FTSE 100 ends in the red as traders mull Fed chair's familiar message

The UK premier share index closed down around 33 points, or 0.47%, at 7,091, below the session peak of 7,124 and above the low of 7,073

Bank of England - FTSE 100 set for lower start ahead of UK inflation readings
  • FTSE 100 closes down 33 points
  • SSP hit by CEO resignation
  • Dunelm dives despite raising full-year guidance

5.05pm; FTSE closes in the red

FTSE 100 index closed in the red midweek as Fed chairman Jerome Powell struck a familiar tone on US monetary policy amid rising inflation.

The UK's premier share index closed down around 33 points, or 0.47%, at 7,091, below the session peak of 7,124 and above the low of 7,073.

Over on Wall Street, things were rather muted too. The Dow Jones was up around ten points at 34,889; the S&P 500 was up two points at 4,371 and the Nasdaq was down four points at 14,673.

"Jerome Powell stuck to the script on monetary policy this afternoon, delighting those who think the current spike in prices will be temporary and frustrating those who had hoped the central bank chief would trim his sails into a growing wind of unease about the direction of inflation," said Chris Beauchamp, chief market analyst at IG in a note.

"Whether he moderates this line under sustained questioning remains to be seen, but for now the world’s most important central banker is remaining firmly ‘on-message’, holding fast to the stance he has maintained (more or less) all year."

4pm: FTSE on the slide

London’s index of leading shares looks set to finish the day in the red despite solid support for banks, miners and housebuilders.

The FTSE 100 was down 32 points (0.4%) at 7,093.

“Concerns about inflation, transitory or otherwise have continued to dominate sentiment today, as worries over the pace and persistence of rising prices, temper optimism over the wider global recovery story. Markets in Europe have undergone a broadly underwhelming session in contrast to US markets which continue to set new records,” said CMC’s Michael Hewson.

“UK CPI [consumer prices] jumped sharply in June to 2.5%, a much bigger jump than expected, though it really shouldn’t have been too unexpected given how strong recent PPI [producer prices] numbers have been in recent months. The bigger puzzle is why expectations are always on the low side when it comes to these forecasts, could it be that some economists want to believe in their own transitory narrative?” Hewson wondered.

The market did not much like the trading update from homewares flogger Dunelm PLC (LON:DNLM), even though it raised full-year profit expectations.

The mid-cap fell 5.1% to 1,366p.

Another mid-cap on the slide was SSP Group plc (LON:SSPG), which was down 4.2% at 253.2p after Simon Smith, the chief executive chairman, decided to cash in his chips.

Smith joined the operator of the Upper Crust food outlets in travel hubs in November 2018. He is leaving to join the private equity brigade.

2.40pm: US stocks open higher

The main indices on Wall Street started Wednesday’s session on the front foot after Fed chair Jerome Powell’s testimony appeared unphased by the recent rise in inflation, possibly soothing nerves among traders.

Shortly after the opening bell, the Dow Jones Industrial Average was up 0.41% at 35,030 while the S&P 500 climbed 0.52% to 4,391 and the Nasdaq rose 0.77% to 14,790.

Economists at Pantheon Macroeconomics cast their eye over the written testimony from Fed head Jerome Powell, ahead of his appearance at the House later today, saying he has not broken any new ground. 

“Mr Powell repeated his view that inflation ‘will likely remain elevated in coming months before moderating’ as ‘bottlenecks unwind’ and unfavorable base effects fade. The Chair did not directly allude to his previously-expressed view that rising labor supply in the fall will prevent the reopening inflation spike from becoming embedded, though he did note that labor participation right now is little changed from a year ago, and is still ‘low’.”

“On the policy front, Mr Powell said that the ‘substantial progress’ needed to trigger tapering is ‘still a ways off’ but that the debate will continue in coming meetings. In short, no change from the June FOMC meeting, and no hint that the latest round of inflation data are threatening Mr Powell’s core view. Still dovish,” they added.

