19th Dec 2024 08:05
(Alliance News) - The FTSE 100 was firmly in the red on Thursday, following a 'hawkish' speech from US Federal Reserve Chair Jerome Powell alongside the expected quarter-point rate cut.
The Bank of Japan kept interest rates unchanged, with policymakers waiting for a clearer picture to emerge of next year's wage increases before announcing another hike, which risks cooling the economy.
"The Federal Reserve (Fed) announced another 25bp cut as widely expected and priced in, but hinted that there will be just about two rate cuts throughout next year," commented Swissquote's Ipek Ozkardeskaya. "The GDP forecasts for this year and the next were revised higher, the unemployment rate lower, and more importantly, the inflation projections were sensibly higher compared to the September projections. The verdict was clear: the Fed must slow down."
She continued: "The market reaction was very aggressive, of course...The Fed may have spoiled this year's Santa rally, as its hawkish shift could trigger a deeper correction across US equity markets—which have enjoyed two stellar years largely thanks to Big Tech."
In corporate news, Serco expects full-year underlying operating profit to rise, while John Wood Group announced a new contract for work on a Romanian refinery.
Here is what you need to know at the London market open:
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MARKETS
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FTSE 100: down 1.1%, at 8,108.60
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Hang Seng: down 0.3% at 19,810.90
Nikkei 225: down 0.7% at 38,813.58
S&P/ASX 200: down 1.8% at 8,168.20
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DJIA: closed down 1,123.03 points, 2.6%, to 42,326.87
S&P 500: closed down 3.0% to 5,872.16
Nasdaq Composite: closed down 3.6% at 19,392.69
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EUR: lower at USD1.0397 (USD1.0473)
GBP: lower at USD1.2609 (USD1.2692)
USD: higher at JPY156.43 (JPY154.03)
Gold: down at USD2,617.25 per ounce (USD2,637.13)
(Brent): down at USD72.91 a barrel (USD74.01)
(changes since previous London equities close)
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ECONOMICS
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Thursday's key economic events still to come:
10:00 CET eurozone current account
08:45 CET France business confidence
08:45 CET France business climate indicator
08:00 CET Germany consumer confidence
12:00 GMT UK interest rate decision
12:00 GMT UK MPC meeting minutes
08:30 EST US quarterly personal consumption expenditures
08:30 EST US GDP
08:30 EST US initial jobless claims
08:30 EST US Philadelphia Fed manufacturing index
10:00 EST US existing home sales
10:00 EST US Conference Board leading index
10:30 EST US EIA natural gas stocks
11:00 EST US Kansas City Fed manufacturing activity
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The Federal Reserve lowered interest rates by 25 basis points, as expected, but pointed to a slower pace of cuts ahead. The 25bp reduction brings the target range for the federal funds rate to 4.25-4.5%. The vote was not unanimous. Cleveland Fed President Beth Hammack, who joined the Fed this summer, preferred to maintain the target range for the federal funds rate at 4.5% to 4.75%. In a statement, the Fed said the committee judges that the risks to achieving its employment and inflation goals are "roughly in balance". It said economic activity has continued to expand at a solid pace, labour market conditions have generally eased, and inflation has made progress but remains somewhat elevated. Looking ahead, the Fed will "continue to monitor the implications of incoming information for the economic outlook". In the accompanying summary of economic projections, the Fed's 'dot plot' of rate projections showed the median official expects to lower rates by a half percentage point in 2025, implying just two quarter-point cuts next year. In September, the median forecast was for four quarter point cuts in 2025. Two further reductions are projected in 2026 to 2.9%, the 'dot plot' shows.
Fed officials see the inflation rate at 2.5% by end of 2025, up from 2.1% forecast in September. Core PCE inflation, the Fed's preferred gauge is seen at 2.8% by the end of 2024 before falling to 2.5% by the end of 2025. In September, the Fed saw core PCE of 2.6% and 2.2% respectively. Core PCE is not seen hitting the Fed's 2% target until 2026.
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The Bank of Japan left interest rates unchanged, extending a retreat for the currency after the Federal Reserve forecast fewer rate cuts. Analysts said policymakers were waiting for a clearer picture to emerge of next year's wage increases before announcing another interest rate hike, which risks cooling the economy. Political factors were also at play after the government passed an extra budget worth nearly JPY14 trillion. The BoJ said after a two-day policy meeting that it would hold rates at around 0.25% – pushing the yen to more than 155 per dollar, compared with 153.66 on Wednesday. "Japan's economy has recovered moderately" and "is likely to keep growing", the bank said in its policy statement, but it also pointed to risks ahead. These included "developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behaviour". Tsuyoshi Ueno, senior economist at NLI Research Institute, told AFP ahead of Thursday's decision that the BoJ thinks "the picture of next year's wage increases will be clearer in January". "As the minority government is discussing budget and tax reforms involving the opposition...it would be bad timing for the BoJ to hike its rate" as it could drag on the economy, he said.
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Federal Reserve Chair Jerome Powell said December's rate cut was a "close call" as he pointed to a slower pace of easing ahead. "With today's action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive," Powell said at his post-meeting news conference. "We can therefore be more cautious as we consider further adjustments to our policy rate." Powell stressed the Fed was still on track to cut rates in 2025, although further progress on inflation would be required. "Inflation has once again underperformed relative to expectations...we really want to see progress." The Fed Chair likened the next move on rates to going out on a foggy night or into a dark room full of furniture: "you take things a little more slowly." Powell faced repeated questioning about prospects for inflation. He noted that there were two months of higher inflation, September and October, which was a "large factor" and perhaps the single biggest factor behind the higher trajectory for inflation forecasts released today. The inflation story is still "broadly on track" but progress is "slower than hoped", Powell said.
