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(Alliance News) - Stocks in London are set to open lower on Thursday, as the pressure is on for the Bank of England at midday, after the US Federal Reserve indicated interest rates are likely to have to reach a higher level than previously expected.
The Federal Open Market Committee lifted the target range for the federal funds rate to 3.75% to 4.00%, from 3.00% to 3.25% previously. The three-quarter point hike was expected by the market. Wednesday's hike was the US central bank's fourth 75bp rate lift in a row.
However, stock market investors had hoped the Fed would lay the groundwork for a later slowdown in the pace of its rate hikes, and initially, it felt like they got it.
"Comments in the initial statement that the Fed would take into account the lag between its aggressive action in raising rates and the effect on the wider economy, as well as other financial developments, were immediately well received. They were taken as a big hint that even though inflationary pressures don't yet look like they are significantly easing, there is expectation that the cumulative effect of successive rate rises will start to feed through," said Hargreaves Lansdown's Susannah Streeter.
However, share prices in New York dropped and the dollar rebounded the more Powell spoke in the subsequent press conference.
The first sign of a slightly hawkish press conference came when Powell said "incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected".
The subject of over-tightening against not doing enough was brought up. Powell affirmed that the risk of doing too little far outweighs the possible hurt from tightening too much.
Powell said, "pausing is not a conversation to be had right now".
"It's not something that we're thinking about. That's really not a conversation to be had now. We have a [long way] to go," Powell added.
"This would seem to suggest that while we can expect to see a 50bps move at the December meeting, the eventual terminal rate could well be much higher than 4.5% and could be as high as 5%," said CMC's Michael Hewson.
Wall Street ended lower following the Fed decision, as the dollar rebounded from recent lows.
"Jerome Powell wouldn't let a rally in the US stock and bond markets develop further because it would be vertically against his goal of slowing inflation in an economy where inflation is not showing signs of abating and the labour market isn't tightening yet," said Swissquote Bank's Ipek Ozkardeskaya.
At 1200 GMT, it is the Bank of England's turn to announce interest rates.
"It is far from certain, but the Bank of England could be set to carry out its biggest rate hike since 1989 raising interest rates by 75 basis points to 3%. This would be the eight consecutive interest rate increase lifting rates to the highest level since 2008 at the start of the global financial crisis," interactive investor's Victoria Scholar said.
It will also be the eighth time in a row that the UK central bank has hiked interest rates. Less than a year ago the rate was 0.1%.
"The Bank of England is also expected to raise rates by 75bp today, but that expectation is down from around 100-150bp hike expected when Liz Truss was busy shaking the financial markets with her crazy mini-budget," Ozkardeskaya said.
Here is what you need to know ahead of the London market open:
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MARKETS
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FTSE 100: called down 58.3 points, 0.9%, at 7,085.84
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Hang Seng: down 3.2% at 15,326.00
Nikkei 225: closed down 0.1% at 27,663.39
S&P/ASX 200: closed down 1.8% at 6,857.90
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DJIA: closed down 505.44 points, or 1.4%, at 32,147.76
S&P 500: closed down 2.5% at 3,759.69
Nasdaq Composite: closed down 3.4% at 10,524.80
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EUR: down at USD0.9785 (USD0.9865)
GBP: down at USD1.1354 (USD1.1456)
USD: up at JPY147.81 (JPY147.08)
GOLD: down at USD1,630.14 per ounce (USD1,646.74)
OIL (Brent): down at USD95.39 a barrel (USD96.32)
(changes since previous London equities close)
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ECONOMICS
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Thursday's key economic events still to come:
1100 CET EU unemployment
1100 GMT Ireland unemployment
0930 GMT UK services purchasing managers' index
1200 GMT UK Bank of England interest rate decision
0830 EDT US international trade
0830 EDT US unemployment insurance claims report
0830 EDT US export sales
0945 EDT US services PMI
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The Caixin China general composite output index slipped to 48.3 points in October from 48.5 in September, remaining below the neutral mark to indicate contraction of activity, S&P Global said. "Overall, the negative impact of Covid controls on the economy lingered, and the economy was faced with increasing downward pressure," said Wang Zhe, senior economist at Caixin Insight Group. "In October, activities in the manufacturing and services sectors continued to shrink, while supply and both domestic and overseas demand contracted. Business costs increased. Service providers were in a better position than manufacturers in terms of prices charged and employment."