Back in London, the FTSE 100 was continuing to narrow its losses and was down 11 points at 7,113 at around 2.40pm.

2.20pm: FTSE 100 wallowing in the red

London's main share indices may be slightly down in the dumps today, 20 points down at the moment at around 7,103, but two newcomers to the market have both started encouragingly. 

Seraphim Space Investment Trust PLC (LON:SSIT), calling itself the world’s first space tech investment fund, started trading on the main market today and has seen its shares not quite rocket into space but hum higher like a Star Wars flying car, up 3.5% from the issue price of 100p to 103.5p.

At the start of the week Seraphim said its IPO fundraising of just under £180mln was oversubscribed.

Chairman Will Whitehorn, who as former president of Virgin Galactic is likely to be an important reason why Sir Richard Branson is an investor in the fund, said: “Space is the final investment frontier but our team has boldly invested where virtually no one has invested before and proved that there are returns out there above the atmosphere.”

Although there is plenty of excitement around the burgeoning space sector, another asset management newcomer, LendInvest PLC (LON:LINV), which is focused on the property finance market, has done a bit better.

At 202.5p, the shares are up 9% on their first day from the 186p at which the company raised £40mln. 

Chief executive Rod Lockhart said: "The capital that we have raised through this IPO will enable us to accelerate our technology roadmap, expand into new areas of property finance, and attract new investors, brokers and borrowers to our platform."

Several others also threw their hats in the ring for an IPO on AIM, following the 35 new arrivals on London's junior market in the first half of 2021 (read more about London's thriving IPO scene: New listings in London are coming so thick and fast, companies are running out of original names).

Today we had Central Copper Resources Limited, which is focused on delivering a high-grade copper project into production and exploration of assets in the Democratic Republic of the Congo (DRC) and in the Republic of Zambia, confirm its intention to float; lithium explorer Bradda Head Holdings Limited said it is raising £6.2mln as part of its flotation; and Poolbeg Pharma PLC, a spin-out from Open Orphan PLC (LON:ORPH), said it expects to arrive on the market next Monday after completing its £25mln fundraising.

Meanwhile, for those focused on the US market, the futures market is still pointing to a positive start.

12.50pm: FTSE red, US heading for green

The FTSE continues to worm its way sideways in negative territory, but its more optimistic cousins from across the Atlantic could soon provide a fillip.   

Led by the tech-powered Nasdaq, the Wall Street indices are pointed towards a positive start, according to the futures market, though the Dow Jones is predicted to open fairly flat.

Investment has continued to flow heavily into US stocks, strategists at Citi noted earlier this morning, with US$6.4bn of new positions added to the S&P 500 (SPX) and US$2.1bn to the Nasdaq 100 (NDX) over the week.

“SPX futures positioning is one sided and very extended, but profit levels remain small. For NDX, positioning is the most extended ever seen and the highest since Sep 20.

“Risk is increasingly skewed to the downside with NDX long holders on average sitting on 5% of profit.

“The reverse seems to be taking place in Europe, with increasing new short positioning across EuroStoxx, DAX and FTSE. Net positioning has fallen over the week in Europe, indicating a higher degree of investor caution.”

In London, the main benchmark is down 30 points or 0.4% at 7,094.5.

11.42am: Footsie remains in the red

London's blue chip shares remain mostly in the red, along with their European cousins on the continent. 

The Footsie index is down 0.5% at a little above 7,089, while the mid caps of the FTSE 250 are down 0.65% at just over 22,777.

“In the UK, the continued rise of Delta variant cases provides downward pressure on stocks that should be looking forward to Monday’s full reopening,” said market analyst Joshua Mahony at IG.

“Instead, airlines, cinemas, restaurants, and alike are all under heavy selling pressure as investors consider the potential ramifications of another major surge in hospitalisations.

