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LONDON MARKET CLOSE: Stocks slump as Fed rate cut hope dwindles

17th Jan 2024 16:55

(Alliance News) - European equities slumped on Wednesday, as interest rate expectations, on both sides of the Atlantic, were re-assessed on the back of some hawkish rhetoric and hotter inflation data.

While a cut by the Federal Reserve in March still the most likely outcome, the odds of one happening have shrunk in recent days. Futures traders have assigned a probability of 57% that the Fed cuts in March. That probability sat as high as 70% a month ago.

In the UK, meanwhile, a stubborn inflation reading put hopes of a May cut by the Bank of England in doubt.

In addition, there was also a batch of underwhelming Chinese data for investors to contend with, also putting pressure on shares.

The FTSE 100 index closed down 112.05 points, 1.5%, at 7,446.29. The FTSE 250 slumped 328.95 points, 1.7%, at 18,864.37, and the AIM All-Share lost 9.01 points, 1.2%, at 738.80.

The Cboe UK 100 ended down 1.5% at 743.31, the Cboe UK 250 closed down 2.2% at 16,321.53, and the Cboe Small Companies fell 1.1% to 14,828.34.

In European equities on Wednesday, the CAC 40 in Paris closed down 1.1%, while the DAX 40 in Frankfurt ended 0.8% lower.

In New York, the Dow Jones Industrial Average was marginally lower, the S&P 500 fell 0.5% and the Nasdaq Composite shed 0.8%.

Fed Governor Christopher Waller said on Tuesday the US is "within striking distance" of the Fed's 2% inflation goal, but the central bank should not rush to cut its benchmark interest rate until it is clear lower inflation will be sustained.

"Waller, who played a role in the Fed's dovish pivot with his remarks in November, now emphasizes a cautious approach to rate cuts, suggesting that the Fed should proceed methodically and carefully. This stance contrasts with the market's anticipation of multiple rate cuts in 2024," SPI Asset Management Stephen Innes commented.

What's more, retail sales climbed, suggesting there is still plenty of heat in the US economy.

According to the Census Bureau, US retail sales rose by 0.6% in December from November. It was better than the 0.4% increase that was forecast, according to FXStreet cited consensus.

In November, sales rose by 0.3% from October.

The Bank of England's next moves were also thrown into doubt on Wednesday.

UK consumer price growth unexpectedly picked up in December, according to data from the Office for National Statistics on Wednesday.

The ONS said the consumer price index rose by 4.0% annually in December, the pace of inflation notching up from a 3.9% increase in November. The reading came in hotter than market expectations, with consensus having been for price inflation to cool to 3.8%, according to FXStreet.

Analysts at Lloyds Banking Group believe Wednesday's reading is "likely a blip", however.

"Despite the upside surprise in today's release, however, it should be noted that inflation has moderated faster over the fourth quarter of 2023 than the Bank of England forecasted and their updated projections in February are likely to show the 2% inflation target being met sooner than they had previously expected," Lloyds analysts added.

Nonetheless, stocks exposed to robust interest rates declined.

Housebuilder Persimmon was among the worst large-cap performers, down 5.0%. It returned to the index this week, replacing veterinary drugmaker Dechra Pharmaceuticals which was acquired by EQT Fund Management and Luxinva.

Retailers Frasers and Marks & Spencer fell 2.0% and 2.4% over concerns about what higher for longer rates would mean for the consumer.

The pound was quoted at USD1.2668 at the time of the European equities close on Wednesday, down slightly from USD1.2676 at the same time on Tuesday. The euro stood at USD1.0853, lower against USD1.0894. Against the yen, the dollar was trading at JPY148.43, higher compared to JPY146.81.

The European Central Bank could start cutting interest rates this summer, President Christine Lagarde said Wednesday, while stressing that any such move would depend on the latest economic data.

In an interview with Bloomberg television in Davos, Lagarde was asked to comment on hints by ECB governing council members that cuts could come in the summer.

"I would say it's likely too," Lagarde said.

"But I have to be reserved because we are also saying that we are data-dependent and that there is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them."

Back in London, Mitchells & Butlers added 4.6%. The Harvester, Toby Carvery, All Bar One, Nicholson's and O'Neill's operator said that sales from its strong festive season had continued into 2024, and it predicts full year results at the "top end" of expectations.

The company reported a 7.7% increase in like-for-like sales in the 15 weeks ended January 13, alongside total sales growth of 9.7%.

Mulberry fell 4.8%. The hand bags and leather goods seller said Christmas sales were impacted by "challenging" backdrop. In the 13 weeks ended December 30, revenue fell 8.4% annually.

It was a poor trading day for other luxury goods firms on the stock market. LVMH fell 2.7% in Paris.

The luxury sector, heavily exposed to the ebbs and flows of the Chinese economy, lost out after some poor economic data from the Asian powerhouse.

China's economy last year grew at one of its slowest rates in more than three decades, official figures showed, as it was battered by a crippling property crisis, sluggish consumption and global turmoil.

China's National Bureau of Statistics revealed that gross domestic product expanded 5.2% to hit CNY126 trillion, or USD17.6 trillion, last year.

The annual reading is better than the 3% recorded in 2022, when strict zero-Covid curbs destroyed activity, but it marks the weakest performance since 1990, excluding the pandemic years.

Brent oil was quoted at USD77.55 a barrel late on Wednesday afternoon in London, down from USD78.10 late Tuesday. Gold was quoted at USD2,009.77 an ounce, lower against USD2,038.07.

Thursday's economic calendar has the latest US initial jobless claims reading at 1330 GMT.

The local corporate calendar has trading statements from miner BHP, fast fashion firm boohoo, electricals retailer Currys and boot maker Dr Martens.

By Eric Cunha, Alliance News news editor

Comments and questions to [email protected]

Copyright 2024 Alliance News Ltd. All Rights Reserved.

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