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LONDON MARKET CLOSE: Stocks sold off amid US debt limit angst

24th May 2023 16:57

(Alliance News) - US debt ceiling concerns battered European equities on Wednesday, leading to broad-based stock price declines, as investors fret over what a default would mean for global markets.

London's FTSE 100 and the CAC 40 in Paris both fell to their lowest level since late-March. The DAX 40 in Frankfurt hit a two-week low, undoing recent progress which saw it achieve a record high last week Friday.

Away from debt ceiling worries, share price slumps for London-listed housebuilders also put pressure on the FTSE 100. Leading the way among UK mid-cap equities, retail Marks & Spencer said it will soon re-join the dividend list.

The FTSE 100 index slumped 135.85 points, 1.8%, to 7,627.10 on Wednesday. The FTSE 250 lost 277.15 points, 1.4%, at 18,931.16, and the AIM All-Share closed down 11.57 points, 1.4%, at 796.47.

The Cboe UK 100 ended down 1.9% at 760.84, the Cboe UK 250 lost 1.7% at 16,478.81, and the Cboe Small Companies fell 0.2% to 13,544.32.

In European equities on Wednesday, the CAC 40 in Paris tumbled 1.7%, while the DAX 40 in Frankfurt dropped 1.9%.

Over in the US, stocks were lower. The Dow Jones Industrial Average was down 0.4%, the S&P 500 0.6% lower, and the Nasdaq Composite down 0.7%.

International Monetary Fund chief Kristalina Georgieva said that protracted domestic wrangling over the US debt ceiling was "unnecessary" for the world economy, but should be settled.

Georgieva also told the Qatar Economic Forum that central banks must keep interest rates high to tame inflation, but there should be improvement in 2024.

International markets have been unnerved by the battle between US President Joe Biden and opposition Republicans on US borrowing limits, with an early June deadline looming.

Some Republicans have questioned whether a quick agreement with the US administration is necessary to avert a painful default.

"History tells us that the US wrestles with this notional default," Georgieva said referring to past US showdowns over spending limits.

"At the 11th hour, it gets resolved and I have confidence we will see this play."

But she added that the Washington drama was "unnecessary for a world economy that is in such high uncertainty".

"We always have to be mindful that the risk is there."

Analysts at Rabobank likened the debt ceiling crisis to a "game of chicken".

"The thinking here is that it is only when the pressure on both parties involved is high enough (either by markets, rating agencies or perhaps the parties' grassroots) that a decision will be forced. If we are lucky, this happens before any real damage is done. But that is not a given, especially when both sides have the confidence that they can either 'win' outright or can just push for more time. House Republicans, for example, are now trying the latter, by openly questioning the Treasury secretary's warning that the government may truly run out of money as soon as 1 June. Yesterday, House majority leader Scalise called for more transparency on how that particular date had come about," Rabobank analysts commented.

The pound was quoted at USD1.2367 at the time of the London equities close on Wednesday, lower compared to USD1.2420 at the equities close on Tuesday. The euro stood at USD1.0762, down against USD1.0774. Against the yen, the dollar was trading at JPY139.12, up compared to JPY138.52.

The Federal Reserve will be in focus when minutes from its latest meeting are released at 1900 BST.

Earlier this month, the Fed enacted a quarter-point hike to the benchmark rate range to 5.00% to 5.25%. At a press conference following the last interest rate decision, Chair Jerome Powell strongly hinted at a rate hike pause.

Comments from some US central bankers since then have been demonstrably hawkish, however.

There is a 72% chance the Fed holds when it meets next month, according to the CME FedWatch tool, though that outcome was at one point a foregone conclusion.

"In the past week there has been a chorus of Fed members making the case for an aggressive interest rate stance, which has resulted in the market scaling back expectations of softer rates by year-end. Interestingly, the one exception was the Fed Chairman Jerome Powell, who did not seem to be singing from the same hymn sheet as the other members as he sounded decidedly dovish by contrast," KCM Trade analyst Tim Waterer commented.

"But on balance, Fed officials have been on the front foot regarding rates, and this has lifted both treasury yields and the USD."

Elsewhere on the central banking front, another robust UK inflation reading put the Bank of England under the spotlight.

The UK inflation rate ebbed to 8.7% in April from 10.1% in March, though it topped FXStreet cited consensus of 8.2%.

"UK inflation came in way higher than expected in April, which undoubtedly puts pressure on the Bank of England to hike by another 25 basis points in June," analysts at ING commented.

The threat of more rate hikes sent shares in London-listed housebuilders lower. Taylor Wimpey lost 4.9%, Berkeley Group fell 4.7% and Barratt shed 4.1%.

Aviva also ended lower, losing 5.4%. The UK-based insurer said General Insurance gross written premiums were up 11% in the first quarter of 2023 to GBP2.4 billion, from GBP2.1 billion a year ago.

Damping otherwise decent first-quarter results, Aviva's net flows into its wealth arm fell 15% on-year, amid "challenging market volatility".

Ending higher, however, Marks & Spencer jumped 13%. In the year to April 1, the London-based clothing, homewares and food retailer said revenue rose 9.6% to GBP11.93 billion from GBP10.89 billion.

Pretax profit jumped 21% to GBP475.7 million from GBP391.7 million.

The retailer declared no dividends, but said it plans to resume payouts at its interim results. It had suspended dividends at the start of the pandemic, in order to protect its balance sheet.

Joint-venture partner Ocado rose 2.6%, the day after index provider FTSE Russell said its place in the FTSE 100 is under threat.

According to the latest set of indicative index changes from FTSE Russell on Tuesday, engineering firm IMI is primed to replace Ocado in the FTSE 100. There may also be a host of other changes in the mid-cap FTSE 250 index. IMI shares fell 2.3% on Wednesday.

Brent oil was quoted at USD78.07 a barrel on Wednesday afternoon in London, up from USD77.00 late Tuesday. Gold rose to USD1,969.75 an ounce from USD1,965.99.

Thursday's economic calendar has a gross domestic product reading from Germany at 0700 BST and the US at 1330 BST.

The local corporate calendar has a trading statement from mixers maker Fevertree Drinks and annual results from speciality chemicals Johnson Matthey and pub company Young & Co's Brewery.

By Eric Cunha, Alliance News news editor

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