LONDON MARKET MIDDAY: Stocks down as aggressive US Fed rate hike looms

(Alliance News) - Stock prices in London were lower at midday on Tuesday following the long bank holiday weekend in the UK, as markets globally prepare for a sharp US interest rate hike and similar moves by other central banks as they struggle to control inflation.

All eyes are on the conclusion on Wednesday of the Federal Reserve's two-day policy meeting, where it is expected to lift borrowing costs by half a percentage point. It would be the first time since 2000 that the US central bank has raised rates by 50 basis points at one meeting.

Earlier Tuesday, Australia joined the tightened cycle started by central banks elsewhere. The Sydney-based central bank raised the main lending rate by 25 basis points to 0.35%, the first increase since November 2010.

The FTSE 100 index was down 32.64 points, or 0.4%, at 7,511.91. The mid-cap FTSE 250 index was down 12.02 points, or 0.1%, at 20,696.69. The AIM All-Share index was down 2.31 points, or 0.1%, at 1,019.95.

The Cboe UK 100 index was down 0.7% at 745.25. The Cboe 250 was down 0.5% at 18,172.69. The Cboe Small Companies climbed 0.1% to 15,174.74.

In mainland Europe, the CAC 40 in Paris was up 0.2% and the DAX 40 in Frankfurt was up 0.4%.

"Markets are particularly worried about lockdown in China and how fast US interest rates might go up. We'll get clarity on the latter tomorrow when the Federal Reserve gives its latest policy decision, with markets expecting half a percentage point increase in the Fed Funds rate. Central banks typically raise rates by a quarter percentage point, but the Fed is under pressure to be more aggressive to combat rising inflation," said AJ Bell's Russ Mould.

The Bank of England will announce its own rate decision on Thursday.

"Can the BoE surprise with a 50bps hike at some point this year? The short answer: it's a long shot," commented Sanjay Raja, senior economist at Deutsche Bank. "While a bigger move may be on the table in the coming meetings, we see...reasons why a 50bps move remains unlikely in the UK, despite other central banks upping the ante for bigger moves."

Raja noted that the UK central bank moved early, so it doesn't need to catch-up with global peers. As well, more so than other advanced economies, the UK is at risk of falling into recession.

In the FTSE 100, M&G was up 3.0% at midday on Tuesday, after HSBC raised the investment manager to 'buy' from 'hold'.

In addition, St James's Place was up 1.9% after HSBC also upgraded the wealth manager to 'buy' from 'hold'.

BP was up 2.0%. The oil major swung to a first-quarter loss due to its decision to exit from its shareholding in Rosneft in response to Moscow's invasion of Ukraine; however on an underlying basis, the oil major reported a big jump in profit.

For the three months that ended March 31, BP swung to an attributable loss of USD20.38 billion from a USD4.67 billion profit in the first quarter last year. BP said the reported result included pretax adjusted items of USD30.8 billion.

By its preferred metric, BP swung to a replacement cost loss of USD23.04 billion from a replacement cost profit of USD3.33 billion the year before.

The London-based firm attributed the loss to its decision to exit its near-20% shareholding in state-owned Russian oil firm Rosneft. BP said that, in the first quarter, the total post-tax charge for this was USD25.5 billion.

On an underlying replacement cost basis, BP reported a profit of USD6.25 billion, up 54% from USD4.07 billion in the fourth quarter of last year and more than doubled from USD2.63 billion a year ago.

BP raised its first-quarter dividend by 4.0% to 5.46 cents from 5.25 cents the year before. Further, during the first quarter BP generated surplus cash flow of USD4.1 billion and said it intends to execute a USD2.5 billion share buyback prior to announcing its second quarter results.

Rival oil producer Shell, which posts its own first-quarter numbers on Thursday, was down 1.0%.

BP's results come as calls from the opposition Labour Party for a windfall tax on UK oil majors grow louder, as the country grapples with a cost-of-living crisis.

Last week, UK Chancellor of the Exchequer Rishi Sunak appeared to distance himself from such a tax but did not entirely rule it out.

The chancellor called on companies making generating large profit to invest the cash back into the UK instead.

"It sounds appealing. 'Great, we're taxing bad energy companies more, that will solve all our problems'," he said in an interview with Mumsnet. "The reason we haven't gone down that road is, really simply…we need to invest more. That's why we haven't gone for some extra tax. Because what I don't want to do is discourage investment in our own energy supplies."

The view was echoed by UK Prime Minister Boris Johnson who said on Tuesday that a windfall tax on big energy firms would deter investment and make it harder to meet the country's net-zero environmental goals.

At the other end of the large-caps, Segro was the worst performer, down 7.4%. Kepler Cheuvreux downgraded the warehouse property investor to 'hold' from 'reduce'.

In the FTSE 250, Auction Technology Group was the best performer, up 7.0%, after JPMorgan raised the online auction operator to 'overweight' from 'neutral'.

Energean was up 4.5%. Subsidiary Energean Israel signed a gas sales agreement with the East Hagit Power Plant Ltd Partnership.

Under the agreement, Energean will supply gas to East Hagit for a term of 15 years, with a total contract quantity of up to 12 billion cubic feet. Energean said the agreement has the potential to generate revenue of up to USD2 billion over the offtake period.

On AIM, Hutchmed (China) was down 15%, after the drugmaker said the US Food & Drug Administration has rejected its surufatinib for treatment of pancreatic neuroendocrine tumours.

In a complete response letter, the FDA said the current data package, based on two positive phase three trials in China and one bridging study in the US, does not support an approval in the US "at this time".

The FDA said a multi-regional clinical trial of surufatinib required for US approval. Surufatinib was approved in China for the treatment of pNETs and extra-pancreatic neuroendocrine tumours in June 2021 and December 2020, respectively.

The dollar was higher across the board as the US Federal Reserve's two-day policy meeting gets underway. The pound was quoted at USD1.2512 at midday on Tuesday, down from USD1.2568 at the London equities close Friday.

The euro was priced at USD1.0517, down from USD1.0547. Against the Japanese yen, the dollar was trading at JPY130.11, up from JPY129.68.

On the economic front, UK manufacturing sector activity edged higher last month on increased intakes of new business against a backdrop of rising price inflationary pressures, S&P Global said.

The UK S&P Global-CIPS manufacturing purchasing managers' index was 55.8 points in April, up slightly from the preliminary estimate of 55.3 and the score of 55.2 registered in March.

S&P said the start of the second quarter saw a mild growth acceleration in the UK manufacturing sector. The rate of expansion in output improved from March's five-month low, leading to a further solid increase in staffing levels.

Brent oil was quoted at USD106.51 a barrel on Tuesday at midday, down sharply from USD110.30 at the London equities close on Friday. Gold stood at USD1,858.33 an ounce, down from USD1,906.75.

New York was pointed to a slightly lower open ahead of earnings reports from semiconductor maker Advanced Micro Devices, drugmaker Pfizer, and coffee-house chain Starbucks.

The Dow Jones Industrial Average was called down 0.2%, the S&P 500 down 0.1%, and the Nasdaq Composite down 0.3%, based on futures trading. The stock indices had closed up 0.3%, 0.6% and 1.6% respectively on Monday.

By Arvind Bhunjun; arvindbhunjun@alliancenews.com

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