FTSE 100 ends higher lifted by China rate cut and UK retail sales data

A surprise interest rate cut in China appears to have lifted global market sentiment

Proactive Published 20/05/2022

Share X in f @

FTSE 100 up 87.24 points
UK retail sales jump unexpectedly in April
China cuts its five-year loan prime rate but leaves one-year rate unchanged

London’s benchmark FTSE 100 index closed higher, ending the week on a positive note with investors buoyed by strong UK retail sales data, China cutting a key lending benchmark, as well as a potential windfall tax decision.

The blue-chip FTSE 100 made up of the largest companies listed on the London Stock Exchange, closed higher by 87.24 points, or 1.2% to 7,389.98.

Healthcare and banking stocks were the top gainers on the FTSE 100 after China cut its five-year loan prime rate by 15 basis points, the largest cut on record. It comes as Beijing seeks to revive the troubled housing sector.

Meanwhile, the news that UK retail sales rose 1.4% in April, in contrast to expectations for a further 0.2% decline boosted sentiment. However, the outlook for consumer spending remained resolutely downbeat as the cost-of-living crunch intensifies.

Rally or not, investors are not exactly flooding back into equities, according to analysts.

“It has been another see-saw week in markets, as a rally in the first part of the week turned to dust in the second, but China’s rate cut has provided the rationale for a bounce in global stocks to round off the week,” said Chris Beauchamp, chief market analyst at online trading platform IG.

“Although very much a lone voice crying in the wilderness, the PBoC’s move provided the fundamental basis for a rally in risk assets, reversing some of the mid-week gloom. But the surge in German factory-gate prices and a slump in UK consumer confidence shows that the broader backdrop continues to be quite negative for equities.”

3.15pm: China’s surprise rate cut boosts sentiment

Craig Erlam, analyst at OANDA, reflects on what has been a positive for the markets.

"Equity markets are back in positive territory on Friday but I'm struggling to get too excited by the moves we see going into the weekend."

"The rebound may partly reflect the scale of the declines we've seen in the previous couple of sessions, while the cut to the five-year loan prime rate in China may also be giving global markets a bit of a lift."

"But ultimately, very little has changed and I expect that will continue to hold these markets back."

"The rate cut announced by the PBOC is obviously good news and is clearly targeted a revitalizing the ailing property market which continues to suffer due to the crackdown last year and Covid lockdowns this."

"Along with other measures already announced, this could help to revive a hugely important part of the economy."

"Whether it's enough to help China hit its 5.5% growth target this year is another thing."

"I imagine we may see further stimulus efforts this year in order to try and get close to that as the country is facing numerous headwinds, as every other is around the world right now. What it has that others lack though is room to manoeuvre on both the fiscal and monetary front."

Erlam also urges, and suggests today's retail sales figures aren't a true reflection of whats to come.

"The UK is in a very tricky position, regardless of the impression the April retail sales data gave this morning. While spending last month hugely exceeded expectations and was accompanied by a small upward revision in March, we also saw consumer confidence fall to its lowest since records began in 1974."

"While survey data can be volatile, I expect this is a closer reflection of the squeezed consumer in the UK right now."

"The cost-of-living crisis is going to have a big impact on household budgets and will intensify again in October when the energy price cap is lifted once more."

"Unless the government offers more support, the country is heading for double-digit inflation and a recession. Not exactly consistent with sustainable gains in retail sales."

2.45pm: Windfall tax decision coming 'soon'

A decision from Boris Johnson on whether to impose a windfall tax on oil and gas giants will be made ‘soon,’ according to a spokesperson.

“Our position on that remains the same, the PM and the Chancellor have both been clear that they are not attracted to the idea of a windfall tax,” the spokesperson said to PA Media.

“We’ve spoken before about our desire to see the industry invest in the UK economy to benefit jobs and growth but also the Chancellor’s been clear that if that doesn’t happen no option is off the table.”

We’ve never put a specific timeline on it but the Chancellor said if that doesn’t happen soon and at significant scale then no option is off the table.

“So, as you see from the Chancellor’s words, if that doesn’t happen soon.”