“The UK has gone from having the lowest cases per 100,000 in Europe, to the worst in just six weeks. Thus, while there is hope that the UK vaccination efforts will stop the rise in hospitalisations at a manageable level, there is a very tangible risk that Monday’s reopening leads to a third wave of cases and another bout of restrictions. From an international perspective, the hope is that proof of vaccinations and testing will allow travel, yet airlines are likely to remain under pressure given the rising likeliness that the UK is consigned to the red list for many major tourist destinations.” 

READ: Where to invest as major companies plan to push up prices - Credit Suisse

Alongside the higher than expected inflation data earlier, higher house price trends also continued, with a 10% leap in UK house prices over the 12 months to May.

“Many will point towards falling commodity prices to speculate that a decline factory costs will soon transmit to lower prices, with the UK PPI input reading showing a surprise decline on 0.1%,” added Mahony.

“Nonetheless, many businesses will have hiked their prices in a bid to regain lost earnings, with few expecting that shift to be temporary in nature. The Bank of England has remained steadfast in their stance that above-target inflation will be fleeting, but markets will only truly breathe a sigh of relief once we see this upward trajectory reverse.”

The soaring New Zealand dollar is also worth flagging, as the Kiwi central bank turned more hawkish, with the market now pricing a first interest rate hike at the October meeting.

The Reserve Bank of New Zealand (RBNZ) said they expected inflation to spike higher but that it would be the result of either “one-off” factors, such as higher oil prices, or “temporary” factors having to do with the pandemic, such as supply shortfalls and higher transport costs.

"This is a significant change for the RBNZ, which is now the first G10 central bank to withdraw its stimulus, and probably warrants a stronger NZD," said analyst Marshall Gittler at BDSwiss.

Gittler said he didn’t anticipate this kind of price action on the NZD - “Luckily Bloomberg said it was 'a surprise move', meaning I wasn’t the only one caught out.” 

10am: FTSE losses narrowing

Heading into mid-morning trading, the FTSE 100 had recovered some ground lost in the wake of the spike in inflation but was still down around 34 points at 7,090 at around 10am.

The blue-chip index was being supported by defensive stocks, with banks and miners among the biggest risers as investors looked for havens to park their cash amid fears of inflationary pressures continuing for the foreseeable future.

NatWest Group PLC (LON:NATW) was the biggest gainer, rising 2% to 205.4p, while Lloyds Banking Group PLC (LON:LLOY) jumped 1.4% to 47.4p while Barclays PLC (LON:BARC) climbed 1.1% to 171.9p.

Banking analyst Andrew Coombs at Citigroup said: “The bounce-back in the economy has been sharper than expected (with Mar/Apr GDP growth well ahead of expectations, even if May was slightly softer), and we consequently expect further write-backs with [upcoming second quarter results].

“There is also the possibility that rising inflation may force the BoE to hike rates earlier than first envisaged. Meanwhile the FPC statement on dividends implies a return to more normalized capital return payouts.” 

Among the London large-caps, Citi said it preference in order is: NWG (Buy) > LLOY (Buy) > HSBC (Buy) > BARC (Neutral) > STAN (Neutral).

Meanwhile, miner Anglo American PLC (LON:AAL) was up 1% at 2,976p while Glencore PLC (LON:GLEN) rose 0.9% to 316.7p.

The main driver for these gains appears to be that higher inflation is a positive sign for commodity producers and the chance of interest rate hikes, which in turn benefit banks.

Defensive stocks may continue to be in play for some time, with analysts at the National Institute of Economic and Social Research (NIESR) estimating that inflation will not peak until March next year.

9.20am: Inflation in depth

UK inflation will reach close to 4% by the end of this year, forecasts Capital Economics, though it should not last long at that level before falling back in 2022 as the impact of higher commodity prices and supply shortages fades.

As a result, the economists said "we don’t expect the Bank of England to tighten policy anytime soon".

But taking lessons from history, pretty much all periods of high inflation appeared temporary at first, said economist Kallum Pickering at Berenberg.

"The risks to the inflation outlook are titled to the upside over the medium-term. Given the long-run outlook for persistent inflation modestly above central bank targets in the UK and the US, a stronger than expected near-term inflation impulse could turn into a sustained trend. For now, this risk remains modest. However, the warning from history is clear – all periods of high sustained inflation appear temporary at first," Pickering said.

