LONDON MARKET CLOSE: Hawkish Federal Reserve minutes unnerve markets

(Alliance News) - London's brief new year winning streak was brought to an abrupt end on Thursday as a hawkish set of US Federal Reserve minutes, which signalled faster than expected rate rises, rattled investors.

The FTSE 100 index closed down 66.50 points, or 0.9%, at 7,450.37. The FTSE 250 ended down 354.26 points, or 1.5%, at 23,416.92, and the AIM All-Share closed down 19.09 points, or 1.6%, at 1,191.85.

The Cboe UK 100 ended down 1.0% at 738.67, the Cboe UK 250 closed down 1.5% at 20,858.45, and the Cboe Small Companies ended down 0.3% at 15,558.47.

In European equities on Thursday, the CAC 40 in Paris fell 1.6%, while the DAX 40 in Frankfurt ended down 1.4%.

European markets tanked, following similar moves in the US overnight, after minutes from the Federal Reserve's last meeting showed conditions for an interest rate hike could be met "relatively soon" if the labour market continues to improve.

Minutes from the December meeting, released on Wednesday, showed that Fed members noted that economic activity had continued to strengthen. They expect "robust growth" to continue in 2022.

It "may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated", the minutes showed, as Fed members also discussed balance sheet runoff plans.

"Markets appear to have been spooked by the prospect that the Fed could well start to normalise policy at a faster rate than had originally been priced in for this year, largely due to discussions around the prospect of balance sheet reduction," said Michael Hewson, chief market analyst at CMC Markets.

The minutes overshadowed data showing new US unemployment claims came in higher than expected, according to numbers released on Thursday, suggesting economic progress is ebbing and contrasting with Wednesday's buoyant ADP jobs report.

According to the Department of Labor, initial jobless claims increased by 7,000 to 207,000 in the week that ended January 1, from an upwardly revised 200,000 a week earlier.

Meanwhile, the Institute for Supply Management's US services purchasing managers' index fell to 62.0 in December from November's all-time high of 69.1. Consensus had been looking for a more moderate fall to 66.9, according to FXStreet.

Stocks in New York were mixed on Thursday. The Dow Jones was down 0.3% in mid-morning trade, the S&P 500 was flat and the Nasdaq Composite rose 0.2% after Wednesday's 3.3% tumble.

As well as equity markets, gold struggled in the wake of the Fed minutes. Gold was quoted at USD1,791.00 an ounce at the London equities close Thursday, tumbling from USD1,823.20 at the close on Wednesday.

"Gold just can’t catch a break. After struggling throughout last year to attract fresh buyers, the start of this year has been equally poor. With the Fed potentially on course to tighten its policy more aggressively, causing renewed strength in bond yields, gold bulls are finding it difficult to justify buying aggressively right now," said Fawad Razaqzada, market analyst at ThinkMarkets.

Oil prices advanced. Brent oil was quoted at USD82.42 a barrel at the London equities close Thursday, up from USD81.20 late Wednesday.

The hawkish Fed minutes lifted the dollar. The pound was quoted at USD1.3534 at the London equities close Thursday, down compared to USD1.3562 at the close on Wednesday. The euro stood at USD1.1304, lower against USD1.1326 at the same time on Wednesday.

However, the safe haven Japanese yen advanced amid Thursday's downbeat tone. Against the yen, the dollar fell to JPY115.76 from JPY115.90 late Wednesday.

In London, banks topped the FTSE 100 as they looked towards a higher interest rate world. Standard Chartered closed up 3.7%, the best blue-chip performer, while NatWest gained 2.6% and HSBC rose 2.1%.

Towards the bottom of the index were ex-dividend stocks such as Aveva, closing down 5.4%, and Experian, down 4.4%.

Next shares fell 3.3% as the fashion and homewares retailer lifted profit guidance and outlined plans for a special dividend, but was cautious on future trading conditions.

Following decent Christmas trading, Next has lifted profit guidance. It now expects pretax profit of GBP822 million for the financial year ending in January, which would be a 9.8% hike from pre-pandemic times. Its previous outlook was for pretax profit of GBP800 million. Pretax profit in the year that ended January 30, 2021 was GBP342 million.

Looking ahead, the retailer reported "five areas of uncertainty in the wider economic environment". They include travel, pent-up demand and savings, essential goods inflation, Next goods inflation, and the tax and interest rates environment.

Dr Martens was the worst performer in the FTSE 250, ending down 11% after shareholder IngreLux disposed of a 6.5% stake.

IngreLux had owned 429.1 million shares in the Wollaston, Northamptonshire-based footwear and clothing maker, about a 43% stake, and now has 364.1 million shares, a 36.4% holding. IngreLux is subject to a 90 lock-up period for the remaining shares.

Greggs fell 8.0% despite the baker reporting that it expects its full year outcome for 2021 slightly ahead of its previous expectations.

Greggs said 2021 sales were GBP1.23 billion, up 5.3% compared to 2019. In the fourth quarter of 2021, two-year like-for-like sales in company-managed shops grew by 0.8%. This was "achieved against a backdrop of continued disruption to staffing and supply chains", Greggs noted.

However, the Newcastle upon Tyne-based sausage roll maker laid out chief executive succession plans, with Roger Whiteside leaving the post and Retail & Property Director Roisin Currie to take the reins.

Elsewhere in London, shares in M&C Saatchi rose 11% after confirming a preliminary takeover approach from London Main Market-listed acquisition vehicle AdvancedAdv.

AdvancedAdvT announced on Wednesday that it had bought a 9.8% stake in M&C Saatchi at GBP2.0 per share, spending GBP24.0 million. Vin Murria, the executive chair of AdvancedAdvT, also is an M&C Saatchi director, so M&C Saatchi said it will form an independent committee to consider any offer made.

Friday's economic calendar has UK Halifax house prices at 0700 GMT and German industrial production at the same time. Eurozone inflation is at 1000 GMT and the day's headline event, US nonfarm payrolls, are at 1330 GMT.

By Lucy Heming; lucyheming@alliancenews.com

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