For months, the government has faced intense calls to impose a windfall tax on oil and gas giants, especially Shell and BP, to assist in the cost of living crisis.

So far, the government has resisted calls, arguing any tax would impact investment by these companies in the UK.

2.10pm: British Gas workers agree on pay deal

Some news for Centrica, as British Gas workers who are members of the GMB union have voted to accept a new pay deal of at least 5%.

The deal comes just a year after 43 days of strike action which saw 460 engineers sacked during the company’s fire and rehire scheme.

Andy Prendergast, GMB National Secretary, said, “GMB worked hard to get the company to start to address the cost of living crisis for workers."

“We are pleased we have been able to negotiate a deal that helps members and their families."

“Like any deal, it is far from perfect but it puts money in workers’ pockets and our reps need to be applauded for the way that they have held the business to account and delivered for their members."

“With memories of a bitter strike still fresh in the minds of workforce, it was a real achievement to be able to deliver a resounding vote in favour of the deal."

“Whilst there is a long way to go, we are starting to see that the dark days of 2021 are behind us and that there is a positive future for British Gas ahead.”

1.40pm: Inflation to hit house prices

Nationwide warned that soaring inflation in the UK could send British house prices into reverse.

Executives at the building society said this they are “highlight concerned” about the outlook for inflation.

Chief executive Joe Garner said, “Obviously we are highly concerned about the outlook environment.”

“And we are very focused on leaning into our members, and really underlining the emphasis of contacting us as early as possible.”

Garner said the building society would offer options and help where possible to struggling customers, but warned that current macro conditions have already housing less affordable.

1.11pm: Consumer confidence suggests recession looms

Data suggest consumer confidence is at its lowest levels in nearly 15 as recessions looms, according to Berenberg.

"So far, the conflicting signals coming from the data are consistent with our call that the UK will stagnate in Q2. However, performance looks likely to be mixed across sectors."

"Our base case for a modest pick-up in real output growth in H2 before momentum strengthens in 2023 therefore comes with a warning. Between Putin’s war, Chinese lockdowns and a potential Fed overtightening, things may get worse before they get better."

"For the UK, we assign a 40% risk of a recession within the next year."

12.30pm: US preview

UK blue-chips have had a strong morning and now US stocks are expected join the party, clawing back some of the recent sharp falls as bargain hunting emerges to shore up prices.

Recent concerns remain, however, and worries that the global economy may slide into a recession amid runaway inflation and rising interest rates are likely to keep trading volatile.

Futures for the Dow Jones Industrial Average were up 0.9% in pre-market trading, while those for the broader S&P 500 index rose 1.1% and the tech-heavy Nasdaq gained 1.6%.

“US equities closed Thursday’s session in the negative following a choppy trading session, as investors’ hearts pounded between buying the dip or selling further on recession fear,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“The S&P500 is a stone’s throw from stepping into a bear market, and if the index closes the week lower, it would be the longest losing streak since the dotcom crisis. And there is nothing (US Fed Chairman) Jerome Powell will do to save the day.”

Thursday’s falls come after the intense sell-off on Wednesday, their worst in two years after large US retailers report weak earnings on the back of rising costs, sluggish sales and supply-chain disruptions.

A surprise interest rate cut in China appears to have lifted global market sentiment at least for now as investors hang on to hope that economic growth in the world’s most populous nation may not slow as much as previously expected. Still, China’s room for manoeuvre is limited given its tough Covid-related measures and the possibility that growth elsewhere may falter as central banks raise interest rates to fight inflation.

Elsewhere, gold, a safe haven in times of uncertainty, was up 0.2% at $1,844.6 an ounce.

Oil prices were a touch lower but still well-supported above the $100 a barrel level. WTI crude oil futures were down 0.3% at $109.57 a barrel and Brent crude futures shed 0.1% at $111.93.

11.05am: China cuts its five-year lending rate

A buoyant stock market is adding to that Friday feeling.

The FTSE 100 was up 141 points (1.9%) at 7,444.

“Overnight sentiment has picked up with Asian stocks trading higher and the Hang Seng tech index outperforming after China cut its five-year loan prime rate by 15 basis points but kept its one-year lending rate on hold,” reported Victoria Scholar, the head of investment at interactive investor.

