- FTSE 100 closes at 7,585
- US markets higher
- US personal income rises 0.4% in April
4.52pm: FTSE 100 closes higher
FTSE 100 closed ahead at the end of the week as traders seem determined to keep the index above water.
Britain's blue-chip index added around 20 points, or 0.27%, to stand at 7,585 at the close.
"Investors have been more comfortable about buying into this rally thanks to the lack of any hints of 75 bps rate hikes in this week’s minutes," said Chris Beauchamp, chief market analyst at online trading platform IG.
"This has been enough to move the sentiment dial out of its trough, providing some space for at least a short-term bounce."
But he cautioned that a recession was not being fully "priced in".
"A gain of even 10% from here might look like an all-clear signal for investors, but growth and earnings forecasts probably need to come down a bit more, which in turn points towards fresh lows for the market in the months to come," said the analyst.
3.12pm: FTSE ahead; Dow Jones surges
It’s Excitement City – but sadly, in New York rather than London.
While the FTSE 100 nurses a 17 point (0.2%) gain on 7,581, in the US the Dow Jones average has leapt 255 points (0.8%) to 32,892 and the S&P 500 has raced 58 points higher (1.4%) to 4,116.
US personal income rose 0.4% in April, a shade below the consensus forecast of 0.5%.
Real income – i.e. adjusted for inflation – rose 0.7%, which was as economists expected.
The core consumer expenditure price deflator rose 0.3%, in line with the consensus forecasts.
PCE data this morning was the first sign that inflation has peaked.
Now, what will the Fed do?
1. Remain hawkish, stick to 8+ rate hikes
2. Tone back on hawkish outlook, but risk inflation spiking again
Any sign of the Fed pulling back sets up a major rally in stocks.
— The Kobeissi Letter (@KobeissiLetter) May 27, 2022
“The increase in the core deflator meant that the year-over-year rate fell to 4.9% from 5.2%, the second straight decline. More importantly, the rate of increase in the three months to April, compared to the previous three months, slowed to 4.2%, a six-month low and well below the 6.3% peak in the three months to July,” commented Ian Shepherdson, the chief economist at Pantheon Macroeconomics.
“We expect a further slowing through the second half, but the pace of the decline is heavily contingent on the speed and extent of the compression in retail and wholesale margins, on the back of the inventory rebuild,” he added.
1.50pm: Inflation debate rages on
It’s been an up and down day for the Footsie but not in a rollercoaster way; it’s been more like a toddler’s see-saw.
London’s index of leading shares was up 12 points at 7,576, led by Scottish Mortgage Investment Trust PLC (LSE:SMT), the investment trust that is heavily exposed to techs and biotechs.
SMT was up 4.8% ahead of the US open today, where the tech-laden Nasdaq index is expected to rise by 0.5% at the open. The company has a large exposure to Chinese tech giant Alibaba, which released strong results overnight.
Budgets all of a sudden seem like busses. None when you want them and then bang, three at once. And these from a chancellor who’s long denied the need for an Emergency Budget, a windfall tax, support for poorer consumers etc…??
— Mark Brumby (@brumbymark) May 27, 2022
Prime minister Boris Johnson has implicitly admitted that the government stole the idea of a support package by observing that the stimulus announced yesterday by finance minister Rishi Sunak was bigger than the one proposed by the Labour Party.
Be that as it may, Johnson also conceded that the £15bn handout would not fix everything for everyone (but it would probably pay for a lot of office parties or some nice expensive wallpaper for the sitting room).
“I’m not going to pretend that this is going to fix everything for everybody immediately. There are still going to be pressures but it’s a very, very substantial commitment by the government to getting us through what will be, I’m afraid, still a bumpy time with the increase in energy prices around the world,” Johnson said on Sky News.
Meanwhile, in an interview with the news agency Bloomberg, the prime minister said he was in favour of Britain being a “high wage economy” while warning that the increase in wages should come from productivity gains rather than a response to rampant inflation.
How do we stop high inflation? @bbcworldservice programme panel with me, @asentance @realVickyPryce @LHSummers @Shanta_WB
Listen at 10:06 (Europe) and again on Sat at 15:06: https://t.co/4CAW1ZBLHT
— Linda Yueh (@lindayueh) May 27, 2022
From a stock market perspective, pundits have pointed out that it is possible for wages to rise without this leading to inflation; all it takes is for companies to make less profit.
“Something funny has been happening recently. Although inflation rates remain high and inflation expectations are still rising, interest rate expectations have been falling back,” said Marshall Gittler at BDSwiss.
“The leader of the pack as usual is the US. The December Fed funds futures are now pricing in a rate of 2.51% at the meeting, down a full 25 bps [quarter point] rate hike from its peak of 2.78%. on May 3.
“The reason is probably that investors are revising down their expectations for inflation. In the US for example the five-year breakeven inflation rate is back to where it was at the beginning of the year. Expectations for other countries too have been declining recently,” he added.
