovery - ended in the red.
Carnival closed down 9.0%, International Consolidated Airlines, down 7.4% and easyJet down 4.2%.
"The FTSE 100's modest drop today masks the carnage underneath the surface, where recent big winners like Carnival and IAG have taken a beating. Such profit-taking is hardly surprising with investors nervous ahead of the Fed meeting, but it acts as a reminder that markets, and their individual stocks, go up AND down, and not just up OR down. Those with positions in these names that go back to the early part of the rally in March will probably ride out the storm, but latecomers may find they have got their fingers burnt," said IG Group's Chris Beauchamp.
The pound was quoted at USD1.2760 at the London equities close, up from USD1.2742 at the close Tuesday.
The euro stood at USD1.1343 at the European equities close, down from USD1.1359 late Tuesday.
Against the yen, the dollar was trading at JPY107.20, lower from JPY107.71 late Tuesday.
Stocks in New York were mostly lower at the London equities close ahead of the US Federal Reserve's interest rate decision at 1900 BST, followed by a press conference with Chair Jerome Powell at 1930 BST.
The DJIA was down 0.8%, the S&P 500 index down 0.6%, but the Nasdaq Composite was up 0.3%. The tech-heavy Nasdaq hit a fresh intraday high in early trade, having ended at all-time highs the last two days.
The CME's FedWatch tool prices in an 84% likelihood that the federal funds rate is kept on hold at 0.00% to 0.25%.
After forgoing its quarterly economic projections in March, the Fed is scheduled to release a new set of 'dot plots' that will map out policymakers' estimates for where interest rates may be headed going forward.
The dot-plot should be accompanied by the Fed's latest economic projections.
Such projections may be difficult for Powell to explain in the press conference, since economic forecasts are tied to forecasts on the spread of the coronavirus itself. The dot plot is widely expected to show no rate hikes through the forecast horizon to 2022.
Analysts at Societe Generale said: "Markets tend to be keen and quick to price-in worst-case scenarios when bad news occurs, and then take time to climb the wall of worries, which makes for a bull market. In the second half of this year, we expect markets to continue pricing in a combination of falling virus cases, rising PMIs, and continuing fiscal injections - this time with no early austerity - while central banks buy the equivalent of new issuance (and probably more) for longer. And, if the Fed is reluctant to go to negative rates, will it prefer to buy equity ETFs to facilitate balance-sheet repair instead, in case another market rout were to develop? Such a cocktail could push risk premia into lower territory.
"With the Fed already at zero and reluctant to go to negative rates, we can no longer use US treasuries as portfolio protection, which makes it difficult to protect the equity portion - except via the 10% yen exposure."
Brent oil was quoted at USD40.70 a barrel at the London close, up from USD40.56 at the close Tuesday.
Gold was quoted at USD1,716.28 an ounce at the London equities close, marginally lower from USD1,718.42 late Tuesday.
The economic events calendar on Thursday has US producer prices at 1330 BST.
The UK corporate calendar on Thursday has annual results from speciality chemicals company Johnson Matthey, home phone and broadband provider Talk Talk Telecom Group and defence contractor Babcock International.
By Arvind Bhunjun; arvindbhunjun@alliancenews.com
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