FTSE 250 stalwart Close Brothers Group PLC (LSE:CBG) climbed 2.0% to 1,092p after a mostly positive trading update.

“The group’s strong margins make it an excellent cash generator, which has allowed them to grow the dividend significantly over time. This year we expect the group to pay out 66p per share, which is the same level that the group paid in 2019 before the pandemic. At that level, the shares will be yielding an attractive 6.1%, covered [by earnings] almost 2x,” said Steve Clayton, a fund manager at Hargreaves Lansdown.

$CBG Close Brothers sees some recovery in trading income at Winterflood https://t.co/TbmyBRNj4d #CBG #Katie_Proactive

— Proactive (@proactive_UK) May 20, 2022

10.10am: Vodafone preparing for life with e& as major stakeholder

Joint investments between Vodafone and e& aren't out of the equation, at least according to the UAE telecoms group which bought a 9.8% stake in the Footsie company last week

Chief executive Hatem Dowidar said he was confident in Vodafone’s strategy, which includes streamlining the business and consolidating in Europe.

"I believe that they are clear on what needs to be done and they're trying to do it," Dowidar said in an interview when asked if Vodafone needs to move more aggressively on acquisitions.

"The channel will be open if there is an investment where us coming in as a partner makes sense for us," he said on potential co-investments.

9.41am: Tough time ahead for retailers

Silvia Rindone, an analyst at EY, provides further comment on today’s better than expected retail sales figures for April.

“Retailers are now facing a combination of high inflation and supply chain and demand headwinds which will create a challenge for the sales growth that has helped drive the post-pandemic recovery so far.”

“Earlier this month, EY-Parthenon’s profit warning analysis found that FTSE Retailers have been most affected by rising costs and supply chain challenges, with UK-listed retailers issuing nine profit warnings in Q1 2022 – the highest quarterly total since the start of the pandemic.”

“Retailers will need to ensure they respond quickly to consumers’ concerns and select the right value strategy for their business to retain cost conscious shoppers.”

“This could include exploring ways to reduce their own cost base and range rationalisation to reduce supply chain costs.”

9.10am: Quick snapshot

London's blue chip index is up 109 points in the first hour of trading after a better than expected UK retail sales for April.

Iceland will offer 10% off to over 60s every Tuesday to alleviate the cost of living crisis.

National Grid’s annual pre-tax profits surged 107% amid rocketing energy prices.

Elsewhere. Next Fifteen agreed to the £310mln takeover of M&C Saatchi which earlier this week rejected an offer from AdvancedAdvT. The boards of Next Fifteen and Saatchi said they had reached an agreement on the terms of a recommended cash and share acquisition.

Wincanton reported growth in full-year revenue and profits, with numbers rising pre-pandemic levels. The company said the strong performance was achieved despite inflationary pressures, as retail volumes remained strong.

ANGLE’s Parsortix liquid biopsy system will be used in a major clinical study that could alter the way prostate cancer is treated. Researchers from the Queen Mary University of London will isolate and assess circulating tumour cells as a predictor of future disease recurrence.

8.40am: Strong open

The FTSE 100 has opened 80 points higher at 7,382 as expected, with the release of retail sales data do little to upset the applecart.

UK retail sales rose by 1.4% in April after falling 1.2% in March. April’s volumes were down 4.9% on a year earlier but this was comfortably better than economists’ forecasts of a 7.2% decline.

“UK retail sales bounced more than we’d expected in April, though the overall trend appears to be one of stagnation. The 1.4% increase in sales volumes last month followed two consecutive falls, and it’s worth bearing in mind that these figures have always been volatile even pre-Covid. A one standard deviation monthly change in sales was around 1% pre-pandemic,” said James Smith, who covers developed markets at ING.

“Big picture, overall retail spending is still down slightly on levels seen during last autumn, which is mainly due to a noticeable downtrend in online sales. These are down by roughly 5% on the third quarter of last year. While it’s tempting to ascribe this to the increase in the cost of living, we think it at least partly reflects consumers rebalancing spending away from goods and back towards services,” he added.

