LONDON MARKET MIDDAY: Banks lead FTSE 100 as US Fed set for rate hikes

(Alliance News) - Stock prices in London were mixed at midday on Thursday with the FTSE 100 overturning earlier losses led by blue-chip banks, as investors come to terms with the prospect of multiple rate hikes from the US Federal Reserve this year.

The FTSE 100 index was up 38.58 points, or 0.5%, at 7,508.36. The mid-cap FTSE 250 index was down 133.16 points, or 0.6%, at 21,739.39. The AIM All-Share index was down 10.94 points, or 1%, at 1,086.35.

The Cboe UK 100 index was up 0.3% at 745.08. The Cboe 250 was down 0.5% at 19.481.19, and the Cboe Small Companies up 0.3% at 15,428.02.

In mainland Europe, the CAC 40 in Paris was down 0.3%, while the DAX 40 in Frankfurt was down 0.5%.

"Once again, the FTSE 100 was an outlier among global markets, with 2022 proving to be quite a year for the underdog. For the past decade the UK market has been like the last child to picked for a team in gym class, no-one having faith in its abilities for fear it wouldn't perform well. But the FTSE 100 is now one of the best performing major markets this year on a relative basis," commented AJ Bell's Russ Mould.

"For once, investors are eager to own the FTSE's 'old economy' companies in banking, tobacco and oil, as these are value stocks which are once again in fashion," Mould added.

In the FTSE 100, lenders were the best performers following the Fed's hawkish tones. Standard Chartered was up 4.6%, NatWest up 2.6%, HSBC up 3.8%, Lloyds up 2.2% and Barclays up 2.7%. Banks generate stronger net interest income in a higher interest rate environment.

At the other end of the large-caps, Fresnillo was the worst performer, down 4.5%. RBC Capital downgraded the Mexican silver miner to Sector Perform from Outperform. Jefferies cut the stock to Hold from Buy. On Wednesday, Fresnillo had lowered its production guidance amid operational challenges.

In the FTSE 250, Mitie Group was the best performer, up 7.1% after the outsourcer performed "strongly" during its third quarter and lifted its full-year guidance.

Mitie said revenue for the financial third quarter ended December 31 stood at GBP1.01 billion, up 51% from GBP667 million a year before and a 1% increase on its second-quarter revenue.

Looking ahead, Mitie expects full-year revenue in the range of GBP3.8 billion to GBP3.9 billion. In the previous financial year, it posted revenue of GBP2.59 billion, so the new guidance would represent a 47% to 51% increase, year-on-year.

Dr Martens was the worst midcap performer, down 12%. The boot maker said wholesale sales had dropped in its financial third quarter, though revenue grew overall from the previous year.

The Wollaston, England-based company said revenue in the three months to December 31 had grown 11% year-on-year to GBP307.0 million, as expected. It said e-commerce had seen strong growth, and retail made a good recovery.

However, as Covid hit manufacturing and global shipping, Dr Martens took the decision to prioritise inventory for direct-to-consumer sales. This caused wholesale performances to drop by 14% over the previous year. The decline of wholesales offset a strong direct-to-consumer performance in the Americas, with revenue in the region up only 4%.

US Federal Reserve Chair Jerome Powell on Wednesday said there is room to raise interest rates without undermining the US labour market, after the central bank signalled a rate hike is imminent.

There is "quite a bit of room" to raise rates without hurting the labour market, he said, calling conditions for workers and employers "historically tight".

The US central bank on Wednesday kept the benchmark federal funds rate in a range of 0.00% to 0.25%, as expected, and signalled a rate hike is imminent.

In an unusually blunt comment for a central bank policymaker, Powell told reporters "the committee is of a mind to raise the federal funds rate at the March meeting".

Fed officials continue to expect that the wave of rising prices, which hit a multi-decade high in 2021, will ease this year as factors such as supply chain struggles, largely caused by the pandemic, begin to resolve.

While a March hike has been pencilled in by traders for several months, investors appeared to be spooked by Powell's apparent hawkishness as he refused to be drawn on a timetable for further increases nor on the Fed's plans to unload assets on its balance sheet, which have helped keep costs down.

Nick Chatters, investment manager at Aegon Asset Management, commented: "Based on what Powell said yesterday, there is a reasonable probability of seven rate hikes this year, one at each meeting. This could cause investors to fall off chairs.

"The story of the Fed meeting is how Powell characterized the current situation versus the slow and gradual cycle we saw starting in late 2015. If the inflation risks continue to point to the upside, as Powell personally expects, there is no reason why this hiking cycle can't be steeper and faster than last time."

The dollar was stronger in the wake of the Fed decision. The pound was quoted at USD1.3390 at midday Thursday, down sharply from USD1.3514 at the London equities close Wednesday.

Analysts at OFX said: "The pound had already lost ground recently on the back of market risk aversion over the Russia-Ukraine standoff, as well as ongoing uncertainty over Prime Minister Boris Johnson's future as we await the publication of a report by Sue Gray into potentially illegal Downing Street parties held during COVID-19 lockdowns."

The euro was priced at USD1.1166, depreciating from USD1.1280 late Wednesday in London. Against the Japanese yen, the dollar was trading at JPY115.20, up from JPY114.34.

Brent oil was quoted at USD89.34 a barrel Thursday at midday, down sharply from USD90.27 at the London equities close Wednesday. Gold stood at USD1,813.10 an ounce, lower against USD1,832.19.

New York was pointed slightly higher on Thursday, following the back-and-forth trading that came after Wednesday's Federal Reserve rate decision.

The Dow Jones Industrial Average was called up 0.1%, the S&P 500 up 0.1%, and the Nasdaq Composite up 0.3%, based on futures trading. The indices had closed down 0.4%, down 0.2% and marginally higher on Wednesday.

On the corporate front, Tesla shares will be in focus after the electric vehicle maker late Wednesday hailed a "breakthrough" 2021 but warned supply chains are set to hold back its factories through 2022.

Revenue for the fourth quarter of 2021 jumped 65% to USD17.72 billion from USD10.74 billion year-on-year. Along with an improved operating margin, at 14.7% versus just 5.4% a year ago, adjusted earnings before interest, tax, depreciation and amortisation more than doubled to USD4.09 billion from USD1.85 billion.

Net income shot up to USD2.32 billion from just USD270 million a year ago, and diluted GAAP earnings per share improved to USD2.05 from USD0.24. After a "successful" year, the firm said it is looking to ramp up production through new factories in Austin and Berlin as well as boosting output at established factories in Fremont and Shanghai.

However, Tesla warned: "Our own factories have been running below capacity for several quarters as supply chain became the main limiting factor, which is likely to continue through 2022."

Tesla shares were down 1.0% in pre-market trade in New York.

Tech earnings continue on Wall Street with iPhone-maker Apple set to report first-quarter results after the closing bell. The stock was up 0.6% in pre-market.

The economic calendar for Thursday has US economic growth figures and jobless claims at 1330 GMT.

By Arvind Bhunjun; arvindbhunjun@alliancenews.com

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