James Lowen, senior fund manager at JOHCM UK Equity Fund, said the narrative around cost of living pressures has been unrelenting over the last two months.
“It has also led to a material derating of financials and domestic cyclicals in the UK equity market,” Lowen claimed, adding that many of the valuations are “absurdly low”.
“The combination of wage growth and Sunak’s move yesterday means average household free cash flow, available for discretionary spending, will fall only slightly this year, with the excess savings noted above potentially more than offsetting this,” Lowen continued.
“Consensus – which we see in valuations – is too negative. This was seen in market action yesterday with £ rising and domestic stocks taking a good step off the bottom," he concluded.
12.40pm: New York, London, Paris, Munich - everyone's talking about ... er ... inflation
Chancellor Rishi Sunak has rejected suggestions from economists that his cost-of-living support package will have much of an impact on inflation.
On his media round this morning, he said the impact of the £15bn package on inflation will be "minimal", less than 1%, in part because part of the money will be "targeted at those most in need" taken from energy companies in the windfall tax.
“The combination of those two things is the responsible approach,” he told Sky News.
The package announced by Sunak a day earlier included a £400 discount on energy bills for all households (including for second and third homes).
As for the impact on the oil & gas industry, analysts at UBS calculated there could be £30-40bn of taxable profits this year and £3-4bn of capital investment.
"The tax take before the new levy could have been around £12bn. After the new levy and with higher capex allowances the tax take could rise to £17bn, in line with the Chancellor's forecast of an additional £5bn impact."
And the power generation industry was estimated to have a taxable profit pool of around £4-5bn in 2020, so, allowing for hedging, UBS said, "we doubt this could have grown above £6-8bn by 2022, and might be much less, suggesting power gen profits would not be more than 20% of the upstream profit pool" at around £1bn.
Valuation impacts for utilities "would be pretty low" at around 0-3% range, the analysts predicted, "before factoring any offsetting measures such as increased capital allowances".
11.46am: Wall St preview
US markets are expected to add to gains over the past two days and heading for their first weekly gains since March.
Futures for the Dow Jones are up 0.1% in pre-market trading, while those for the S&P 500 are rising 0.3%, and 0.5% for the techy Nasdaq-100.
Looking back to the overnight performance, Ipek Ozkardeskaya, an analyst at Swissquote, noted that the Federal Reserve Open Market Committee (FOMC) minutes released on Wednesday weren’t as hawkish as many investors had feared.
The Fed's rate-setters have signaled 50 basis point rises at their next two meetings and investors worried about rapid and sizeable rate increases found enough in the minutes to seek out bargains in the stock market.
“But there was no sign that the Fed would go down the 75bp hike road. Some members thought the price pressures won’t get much worse, and the Atlanta Fed President Bostic even suggested that, given that economic data has taken a step backward, the central bank could even pause on rate hikes in September!,” said Ozkardeskaya.
Still, that statement was perhaps a little daring, she argued, noting that a single month’s softness in inflation data doesn’t necessarily suggest that the US is out of the woods just yet at a time when gas and food prices continue to rise, threatening price stability.
“But the latest FOMC minutes confirm that the Fed is ready to scale back on the tightening plans, if only it could,” she said.
The rally in energy prices could certainly throw a shadow on the latest bout of market optimism, underscoring worries about inflation, said Ozkardeskaya, adding that after all, soaring energy prices are one of the major responsible for the skyrocketing inflation.
10.15am: Alibaba and the 4 percent
One of the top risers on the FTSE is Scottish Mortgage Investment Trust PLC (LSE:SMT), helped by a better than expected update from major Chinese investment Alibaba. It's up 4%.
Good numbers from Alibaba and Baidu has helped drive a rally in Asian shares that followed the overnight rally in US markets.
"In addition, the reported cooling of tensions between China and the US, and the likelihood of more stimulus from the former to support the local economy underpinned the positive moves," said analyst Richard Hunter at ii.
The FTSE is up seven points at 7,572, ahead 2.5% for the week.
9am: Mixed so far
London’s leading shares are having a mixed start, with gains on commodity plays largely offsetting losses among utilities.
The FTSE 100 was down 9 points (0.1%) at 7,556, led by SSE PLC (LSE:SSE), which is down 2.2%; sector peers Severn Trent PLC (LSE:SVT) and National Grid PLC (LSE:NG.) are also getting the bargepole treatment, showing losses of around 1.2%.
In contrast, miners such as Glencore PLC (LSE:GLEN), Rio Tinto PLC (LSE:RIO) and Antofagasta PLC (LSE:ANTO) are sporting gains of around 0.9%.
“The UK market is ending the week on a more subdued note, as investors digest Rishi Sunak’s announcement yesterday. This epitomises an often overlooked fact – that the economy and stock market are very different beasts. While support packages and windfall taxes are what the nation has been calling for, the market effect of such measures hasn’t shown its face yet,” declared Sophie Lund-Yates at Hargreaves Lansdown.
