LONDON MARKET MIDDAY: Hawkish Fed Statement Hits Stocks, US Futures

LONDON (Alliance News) - Wall Street was called lower ahead of the open Thursday, after having had time to digest a hawkish Federal Reserve monetary policy statement, which indicated a December interest rate hike remains on the table.

Concluding a two-day policy meeting, the Fed released a statement on Wednesday saying it has kept interest rates at effectively zero, in-line with analyst expectations. The vote to maintain interest rates was 9-1, with only Richmond Fed President Jeffrey Lacker arguing for a rate hike.

However, Federal Open Market Committee members said that an increase in interest rates is still on the cards for their next meeting in December.

"In determining whether it will be appropriate to raise the target range at [the FOMC's] next meeting, the Committee will assess progress - both realized and expected - toward its objectives of maximum employment and 2% inflation," the Fed said in its statement.

US private bank Brown Brothers Harriman said the statement gave the clearest signal to date that the Fed is prepared to hike interest rates at its last meeting of the year on December 16.

"The nuanced shift in the wording of the assessment, and the specific mention of the 'next' meeting created a powerful incentive to market participants to re-price the risks of a December hike," BBH wrote.

Deutsche economist Joseph LaVorgna agreed, saying that by being so specific about the December meeting, policymakers were attempting to force market participants to price the very real possibility of a rate hike in December should economic and financial conditions warrant.

Another key point from the statement was the absence of a sentence referring to the restraining influence of global economic and financial developments on US economic activity and inflation. The October statement instead said the Fed "is monitoring global economic and financial developments", suggesting it sees fewer potential global risks to the US since its September meeting.

When the FOMC first highlighted the danger to the US economy from global risks in its September statement, stocks in the US fell, but the removal the sentence this month saw US equities end on much more positive note Wednesday, recovering from an initial dip.

The Dow Jones Industrial Average ended 1.1% Wednesday, with the S&P 500 index up 1.2% and the Nasdaq Composite up 1.3%. However, ahead of the open on Thursday, futures indicate the Dow and S&P to open down 0.4% and the Nasdaq 100 to open down 0.6%.

Stocks in the UK were trading lower in reaction to the statement. At midday, the FTSE 100 index traded down 1.2% at 6,358.67 points. The FTSE 250 was down 0.2% at 17,104.27, and the AIM All-Share also was off 0.2% at 740.55.

Europe was lower as well, with the CAC 40 in Paris down 0.9% and the DAX 30 index in Frankfurt down 0.4%.

On the corporate front in the London, Smith & Nephew traded down 5.3% after it agreed to acquire Blue Belt Holdings in the US for USD275 million, as it maintained its outlook for 2015 and reported a slight rise in revenue for the first nine months of 2015.

The medical equipment company expects revenue growth from Minnesota-based Blue Belt, which works in orthopaedic robotics-assisted surgery, to be over 50% in the medium-term. However, Smith & Nephew said that its group trading profit margin will be diluted by around 60 basis points in 2016 as a result of investment it will make in combined research and development programmes and supportive clinical evidence.

Barclays shares were down 5.2%, also amongst the worst FTSE 100 performers. The bank missed market expectations and cut guidance for 2016, as its adjusted pretax profit fell in the third quarter, with larger losses in the non-core businesses that Barclays is winding down more than offsetting stronger earnings in three of its four main operating businesses.

Barclays raised its 2016 core cost guidance by GBP400 million and cut its core return on equity target for 2016 to 11% from the 12% previously guided due to the UK banking surcharge. The trading update came a day after Barclays appointed Jes Staley, the former JPMorgan Chase investment banking chief, as its new chief executive.

Royal Dutch Shell said it swung to a major loss in the third quarter after booking substantial exceptional charges and suffering a fall in revenue, with its results missing analyst expectations by around a third.

The FTSE 100 oil and gas giant reported a USD6.10 billion current cost of supply loss overall in the third quarter of 2015, swinging from a USD5.30 billion profit a year earlier. That loss was caused by exceptional items totalling USD7.90 billion.

The exceptional items were mainly driven by decisions to pull out of major projects during the period to try to make the company more competitive. The charges, combined with lower oil prices, sent Shell's earnings in the first nine months of 2015 down 87% from a year before, falling by almost USD13.00 billion.

Shell 'A' shares were trading down 2.6%, while 'B' shares were down 2.3%.

In the FTSE 250, Playtech led gainers, up 7.5% after it said it has seen strong trading from both its gaming and financial divisions in the third quarter of 2015. The gaming division's revenue increased by 23% to EUR143.4 million in the third quarter of 2015, while the financial division's revenue amounted to EUR27.5 million in the period, without a prior year comparison.

Overall, third-quarter revenue increased by 47% to GBP170.9 million. "Given the strength of our business and the momentum that we are enjoying, we have confidence for the remainder of 2015 and beyond," Chief Executive Mor Weizer said.

Transport operator National Express Group said it delivered constant currency growth in all of its divisions in the second quarter, with like-for-like operating profit also increasing. The company said its group revenue was up 3.0% in the second quarter to the end of September on the year before, with growth in all of its divisions. Like-for-like operating profit was up 7%. National Express shares were up 2.9%.

In the AIM All-Share, Falkland Oil and Gas traded down 37%. The company said it has failed to find a commercial amount of hydrocarbons at the Humpback exploration well offshore its namesake country, two weeks after the company said initial results suggested there was oil to be found.

On October 16, Falkland Oil said it recorded oil and gas shows whilst drilling through the main target horizon, with the immediate wireline logging indicating the "possible presence" of hydrocarbon bearing sandstones. But those hopes were dashed on Thursday after Falkland confirmed the well encountered "non-commercial quantities of oil and gas within a number of sandstone intervals."

Still ahead in the economic calendar, the first reading of third quarter US GDP is at 1230 GMT. According to FXStreet.com, economists expect a sharp slowdown in growth in the third quarter to just 1.6% year-on-year compared to 3.9% in the second quarter.

Alongside the GDP figure is US continuing and initial jobless claims. German inflation is at 1300 GMT, before US pending home sales at 1400 BST.

By Neil Thakrar; neilthakrar@alliancenews.com; @NeilThakrar1

Copyright 2015 Alliance News Limited. All Rights Reserved.