Source: ING

Earlier, the GfK composite of consumers’ confidence painted a more pessimistic picture of Britain’s retail sector, with the index falling to -40 in May from -38 in April. Economists has pencilled in a figure of -39 for May.

“On the face of it, the record low level of GfK’s composite index of confidence in May suggests that households will be very cautious. Indeed, note that the the net balance of households judging that now is a good time to make a major purchase fell again in May, signalling low confidence will impact spending but households likely will be more willing to borrow more and save less when they are despondent due to high inflation—as they seem to be now—than when they are worried about losing their jobs,” suggested Samuel Tombs at Pantheon Macroeconomics.

“The extremely low unemployment rate and high level of vacancies should reassure households who have been able to amass savings over the last two years that they can draw upon them now to support their consumption. Confidence also might pick up if, as we expect, the Chancellor announces additional measures to support households in September, before consumer energy prices jump again in October. As a result, we still think it is too soon to conclude that the economy is hurtling towards a recession,” Tombs reassured.

I am nearly 50. @GfK started tracking UK consumer confidence in the month I was born. It has never been this bad. https://t.co/dw6n6fJ0tl

— Trevor Godman (@Trevski74) May 20, 2022

Switching to equities, it has been a quiet morning for announcements from the big players.

Croda International PLC (LSE:CRDA) rose 2.8% to 6,730p after an upbeat trading statement issued ahead of its annual general meeting this morning.

“Trading in 2022 has been strong, with continued sales and profit growth across the group,” the speciality chemicals company said.

M&C Saatchi PLC (AIM:SAA) may not be a “big player” in FTSE 350 terms but it has name recognition, so metaphorically speaking many people will now be breaking out the popcorn as they watch a good old-fashioned bid battle.

Shares in the advertising agency shot up 32% to 218.5p as Next Fifteen Communications PLC secured the backing of the Saatchi board for its offer of 0.1637 Next Fifteen shares plus 40p cash for each Saatchi share.

6.40am: 80 points rise expected for the Footsie

It’s time to wheel the rollercoaster metaphor out again, as equities look set to claw back some of yesterday’s losses.

Spread betting quotes suggest the FTSE 100 will open 80 points higher at 7,383.

Indices in the US took another battering yesterday but Asian indices this morning are on the recovery trail.

The Dow Jones 30-share index tumbled 237 points to 31,253 while the S&P 500 dived 23 points to 3,901, leaving it close to 20% below its high point (4 January) – the traditional definition of a bear market.

In Asia, Japan’s Nikkei 225 was up 321 points at 26,724 while Hong Kong’s Hang Seng was 369 points heavier at 20,490.

In the UK, it’s time to hide behind the sofa and peek through your spread fingers at today’s inflation data release.

“As we look ahead to today’s European open, we’ll be looking for a further insight into the damage that a record 9% UK CPI [consumer price inflation] has done to the appetite for UK shoppers to go out and spend money, as the latest Gfk consumer confidence numbers for May fell to a record low of -40 in data released this morning, a truly sobering reflection of how much damage surging inflation is doing to consumer sentiment,” reported Michael Hewson at CMC Markets.

“In cutting back on their spending, consumers will also have had one eye on the upcoming surge in energy bills, as well as other price rises, which were due to hit their wallets in April,” he added.

“Expectations are for a fall of -0.3% including fuel sales, however, it wouldn’t surprise to see a much bigger decline,” Hewson said.

On the corporate news front, Close Brothers PLC and its fiscal third-quarter trading update is about as exciting as it gets, which is to say not very exciting at all.

The first half of the year saw banking loan growth rise by just 1.9% year-on-year, with the performance held back by property book repayments.

The broker Peel Hunt is going for full-year growth of 4.2% so Close Brothers has some catching up to do.

Also of concern is the collapse in profits of Winterflood, its broking arm, due to less favourable market conditions.

Around the markets

Sterling: US$1.2455, down 18 cents
Gilt: 1.866%, down 0.31 basis points
Gold: US$1,839.80 an ounce, down US$1.40
Oil: US$111.20 a barrel, down 84 cents
Bitcoin: US$30,017, down US$197
Ethereum: US$2,014, up US$2