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LONDON MARKET CLOSE: Stocks red, sterling slumps after BoE decision

11th May 2023 16:49

(Alliance News) - Stock prices in London closed in the red on Thursday after the Bank of England raised UK interest rates by another 25 basis points, taking the benchmark bank rate to a 15-year-high.

The FTSE 100 index closed down 10.75 points, 0.1%, at 7,730.58. The FTSE 250 ended down 6.99 points at 19,266.30, and the AIM All-Share closed down 10.09 points, or 1.2%, at 815.10.

The Cboe UK 100 ended down 0.2% at 772.72, the Cboe UK 250 closed down 0.2% at 16,844.34, and the Cboe Small Companies ended down 0.2% at 13,524.09.

The quarter-point hike, which was expected, takes the bank rate to 4.50% from 4.25%. It is the BoE's twelfth successive rate hike. The bank rate stood at 0.10% prior to the current hiking cycle.

Seven policymakers voted for the hike, two voted against. The vote split was expected, with Silvana Tenreyro and Swati Dinghra backing a hold.

Sterling slipped in the wake of the decision. The pound was quoted at USD1.2514 at the London equities close on Thursday, sharply lower compared to USD1.2620 at the close on Wednesday.

Fawad Razaqzada, market analyst at City Index & said that the dip in sterling tells us that the market was not expecting the central bank to be "so hawkish".

The central bank said on Thursday that the monetary policy committee will continue to monitor closely indications of persistent inflationary pressures, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation.

In a press conference following the decision, Governor Andrew Bailey said: "I want to be very clear on this: we are not giving, that I would call, a directional steer on rates today.

"We will be guided by the evidence, and that's very important. We've repeated the point we've made before that if we see further signs of greater persistence the of course we'll have to act. But, let's be very clear, that's a conditional statement. That's not an unconditional statement," he said.

James Smith, developed markets economist at ING, said another hike from the BoE is possible. However, he added that, with inflation forecasted to be "well below" target in a couple of years' time, he thinks this current tightening cycle is "reaching its limit."

"We continue to feel that this will most likely mark the top in this tightening cycle, though we accept this is heavily contingent on the next set of wage and inflation data. Another hike in June is possible, though for now it is not our base case," Smith said.

The central bank predicted on Thursday that the UK inflation rate will fade to 8.2% in the second quarter of 2023. Previously, it had expected inflation to cool to 8.5% in the second quarter.

The BoE also markedly lifted its gross domestic product outlook. It expects GDP to be flat in the second quarter of 2023, having previously pencilled in a 0.7% fall.

CMC Markets Chief Market Analyst Micahel Hewson said that while this was welcome news, it is also important to remember that just over six months ago the central bank was predicting a two-year recession.

"So their track record isn't particularly great," he said.

In London, Rolls-Royce was the worst blue-chip performer, finishing 6.1% lower after the company disappointed investors with no boost to its forward guidance.

The developer of power and propulsion systems, including jet engines and nuclear reactors, said its transformation under new Chief Executive Officer Tufan Erginbilgic is picking up pace, however.

For the first four months of 2023, Rolls-Royce backed its underlying operating profit guidance range of GBP800 million to GBP1.0 billion for 2023, and maintained its free cash flow guidance of GBP600 million to GBP800 million.

In 2022, operating profit was GBP837 million. Underlying free cash flow was GBP505 million.

Airtel Africa closed down 5.3%. It reported a drop in annual profit, as its net finance costs ballooned due to the devaluation of some African currencies.

The telecommunications company said pretax profit in financial year 2023 ended March 31 fell 16% to USD1.03 billion from USD1.22 billion a year prior. This came as net finance costs increased 79% to USD723 million from USD403 million.

Airtel Africa reported higher foreign exchange and derivative losses of USD245 million, and a hit of USD82 million from devaluations of the Nigerian naira. It also reported a USD96 million hit from the devaluation of Kenyan and Ugandan shillings and Malawian and Zambian kwachas.

In the FTSE 250, FirstGroup ended 5.3% lower.

The stock was knocked after the UK government announced that train services run by TransPennine Express, which FirstGroup operates, will be nationalised after months of delays and cancellations.

The Department for Transport said services will be brought under its Operator of Last Resort from May 28.

ITV dropped 2.1% after it reported first-quarter revenue dipped amid a weaker advertising market.

Total revenue for the television broadcaster and content producer was down around 7.0% to GBP776 million from GBP834 million a year earlier.

Looking ahead, ITV expects at least 5% average organic growth per year to 2026. It added that it maintains committed to delivering GBP15 million of cost savings in 2023.

Elsewhere in London, Reach closed 7.3% lower after the newspaper publisher went ex-dividend, meaning new shareholders do not qualify for the latest payout.

On AIM, PetroNeft finished 16% lower.

The oil and gas exploration company said it has so far been unable to find an auditor for its 2022 results. As a result, PetroNeft said it is becoming "increasingly clear" it will be unable to report annual results by its June 30 deadline.

Stocks in New York were lower at the London equities close, with the Dow Jones down 0.9%, the S&P 500 index down 0.4%, and the Nasdaq Composite flat.

Data from the US Department of Labor showed that yearly producer price growth in the US was lower than expected in April.

Annual producer price inflation eased to 2.3% from 2.7% in March. FXStreet-cited consensus expected a rise of 2.4% in April.

Matthew Martin, US economist at Oxford Economics, said the report supports the view that the Fed will hold rates at "elevated levels" through year-end as officials "want to ensure inflation's momentum is quashed".

"Fed officials have signalled they'll pause in June, though the recent inflation data signal there's a risk of another rate hike," he said.

Against the yen, the dollar was trading at JPY134.33 late Thursday, lower compared to JPY134.48 late Wednesday. The euro stood at USD1.0917, lower against USD1.0975 at the same time on Wednesday.

In European equities on Thursday, the CAC 40 in Paris ended up 0.3%, while the DAX 40 in Frankfurt ended down 0.4%.

Brent oil was quoted at USD75.61 a barrel at the London equities close on Thursday, down from USD76.85 late Wednesday. Gold was quoted at USD2,019.26 an ounce, lower against USD2,023.42 at the close on Wednesday.

In Friday's UK corporate calendar, there are first quarter results from Allianz Technology and Beazley. The economic calendar has UK GDP data at 0700 BST.

By Heather Rydings, Alliance News senior economics reporter

Comments and questions to [email protected]

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