LONDON MARKET MIDDAY: Shares fall back ahead of key US inflation data

(Alliance News) - London's large-cap and mid-cap indices had slipped into the red by midday on Tuesday, having started the day positively, as a risk-off mood crept into markets ahead of the release of key US inflation data at 1330 BST.

"These [inflation figures] will offer a clue into the thinking of the Federal Reserve ahead of its meeting to decide interest rates tomorrow. A higher-than-expected number could hit market sentiment as it might suggest further US rate hikes are necessary," said Russ Mould, investment director at AJ Bell.

The FTSE 100 index was down 4.44 points, or 0.1%, at 7,566.25. The FTSE 250 was down 26.23 points, or 0.1%, at 19,164.58.

Smaller stocks were faring better. The AIM All-Share was up 2.60 points, or 0.3%, at 795.08, meanwhile.

The Cboe UK 100 was flat at 754.60, the Cboe UK 250 was down 0.3% at 16,684.58, and the Cboe Small Companies was marginally lower at 13,230.33.

According to FXStreet-cited consensus, markets are expecting May's US consumer price index to show a continued slowdown in inflation. Headline consumer price inflation is expected to cool to 4.1% from 4.9% on an annual basis, with core prices expected to slow their annual rise to 5.3% from 5.5%.

"If we don't see a slowdown in core prices, then that might introduce some nervousness that might prompt the Fed to hike again tomorrow instead of the pause that is currently being priced," said Michael Hewson, chief market analyst at CMC Markets.

The Fed will announce its next interest rate decision on Wednesday at 1900 BST. Markets currently see a 79% chance that the US central bank will hold rates steady on Wednesday, according to the CME FedWatch Tool.

Ahead of the inflation data, which comes out before the US market open, stocks in New York were called mostly higher. The Dow Jones Industrial Average was pointed marginally lower, but the S&P 500 index was indicated up 0.1% and the Nasdaq Composite up 0.3%.

The pound was quoted at USD1.2569 at midday on Tuesday in London, higher compared to USD1.2511 at the equities close on Monday. The euro stood at USD1.0799, up from USD1.0754. Against the yen, the dollar was trading at JPY139.63, higher compared to JPY139.54.

London-listed miners were the top-performing stocks in the FTSE 100 at midday on Tuesday.

Glencore, Rio Tinto, Anglo American and Antofagasta were up 3.7%, 3.0%, 2.9%, and 2.1%, respectively.

The stocks benefited from a cut in interest rates in China as the country looks to revive a flagging post-Covid recovery. China is a huger buyer of commodities.

The People's Bank of China lowered the seven-day reverse repo rate to 1.9% from 2.0%, the first such move since August last year.

Housebuilders were among the worst performing large-caps in London.

Barratt Developments, Taylor Wimpey, Persimmon and Berkeley were down 3.7%, 3.8%, 3.2% and 2.1%.

The stocks were weighed down by poorly received results from smaller peer Bellway, whose shares 3.8% lower at midday. Expectations of higher interest rates in the UK also hurt the big housebuilders, as more expensive mortgages would hold back buyers.

Bellway said it had seen a "sustained improvement" in demand and a healthy balance sheet in 2023, despite reporting lower reservations and a smaller order book.

From February 1 to June 4, Bellway said its overall reservation rate decreased by 25% to an average of 190 per week from 253 per week for the same period a year before. It said the average private reservation rate decreased 30% to 139 from 198 per week.

Bellway also noted that mortgage rates are currently higher than the equivalent period last year.

"While overall mortgage availability has improved in recent months, the re-pricing of mortgage products, as lenders respond to changes in interest rates, continues to affect shorter-term availability. The recent expiry of Help-to-Buy in England has led to lower year-on-year demand from first time buyers," it said.

Analysts at Irish broker Davy said Bellway's update does not yet reflect "the impact of the most recent squeeze in affordability". Mortgage rates have risen in recent days on the expectation of more Bank of England interest rate hikes.

The Bank of England next decides on interest rates a week on Thursday. It is expected to lift the bank rate by another 25 basis points.

The expectations of another hike next week and potentially another in August were cemented by an "undeniably hawkish" UK jobs report from the Office for National Statistics on Tuesday.

The UK unemployment rate edged down to 3.8% in the three months to April from 3.9% in the three months to March. Market consensus, as cited by FXStreet, had expected unemployment to rise to 4.0%.

In the three months to April, annual growth in average total pay, including bonuses, picked up to 6.5% from 6.1% in the three months to March. This came above market consensus, which expected pay growth to hold steady.

Excluding bonuses, annual average earnings growth was 7.2% in the three months to April, compared to 6.8% in the previous three months. This was above expectations of 6.9% growth.

"Those pay rises will be giving members of the Bank of England's MPC a massive headache...Pay rises have helped mitigate rising costs to a degree, but they've also helped maintain purchasing power and that just fuels the very thing that's causing all the pain in the first place," said Danni Hewson, head of financial analysis at AJ Bell.

CMC Markets was the FTSE 250's worst performer, down 3.9%.

The contracts-for-difference and shares trading platform reported a sharp drop in profit in the financial year that ended March 31. Pretax profit fell 40% year-on-year to GBP52.2 million from GBP91.5 million the year prior.

The reduced profitability came as CMC Markets' operating expenses increased by GBP45.6 million as a result of "significant" investment in technology, people, and product throughout the year along with the impact of the elevated inflationary environment seen across all regions, CMC said.

Elsewhere in London, William Hill owner 888 added 3.9% after it announced it had completed the EUR28.3 million sale of its Latvian business to Paf Consulting.

On AIM, IOG surged 10% after it said it delivered first gas from the Blythe H2 well in the southern North Sea.

The UK-focused gas producer said the well was brought on-stream in three months and one week from the spud date. This was better than the initial guidance of around three months, despite 34 days lost to a well control event.

In European equities on Tuesday, the CAC 40 index in Paris was flat, while the DAX 40 in Frankfurt was up 0.2%.

Brent oil was quoted at USD73.38 a barrel at midday in London on Tuesday, up from USD72.71 late Monday. Gold was quoted at USD1,964.73 an ounce, higher against USD1,957.18.

By Heather Rydings, Alliance News senior economics reporter

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