He added that the fact that the BoE has acknowledged the potential economic risks from a sudden tightening of financial conditions, helps to mitigate part of the threat.

"Aware of a ‘taper tantrum’ risk, policymakers can take steps to soften it. Broadly speaking, rising market rates supported by better economic performance would be a positive sign, in our view. They would reflect strong demand for investment assets and credit. While the market adjustment may trigger some temporary correction, it would probably would not present a serious headwind to medium-term economic growth."

8.50am: FTSE 100 opens on the back foot

The FTSE 100 fell at the open as the inflation threat in the UK became a reality.

With a 2.5% rise in June, the consumer price index jumped by its most since 2018.

The figure was well ahead of forecasts of 2.2% and above the Bank of England’s ceiling of 2%, which will fuel the debate over interest rates.

Internationally, markets have been haunted by the spectre of inflation, which not only threatens to drive up the cost of borrowing but may lead to a curtailing of monetary support.

All of this has led to a period of uncertainty typified by bouts of volatility.

Here at home, the inflation rise has been driven by the rising cost of food and transport.

‘’The creeping UK headline inflation rate is likely to add to the sense of unease pervading the financial markets about the impact higher prices will have on economies around the world, as concerns about new Covid variants also rise,” Susannah Streeter, analyst at Hargreaves Lansdown.

“The FTSE 100 opened lower amid expectations central bank mass stimulus programmes may start to be eased more quickly, even though the recovery remains fragile.”

On the market, better than expected results from Barratt Developments (LON:BDEV) were met with a collective ‘meh’ with the shares more or less standing pat in the early exchanges.

The banks continued their ascent, led by NatWest (LON:NWG), up 2.2%. They were in demand after regulators freed them from pandemic restrictions on dividend payments.

6.50 am: FTSE 100 set for back foot start

The FTSE 100 is expected to start on a slightly negative footing as investors await the latest UK inflation data.

Spread betters IG expect the blue-chip index to open down 6 points after ending Tuesday’s session nearly flat at 7,124.

The UK’s inflation readings will likely attract close attention following yesterday’s higher than expected US figure, which saw the headline American consumer price index rise (CPI) rise 5.4% in June compared to a year ago, above the 5% recorded in May and above the 4.9% increase expected by analysts.

The UK CPI mark was 2.1% last time, the first time the figure had come in above the Bank of England’s 2% target since November 2018. With US inflation beating forecasts, there will be fears the UK economy could follow suit.

The higher than predicted US CPI reading drove Wall Street to a lower close overnight, with the Dow Jones Industrial Average ending 0.31% lower at 34,888 while the S&P 500 dropped 0.35% to 4,369 and the Nasdaq fell 0.38% to 14,677.

Sentiment was similarly bleak in Asia this morning, with Japan’s Nikkei 225 down 0.3% while Hong Kong’s Hang Seng fell 0.78%.

On currency markets, the pound was up 0.06% at US$1.382 against the dollar, with the inflation data later potential providing a catalyst for movement.

Around the markets:

Sterling: US$1.382

Brent crude: US$76.29 a barrel, down 0.26%

Gold: US$1,812 an ounce, up 0.39%

Bitcoin: US$31,980, down 2.87%

6.50am: Early Markets - Asia / Australia

Stocks in the Asia-Pacific region were mostly lower on Wednesday as Singapore's economy grew 14.3% year-on-year in the second quarter, official advanced estimates revealed.

This was slightly above analysts’ expectations for a 14.2% year-on-year rise, according to a Reuters poll.

The Shanghai Composite in China dipped 0.62% and Hong Kong’s Hang Seng index slipped 0.60%

In Japan, the Nikkei 225 fell 0.33% while South Korea’s Kospi declined 0.36%.

Shares in Australia gained, with the S&P/ASX 200 trading 0.25% higher.


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