LONDON MARKET PRE-OPEN: Next Profit Grows As Diageo Warns On Trade War

(Alliance News) - Stock prices in London are set for a lower open on Thursday following the US central bank's rate cut, while in early UK corporate news Next reported a strong online performance and Diageo cautioned on trade headwinds.

IG futures indicate the FTSE 100 index is to open 23 points lower at 7,289.25. The blue-chip index closed down 6.35 points, or 0.1,% at 7,312.85 on Wednesday.

For a third straight day, the Federal Reserve Bank of New York on Thursday will inject billions into US money markets to preserve the Federal Reserve's control over short-term interest rates.

In a statement late Wednesday, the New York Fed said it will again conduct a repurchase agreement operation of up to USD75 billion to offer more liquidity to the system. It offered the same amount in repo operations Tuesday and Wednesday.

Banks have struggled in recent days to find the cash needed to meet reserve requirements which has pushed up short-term borrowing rates.

The move comes as the US central bank cut its benchmark interest rate by a quarter point for the second time this year on Wednesday, and Federal Reserve Chair Jerome Powell vowed to do whatever is needed to keep the economy growing.

But the Fed's policy committee is divided, with three of 10 voting members dissenting from the decision, one because he wanted even more stimulus.

Powell said policymakers do not expect a recession, but trade uncertainty is creating "cross winds" that are weighing on the economy amid US President Donald Trump's conflict with China.

Although consumer spending remains strong, "trade uncertainty is having an effect. You see it in weak business investment, weak exports," Powell told reporters, stressing the Fed will "will act as appropriate to sustain the expansion".

The Fed's policy-setting Federal Open Market Committee lowered the policy interest rate by 25 basis points to a target range of 1.75 to 2.0%, as expected. With that second rate cut, it has now pulled back on half of the four interest rate increases it implemented in 2018.

While officials continue to believe the most likely outcome is for the economy to continue to grow and inflation to gradually increase, "uncertainties about this outlook remain", the FOMC said in a statement.

"Last night's Fed decision was almost a side issue to concerns about US dollar liquidity which has seen short-term rates push above the Fed Funds rate, forcing the US central bank to increase the amount of short-term funding available for the first time since the financial crisis in 2008," said Michael Hewson at CMC Markets UK.

"A number of reasons have been cited for the squeeze in funding costs, including the settling of quarterly tax bills, as well as the settlement of USD78 billion of US treasury notes. With bank reserves also quite low and triple witching settlements due later this week, questions are being asked as to whether this spike in short-term rates is a symptom of something more sinister with respect to the plumbing of the US financial system," Hewson added.

In the US on Wednesday, Wall Street ended mixed, with the Dow Jones Industrial Average ending up 0.1%, the S&P 500 flat, and the Nasdaq Composite down 0.1%.

In Asia on Thursday, the Japanese Nikkei 225 index ended up 0.4%. In China, the Shanghai Composite is up 0.2%, while the Hang Seng index in Hong Kong is down 1.2%.

The Bank of Japan decided on Thursday to maintain its ultra-easing monetary policy despite other central banks cutting interest rates to prop up growth.

"Japan's economy has been on a moderate expanding trend, with a virtuous cycle from income to spending operating, although exports, production, and business sentiment have been affected by the slowdown in overseas economies," the central bank said in a statement issued after a two-day monetary policy meeting.

On the political front, US Secretary of State Mike Pompeo said Wednesday that attacks on Saudi oil facilities at the weekend were an Iranian "act of war" and called the Houthi rebels' claim of responsibility "fraudulent".

"We were blessed there were no Americans killed in this attack, but any time you have an act of war of this nature, there's always risk that could happen," he said before arriving in Saudi Arabia.

Pompeo added the US intelligence community has "high confidence" the Houthis do not possess the weapons used in the attack.

"We've seen no evidence it came from Iraq. It could have well have travelled over Kuwait, we've not seen that," Pompeo added.

In early UK corporate news, FTSE 100 retailer Next reported a strong Online performance, but sales in its bricks-and-mortar Retail unit continue to slide.

Overall sales for the six months to July 2 rose 3.7% to GBP2.06 billion, with Online sales up 13% to GBP1.00 billion and Retail sales falling 5.5% to GBP874.3 million.

Next's pretax profit was up 4.0% to GBP327.4 million, and on an underlying basis, pretax profit was up 2.7% to GBP319.6 million. The company has increase the interim dividend by 4.5% to 57.5 pence each.

Next reaffirmed guidance given in July for 0.3% year-on-year pretax profit growth, with earnings per share set to rise 5.2% due to ongoing share buybacks.

Drinks giant Diageo said its year ending June 2020 has begun well, with organic net sales growth guided at the mid-point of its 4% to 6% range. Organic operating profit is set to be one percentage point ahead of organic sales growth.

However, due to a strong comparable a year prior, Diageo sees first half organic operating profit growth to either match, or be slightly slower than, organic net sales growth.

Diageo also said it is not immune to changes to global trade policy.

Chemicals firm Johnson Matthey guided over the "medium term" for mid-to-high single-digit compound annual growth in earnings per share, as well as expanding its return on invested capital to 20%. It also hopes to continue boosting payouts.

Clean Air will deliver mid-single-digit growth up to 2025, Johnson Matthey said, with Efficient Natural Resources expected to deliver similar growth in the same period.

Johnson Matthey is making good progress in the Health unit, it continued, while "strong" performance has been registered in the New Markets segment, especially in Battery Materials.

Johnson Matthey has kept its outlook for its year ending March 2020 unchanged.

Also in the FTSE 100, the UK Competition & Markets Authority has stepped up its investigation into JD Sports Fashion's takeover of Footyaslum.

It has asked for remedies from the sports retailer, the CMA said in its own statement, while JD Sports said it will work with the CMA to avoid a phase two investigation into competition concerns.

In the FTSE 250, IG Group reported flat revenue for the three months to August 31, its first quarter, at GBP129.1 million. Stock trading & investment revenue was up 9%, the core OTC leveraged flat, and exchange trade derivatives down 2%.

IG also said the search for a new chair is "at an advanced stage", with the preferred candidate now identified. IG is now securing the relevant regulatory approvals.

The company is looking to appoint new non-executive directors, as well, and it announced the hiring of Andrew Didham in that role, who will join immediately.

Controls systems firm Spectris has agreed to sell BTG Group to Germany's Voith for EUR319 million.

BTG is part of Spectris' Industrial Solutions segment, providing specialising measuring instruments, software, and services. The sale, Spectris said, is in line with the company's portfolio simplification plans.

The economic events calendar on Thursday has UK retail sales at 0930 BST.