Stocks in London ended the week higher on Friday, while unambiguously dovish remarks from US Federal Reserve Chair Jerome Powell propelled the pound to a 29-month high against the dollar.
‘The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,’ Powell said in a speech at the Jackson Hole economic symposium.
The FTSE 100 index closed up 39.78 points, 0.5%, at 8,327.78. The FTSE 250 ended up 84.78 points, 0.4%, at 21,189.48, and the AIM All-Share closed up 2.96 points, 0.4%, at 777.69
For the week, the FTSE 100 rose 0.2%, the FTSE 250 rose 0.7% and the AIM-All-Share rose 0.6%.
The Cboe UK 100 ended up 0.7% at 833.15, the Cboe UK 250 closed up 0.6% at 18,661.03 and the Cboe Small Companies ended up 0.5% at 17,061.74.
European markets joined in the upbeat mood. The CAC 40 in Paris ended up 0.7%, while the DAX 40 rose 0.8% in Frankfurt.
In New York at the time of the London close on Friday, the DJIA was up 1.2%, the S&P 500 was up 1.1% and the Nasdaq Composite was up 1.4%.
In an eagerly awaited speech, Powell said confidence has grown that inflation is on a sustainable path back to 2% while the labour market has ‘cooled considerably’.
The cooling in labor market conditions is ‘unmistakable’, Powell added, noting job gains remain solid but have slowed this year.
Powell said the Fed was ‘attentive’ to the risks to both sides of its dual mandate, noting while upside risks to inflation have diminished, the downside risks to employment have increased.
The Federal Reserve’s attention has shifted more markedly to the labour market since July nonfarm payrolls undershot expectations raising fears that the US economy could be heading into recession.
‘We do not seek or welcome further cooling in labor market conditions,’ Powell stressed.
Powell said with ‘an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market.’
‘The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions.’
Stephen Brown at Capital Brown said Powell’s ‘unmistakably dovish speech’ implies that a 50 basis points rate cut could be on the table at the September Fed meeting.
However, he thinks a soft jobs report in August would see the Fed ‘comfortable’ with a 25 basis points reduction.
ING’s James Knightley also thinks the jobs report will determine the magnitude of the cut in rates.
‘If we get a sub 100,000 on payrolls and the unemployment rate ticking up to 4.4% or even 4.5% then 50bp looks more likely. If payrolls comes in around the 150,000 mark and unemployment rate stays at 4.3% or dips to 4.2% we can safely say it will be a 25bp,’ he remarked.
Powell’s categorical statements knocked the dollar and sent sterling to its highest level since March 2022.
The pound was quoted at $1.3220 at the London equities close Friday, up from $1.3091 at the close on Thursday. The euro stood at $1.1193, up against $1.1110. Against the yen, the dollar was trading at JP¥144.80, down compared to JP¥146.08.
UK consumer confidence is expected to pick up in the coming months, after stalling in August, as real incomes continue to rise and borrowing costs fall, analysts on Friday said.
The GfK consumer confidence index registered a score of negative 13 points in August, the same as July. The index was compiled by research house GfK from a survey among 2,003 adults in the UK, with interviewing conducted between August 1 and 15.
Within the flat score, readings on personal financial situation increased both for the past 12 months and the coming 12 months. What’s more, the major purchase index also rose. However, the view on the general economic situation declined, both looking back and ahead.
Elliott Jordan-Doak at Pantheon Macroeconomics explained that although the composite index was unchanged in August, consumer confidence is still at its highest level since September 2001.
He expects it to increase further over the rest of the year as real incomes continue to rise and borrowing costs fall.
He pointed out real average weekly earnings excluding bonuses rose by 3.2% year-over-year in the three months to June and will likely continue strongly as inflation remains well below wage growth.
He also expects the downward trajectory of interest rates to filter through to consumer confidence in the coming months.
In the FTSE 100, JD Sports Fashion rose 4.8%, building on double-digit gains achieved on Thursday after a well received trading statement.
But Melrose Industries fell 7.1% after UBS downgraded to ’sell’ from ’buy’ as the broker questioned the value of the firm’s Revenue & Risk Sharing Partnership portfolio.
The broker has switched its valuation methodology from P&L to free cash flow-based tools, consistent with treatment of peers like Rolls Royce Holdings.
UBS said it had constructed an engine by engine net present value model for each engine in Melrose’s portfolio to derive a fair value estimate.
This yielded a £2.8 billion fair value for the current portfolio against management’s estimate of £5.7 billion and an implied market valuation of £3.9 billion, UBS said.
Direct Line fell 2.0% after it said an error has been found in its Solvency II capital ratio for 2023, which means it was lower than previously reported.
The London-based car and home insurer said the mistake arose particularly in the translation of the reinsurance debtors between IFRS and Solvency II own funds, and the error will not have an impact on the IFRS figures.
Amending the error, the company said its year-end solvency capital ratio was revised down to 188% from 197%. It noted this is still above its risk appetite range of 140% to 180%.
Elsewhere in London, Evoke edged up 0.2%.
Evoke is a Gibraltar-based betting and gaming operator, formerly known as 888 Holdings and owner of William Hill, 888, and Mr Green brands.
It announced the acquisition of New Gambling Solutions SRL, the operator of Winner.ro, an online betting and gaming operator in Romania.
Evoke said it will inject its Romania business and a consideration of €10 million in exchange for a 51% share in the enlarged Romania business, bringing together 888.ro with Winner to create the fourth largest group in the Romanian market with a combined market share of around 7%.
The soft dollar pushed the price of gold up once more. The yellow metal was quoted at $2,515.73 an ounce, against $2,478.64 at the close on Thursday.
Brent oil was quoted at $78.88 a barrel at the London equities close Friday, up from $77.38 late Thursday.
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