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Ireland's service sector continued to lose momentum in October, S&P Global said, with the AIB Ireland services PMI registering 53.2 points last month, down from 54.1 in September. "Businesses across all four sub-sectors continued to experience strong upward pressure on input costs, especially energy prices and wages. These continued to be passed on to customers in the form of higher prices," said AIB Chief Economist Oliver Mangan. "However, the rate of increase in both input prices and prices charged, while still elevated, did ease in October and are off their peak levels seen earlier in the year."
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The US welcomed the restoration of a deal allowing safe passage of Ukrainian grain through the Black Sea, and urged Russia to renew it later this month. State Department spokesman Ned Price praised UN and Turkish mediators but said it was important that the deal is "not only set back in motion, but it's renewed later this month." "That will ultimately inject even more predictability and stability in this marketplace and, most importantly, apply downward pressure to the prices" of global food, he told reporters.
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BROKER RATING CHANGES
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Peel Hunt reinitiates Tullow Oil with 'buy' - price target 80 pence
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Barclays cuts Wizz Air price target to ,2640 (3,500) pence - 'overweight'
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Barclays cuts Next price target to 7,000 (8,100) pence - 'overweight'
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COMPANIES - FTSE 100
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Sainsbury's reported that, in the 28 weeks to September 17, revenue grew 4.4% year-on-year to GBP16.41 billion from GBP15.72 billion. Pretax profit, however, dropped by 30% to GBP376 million from GBP527 million. It said grocery sales grew 0.2% in its first half overall, and by 3.8% in the second quarter as tough lockdown comparatives eased. The grocer will pay an interim dividend of 3.9 pence per share, up 22% from 3.2p a year before, and backed its annual underlying pretax profit guidance of GBP630 million to GBP690 million. It expects annual retail free cash flow generation of "at least GBP500 million". "We are well placed through the peak trading period and into next financial year to support customers as they manage further cost of living pressures. We are half way through a GBP1.3 billion cost saving programme that has doubled the run rate of previous years and we are confident in our competitive position in the face of macro challenges and operating cost inflation," Sainsbury's said.
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Industrial and electronic products distributor RS Group said revenue in the six months to September 30 jumped 21% year-on-year to GBP1.46 billion from GBP1.21 billion. This included GBP48.7 million from favourable exchange rate movements, and GBP2.3 million from acquisitions, offset by a GBP8.0 million hit from reduced trading days. Pretax profit rose 34% to GBP182.5 million from GBP136.1 million. "Notwithstanding the tougher global economic environment, trading remains in line with our and consensus expectations for the full year," the firm said. RS also said CEO Lindsley Ruth to take leave of absence with immediate effect, replaced by CFO David Egan during the absence.
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COMPANIES - FTSE 250
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Hikma Pharmaceuticals reiterated annual guidance for all three of its businesses. "We are seeing strong momentum in our Branded and Injectables businesses, reflecting the benefits of their increasingly broad and differentiated product portfolios, leading market positions and our flexible high-quality manufacturing footprint," the company said. It noted the US generic market remains competitive, but its Generics business is performing in line with previous guidance. Hikma noted the impact of inflation on costs, and now expects a core net finance expense of USD74 million compared to previous guidance of USD68 million, due to increasing interest rates. The search for a new CEO remains on track, it said.
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Trainline said net ticket sales more than double in the six months to August 31, reaching GBP2.16 billion from GBP1.00 billion a year before. Revenue jumped to GBP165.1 million from GBP77.7 million. The online ticket seller swung to a pretax profit of GBP12.2 million, from a loss of GBP8.4 million a year before. "Overall, the business continues to build momentum and we reaffirm guidance for the full year," the company affirmed.
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OTHER COMPANIES
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Hochschild Mining announced there was an incident at its Immaculada Mine in Peru, where a group of around 30 people from the local community broke into the mining unit and severely damaged some of its non-critical installations. Law inforcement has been notified, with production unaffected as of yet. "Despite these developments and the fact that a prior agreement had been in place with the community in question, the company held discussions with community representatives on 1 and 2 November. As this did not result in an agreement being reached, further discussions will be held next week with representatives from the Peruvian government also scheduled to attend," it said.
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By Elizabeth Winter; elizabethwinter@alliancenews.com
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