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LONDON MARKET MIDDAY: Powell offers tonic after US jobs spooked stocks

8th Feb 2023 12:14

(Alliance News) - London's FTSE 100 traded not far off its best-ever level at midday on Wednesday, with equities supported by a more bullish forecast for the UK economy and Federal Reserve Chair Jerome Powell taking a softer tone than feared in a speech on Tuesday.

Retailers and housebuilders supported London's flagship index, while oil producer BP extended gains on a bullish price target bump from Barclays.

London's equity benchmark was up 52.53 points, or 0.7%, at 7,917.24 early Wednesday afternoon, having set a new record high of 7,934.30 shortly after 1100 GMT.

The FTSE 250 index was up 218.72 points, 1.1%, at 20,407.72, and the AIM All-Share was up 4.80 points, 0.6%, at 883.93.

The Cboe UK 100 was up 0.7% at 791.93, the Cboe UK 250 was up 1.1% at 17,805.89, though the Cboe Small Companies was down 0.2% at 14,140.70.

Continental equities also were higher. The CAC 40 index in Paris was up 0.4%, while the DAX 40 in Frankfurt surged 0.8%.

The dollar was returning some of its post-US jobs report gains.

Sterling was quoted at USD1.2096 midday Wednesday, up from USD1.2015 at the London equities close on Tuesday. The euro traded at USD1.0744, up from USD1.0700. Against the yen, the dollar was quoted at JPY130.67, down from JPY131.17.

Analysts at Lloyds Bank commented: "Powell in an interview largely repeated his comments of last week that interest rates have further to rise. However, markets seemed relieved that he was not more hawkish in the wake of last Friday's very strong employment report."

Speaking at The Economic Club of Washington, Powell said the US central bank will need to keep raising interest rates.

"We think that we'll need to do further rate increases and we think we will need to hold policy at a restricted level for some time," Powell said, echoing his language at a press conference last week.

When asked on Tuesday whether the Fed would have still lifted rates by 25 basis points had members known about Friday's strong US jobs data, Powell said: "We didn't expect it to be this strong but I would say it kind of shows you why we think this will be a process that takes a significant period of time."

There is one more US jobs report before the Fed's next interest rate decision. The Federal Open Market Committee next meets on March 21, before it decides on rates a day later.

Should the jobs report that precedes this come in hotter-than-expected, like last week's, markets could be spooked once more.

At this early stage, there is a 94% chance of another 25 basis point hike by the US central bank next month, according to the CME FedWatch tool. That would take the federal funds rate target range to 4.75% to 5.00%.

US equities climbed overnight in the wake of Powell's speech. The Dow Jones Industrial Average closed up 0.8%, the S&P 500 up 1.3%, and the Nasdaq Composite up 1.9%.

Stocks in New York were called to open lower on Wednesday, however. The Dow and S&P were called 0.3% lower, and the Nasdaq down 0.2%.

It was a wild ride for US stocks on Tuesday before they eventually ended solidly higher. The tech-heavy Nasdaq climbed some 160 points shortly after Powell began speaking. It then shaved around 240 points from its tally inside the next hour of trading, before investor sentiment improved as the afternoon wore on.

Lifting the market mood in London on Wednesday, the National Institute of Economic & Social Research forecast that the UK will swerve a technical recession this year. A technical recession is defined by two or more quarters in a row of falling gross domestic product.

This is a more optimistic outlook for the UK economy than that offered by the Bank of England last week, which predicted a shallower but still protracted recession, as well as a recent gloomy prediction from the International Monetary Fund, which predicted Britain to be the only major economy to suffer a contraction this year.

The better forecast for the local economy lifted retail shares in London. Sports Direct-owner Frasers climbed 2.9%, Next rose 2.4%, and JD Sports added 1.5%.

The leisure sector also got a boost, Wagamama-owner Restaurant Group rose 4.6%, Grosvenor Casinos-operator Rank was 3.0% higher, and low-cost gym chain Gym Group was up 3.9%.

Housebuilders were on the up, despite a dividend cut by Barratt Developments. Barratt was up 2.0%, while peers Persimmon and Taylor Wimpey added 2.5% and 1.6%.

Barratt reported revenue rose 24% annually to GBP2.78 billion from GBP2.25 billion in the half-year ended December 31. Pretax profit rose 16% to GBP501.5 million from GBP432.6 million.

Barratt said it has seen some "early signs of improvement" in trading in January.

"One important area which has improved is the number of reservations per outlet, which in January bounced back somewhat from December lows, though still down markedly year-on-year," AJ Bell analyst Russ Mould commented.

"A slight improvement in the housing market in January has reassured shareholders in Barratt Developments but the company's decision to cut its dividend suggests it is reacting to new realities."

The housebuilder cut its interim dividend to 10.2 pence per share, an 8.9% decrease from 11.2p a year before. It said the payment was in line with its planned reduction in dividend cover to 2.0 times for the full-year from 2.25 times in the first half of financial 2022.

BP added 2.1% to 527.40 pence. Barclays lifted its price target for the stock by 43% to 1,000p from 700p. BP had jumped 8.0% on Tuesday, after announcing a share buyback and surging annual profit.

On AIM, Xeros fell 7.1%.

The developer of laundry technology, that reduces water use, warned its annual loss before interest, tax, depreciation, and amortisation will be worse than expected. The Ebitda loss will be 5% to 10% higher than previously forecast due to the timing of milestone payments and the cost of some restructuring work.

Gold was quoted at USD1,880.47 an ounce early Wednesday afternoon, up from USD1,875.35 on Tuesday.

"Powell's words generated some relief in gold as well overnight, although compared to the declines late last week, it was quite mild. The yellow metal has been on a phenomenal run since early December and a correction was growing ever more likely. While traders have welcomed Powell's consistent stance, it may not be enough to save gold and a deeper correction could well be on the cards," Oanda analyst Craig Erlam commented.

Brent oil was trading at USD84.15 a barrel on Wednesday afternoon, rising from USD82.75 late Tuesday.

Still to come on Wednesday, there are first-quarter results from entertainment company Walt Disney, due after the closing bell in New York.

By Eric Cunha, Alliance News news editor

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