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Donald Trump has come out against the federal stop-gap bill unveiled by congressional leadership, setting up a dramatic fight just two days before funding expires and the government begins to shut down. "The only way to do that is with a temporary funding bill WITHOUT DEMOCRAT GIVEAWAYS, combined with an increase in the debt ceiling," the incoming president and vice president-elect JD Vance said in a statement on X. "Anything else is a betrayal of our country." The pair said congressional "Republicans must GET SMART and TOUGH", and "if Democrats threaten to shut down the government unless we give them everything they want, then CALL THEIR BLUFF". The 1,500-page continuing resolution would keep the government funded until March 14.
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BROKER RATING CHANGES
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Jefferies raises Intermediate Capital target to 2,700 (2,300) pence - 'buy'
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Barclays reinitiates TT Electronics with 'overweight' - price target 170 pence
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Barclays cuts Alphawave IP price target to 150 (190) pence - 'overweight'
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COMPANIES - FTSE 100
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United Utilities Water of United Utilities Group said it notes UK water regulator Ofwat's publication of the final determination of price controls for the April 2025 to March 2030 period. It says: "The Final Determination is a detailed publication that will take time to review thoroughly, and we have until February 18, 2025 to respond." PA reports that Thames Water is to be allowed to hike consumer bills by 35% by 2030 following a decision by Ofwat, as it was also handed an GBP18.2 million fine for paying "unjustified" dividends to shareholders. The average annual bill will rise to GBP588 by 2030, Ofwat said, up from current levels of GBP436. The ruling falls well short of the 59% Thames Water had said it needed in the run-up to the decision, as the embattled water company tries to negotiate a bailout. The company, which serves about 16 million people in London and the South East, is in the grip of a funding crisis and needs a GBP3 billion loan from creditors to keep operating beyond March. Household water bills in England and Wales will increase by an average GBP31 a year over the next five years. The increase is significantly higher than the expected average rise of around GBP20 a year per household, outlined in the regulator's draft proposals in July. Ofwat said the increase would pay for a GBP104 billion upgrade of the water sector to deliver "substantial, lasting, improvements for customers and the environment". However, despite the average GBP31 a year increase figure, households will face a heavy average hike of GBP86 or 20% in the next year, excluding inflation, with smaller percentage increases in each of the next four years. The average bill will rise by a total of GBP157 or 36% over the next five years.
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COMPANIES - FTSE 250
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Serco said it expects to post full-year revenue of around GBP4.8 billion, down 3% on-year but in line with guidance. It also expects to post FY underlying operating profit of around GBP270 million, up 9%, including an annual increase exceeding 25% in the second half of the year. The firm added that its second-half order intake is "much improved" with a book-to-bill for 2024 of around 100%. Adds that its "Pipeline of new business opportunities [is] set to end the year at highest level in more than a decade". Serco also increased its free cash flow guidance by over GBP20 million to around GBP170 million. Looking further ahead, Serco expects 2025 underlying operating profit of around GBP260 million, and for revenue to be in line with 2024 at around GBP4.8 billion despite a revenue cut of around 7% from losing immigration contracts in the UK and Australia. "Good organic growth [is] anticipated in US defence," it added.
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John Wood Group said it "has been awarded a significant contract by OMV Petrom for a major project to boost the production of sustainable fuel in Southeast Europe". John Wood will, having successfully delivered front-end engineering and design work for the Petrobrazi refinery in Romania, conduct engineering, procurement and construction management to install a new bio-hydrotreater unit and relevant storage facilities. The Petrobrazi refinery is set to "become the first major production facility for sustainable aviation fuel in the region", John Wood said.
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OTHER COMPANIES
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Intelligent Ultrasound Group has accepted a cash takeover offer from Surgical Science Sweden AB, in a deal valuing Intelligent Ultrasound at around GBP45.2 million - a premium of about 16.9% to its closing price of 11.13p on Wednesday. Shareholders will be entitled to receive 13 pence in cash per share. Surgical Science said it "has closely monitored the developments at Intelligent Ultrasound for some time. Following Intelligent Ultrasound's strategic decision to sell its Clinical AI Business to GE HealthCare, this moment presents a unique opportunity for both companies to join forces in a way that can significantly benefit both companies' long-term goals." It adds: "The acquisition...will enable Surgical Science to establish a firm footprint in the UK, with a new research and development site as well as a comprehensive commercial organisation, and leverage its existing expertise in medical simulation while integrating Intelligent Ultrasound's specialised knowledge in ultrasound training."
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Triple Point Energy Transition announced that Chair John Roberts has decided to step down with immediate effect, "given the substantial progress made in the managed wind-down, and in order to reduce operating costs". The company has promoted Rosemary Boot to succeed him. Says: "The board is keen to maximise the cash returned to shareholders as part of the wind-down...Given the progress in respect of the disposals to date, and the substantial progress made in respect of the sale of TENT Holdings, a board of three directors is felt to be sufficient to oversee the short remaining period prior to the proposed members' voluntary liquidation."
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1Spatial reports "growing traction within its Enterprise business for its AI-supported applications", including "increased interest in recent months" for its Pipe Inference solution and its Utility Network Migration application. Says the former was recently adopted by two large UK water companies, bringing total customers to four, and discussions are ongoing with other potential clients. The latter has attracted four customers in the utility sector in the last six months, and 1Spatial says that "we continue to build on our pipeline of opportunities". The contracts are worth up to around GBP300,000 in total.
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By Emma Curzon, Alliance News reporter
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