“The big shakedown will be how investors in the UK’s oil and gas majors like BP and Shell will feel about windfall taxes. While not a long-term problem for profits, the incentivisation to invest their profits could see dividends trimmed. That’s by no means a given, but even the possibility of such a move could see investors spooked as the dust settles,” she added.
BP PLC (LSE:BP.) shares are off 0.7% at 432.1p and Shell PLC (LSE:SHEL, NYSE:SHEL) is down 0.4% at 2,394p.
There has not been a lot of news out from FTSE 100 companies this morning with the announcement from GSK PLC being the main event. Given the share price of the drugs giant is down 1.2% after positive news about China approving the Cervarix two-dose vaccine schedule for girls aged 9 to 14 against certain types of cancer-causing human papillomavirus it is safe to assume that the news was not earth-shattering.
Among the mid-caps, textiles outfit Coats Group PLC (LSE:COA) was 0.3% lower after completing the sale of its business in Brazil and Argentina following satisfaction of the completion conditions while housebuilder Vistry Group PLC (LSE:VTY) defied the trend, adding 1.3% at 894p after it kicked off its £35mln share buyback programme.
Also on the up was Workspace Group PLC (LSE:WKP), which advanced 1.4% to 713p after it said it is considering disposing of the light industrial assets, formerly owned by McKay, as a single portfolio.
8.25am: Pause for breath
London paused for breath after a run that has seen the FTSE 100 advance around 2.4% this week.
The blue-chip index opened just four points higher at 7,568.56 as traders chose to ignore the rebound in Asia and on Wall Street.
“After a torrid few months, there are some tentative signs of green shoots emerging as investors become more comfortable with the stance of the central banks in tackling inflation,” noted Richard Hunter, head of markets at Interactive Investor.
The miners were well bid again after Thursday’s flurry of buying based on their income potential. Glencore led the sector charge with a 1.8% advance at the open.
JD Sport, up 1.7%, was in bounce-back mode after the shock departure of boss Peter Cowgill unsettled investors earlier in the week.
Shares in the greeting cards and gifts group Moonpig fell 8.2% in early deals amid rumours that 27mln shares had been offloaded at a price of 250p each.
6.55 am: Subdued start predicted
Having had the evening to ponder on the chancellor of the exchequer’s fiscal stimulus package, UK investors look set to start Friday in a cautious mood.
While stock markets across the globe race ahead, the FTSE 100 is expected to open 13 points lower at 7,552. Nevertheless, the Footsie is on track for its strongest week of gains since March.
Across the pond, the Dow Jones industrial average had a bumper day on Thursday, surging 517 points to 32,637, while the S&P 500 ended the day 79 points heavier at 4,058.
“Yesterday in the latest quarterly Q1 GDP numbers the Core PCE [Personal Consumer Expenditure] number fell back from 5.2% to 5.1%, and US policymakers will be looking for further signs that the current bout of inflation is starting to run out of steam and slip back,” observed Michael Hewson at CMC Markets.
“Today’s US PCE Core Deflator could offer some clues about that, with the hope that we could see a decline to 4.9% from 5.2% in March. PCE Core Deflator is the Fed’s preferred inflation targeting measure and a softer number here, could give further encouragement to the view that we might see rate pause in September, after Atlanta Fed President Bostic floated the idea earlier this week. The PCE Deflator is expected to fall to 6.2% from 6.6%.
“Personal Spending for April is expected to rise by 0.7%, down modestly from 1.1% in March, with personal income set to increase 0.5%,” he added.
In Asia this morning, the colour red is largely noticeable by its absence from traders’ screens.
In Tokyo, the Nikkei 225 is 186 points to the good at 26,793 while in Hong Kong the Hang Seng index is 557 points firmer at 20,673.
Back in London, as is often the case on a Friday there is little scheduled news flow from corporate heavyweights. It does seem to be the annual general meeting (AGM) season, however, with the likes of Irn-Bru maker AG Barr PLC (LSE:BAG) and precision instrumentation specialist Spectris PLC (LSE:SXS) holding their AGMs.
Renewi PLC (LSE:RWI), the waste-to-product business, will release its full-year results having said in March that trading in the year to the end of March had been ahead of previous expectations and performance for this year should also be ahead of market forecasts.
The company was also boasting of its ability to pass inflationary costs through to customers, so we’ll see if that is still the case now that the inflation demon is getting its groove on.
Around the markets
- Sterling: US$1.2650, up 0.43 cents
- Gilt: 1.972%, +5.78 basis points
- Bitcoin: US$28,958, down US$489
- Ethereum: US$1,752, down US$74
- Gold: US$1,851.10 an ounce, up US$3.50
- Oil: US$114.42 a barrel, up 25 cents