LONDON MARKET CLOSE: Inflation jitters hit stocks as oil tops USD80

(Alliance News) - European stocks slumped on Tuesday as soaring oil prices fuelled inflation worries, though the FTSE 100 was spared some pain as a weaker pound provided some cushioning for the internationally-exposed index.

The FTSE 100 index closed down 35.30 points, or 0.5%, at 7,028.10. The FTSE 250 ended down 479.53 points, or 2.0%, at 23,129.10, and the AIM All-Share closed down 12.26 points, or 1.0%, at 1,255.97.

The Cboe UK 100 ended down 0.5% at 698.76, the Cboe UK 250 closed down 1.8% at 21,041.27, and the Cboe Small Companies ended down 0.9% at 15,725.58.

In European equities on Tuesday, the CAC 40 in Paris ended down 2.2% and the DAX 40 in Frankfurt ended down 2.1%.

"The prospect of higher energy prices, fuelling inflation, and rises in bond yields that appear to be pre-empting tighter monetary policy by central banks, have prompted widespread selling across global stock markets," said Chris Beauchamp, chief market analyst at IG.

Despite having traded above USD80 on Tuesday, Brent oil prices settled to trade at USD79.00 a barrel at the London equities close, down from USD79.48 late Monday.

Nonetheless, oil majors climbed. Royal Dutch Shell 'A' and 'B' shares ended up 2.8% and 2.3% respectively, while BP closed up 1.6%.

OPEC said Tuesday it expects oil demand to rise between now and 2045, and remain the dominant source of energy despite warnings that it must fall to combat climate change.

"Energy and oil demand have picked up significantly in 2021, after the massive drop in 2020, and continued expansion is forecast for the longer-term," OPEC chief Mohammad Barkindo said in the group's World Oil Outlook.

Further rises in oil prices could spell trouble ahead in the UK, with the fuel situation already in crisis as army tanker drivers were put on standby to ease the chaos at petrol stations.

Military drivers will get specialised training in preparation for their deployment while certain HGV licences will be extended to help tackle the issue, ministers announced on Monday. The move comes after many filling stations ran dry after drivers made a dash for the pumps amid fears a shortage of tanker drivers would hit supplies.

Michael Hewson, chief market analyst at CMC Markets, commented: "Having been told for months that inflation is transitory it is becoming increasingly apparent that the rise in energy prices, along with associated supply chain problems, is acting as a headwind to growth and will likely prompt a sharp slowdown in economic activity, as well as an element of demand destruction."

Bank of England Governor Andrew Bailey on Monday warned that the UK's pandemic recovery is slowing, but said modest tightening may be warranted to bring inflation back to target.

He noted that the economic recovery from the pandemic is decelerating, and supply chain disruptions and labour shortages are presenting fresh headwinds to the rebound. While inflation remains elevated - accelerating to 3.2% on an annual basis in August - the BoE still believes price pressures are "transient", with demand seen shifting back to services from goods and supply chains "likely to repair themselves".

The pound was quoted at USD1.3545 at the London equities close Tuesday, tumbling from USD1.3706 at the close on Monday.

Meanwhile, Bailey's eurozone counterpart, European Central Bank President Christine Lagarde, has warned not to "overreact" to transitory supply shortages.

Speaking at the opening of the ECB Forum on Central Banking, Lagarde said "the key challenge is to ensure that we do not overreact to transitory supply shocks" that have been caused by the coronavirus pandemic.

Shortages of raw materials and key components like semiconductors have added to rising prices but "have no bearing on the medium term," Lagarde said.

The euro stood at USD1.1684 at the European equities close Tuesday, down from USD1.1698 at the same time on Monday.

Federal Reserve Chair Jerome Powell, testifying in front of Congress on Tuesday, has also insisted that recent price pressures are temporary.

"As the economy continues to reopen and spending rebounds, we are seeing upward pressure on prices, particularly due to supply bottlenecks in some sectors. These effects have been larger and longer lasting than anticipated, but they will abate," said Powell.

As the economy continues to reopen, he added, supply bottlenecks and labour shortages "could again prove to be greater and more enduring than anticipated".

Stocks in New York were in the red at the London equities close, with the DJIA down 1.3%, the S&P 500 index down 1.8%, and the Nasdaq Composite down 2.5%.

Safe havens suffered on Tuesday. Against the yen, the dollar was trading at JPY111.27, up compared to JPY110.98 late Monday. Gold was quoted at USD1,739.12 an ounce at the London equities close Tuesday against USD1,752.17 at the close on Monday.

Back in London, Smiths Group topped the FTSE 100, advancing 3.5% after its annual results beat market forecasts.

For the financial year ended July 31, revenue was down 5.5% to GBP2.41 billion from GBP2.55 billion the year before. Revenue slightly pipped the market consensus estimate of GBP2.40 billion.

Annual operating profit, adjusted for strategic restructuring programme costs and write-downs, was GBP372 million, up 14% from GBP327 million. The figure beat the consensus forecast for operating profit of GBP357 million.

Sage fell 4.5% after Goldman Sachs cut the accounting software firm to Sell from Neutral.

In the FTSE 250, Moonpig fell 5.6% despite upping its full-year outlook.

The company has raised its revenue guidance for the financial year to the end of April 2022, which it now expects to be between GBP270 million and GBP285 million. Moonpig has previously expected its full-year revenue to come in between GBP250 million and GBP260 million.

Revenue will still be down from financial 2021, when Moonpig reported takings of GBP368.2 million. However, it will be well above financial 2020 revenue of GBP173.1 million.

Go-Ahead shares collapsed 25% on news that the UK government will seize control of the Southeastern rail franchise after the operator was found to have not declared more than GBP25 million of historic taxpayer funding.

The Department for Transport have appointed the so-call 'operator of last resort' to take over the running of the service from October 18, after a "serious breach" of its franchise agreement. Go-Ahead, which owns operator London & Southeastern Railway alongside Keolis UK, said it regretted the decision, while acknowledging "errors".

Go-Ahead said it had repaid the GBP25 million referred to in the government's statement and that it would provide a "detailed update on further liabilities in its full-year results".

Wednesday's corporate calendar has half-year results from clothing and homewares retailer Next and trading statements from energy utility SSE and SSP, which operates food outlets in travel locations.

The economic calendar on Wednesday has eurozone consumer confidence at 1000 BST and then Fed Chair Jerome Powell makes another appearance, speaking at 1645 BST at the ECB forum.

By Lucy Heming; lucyheming@alliancenews.com

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