A 50-basis-point interest rate hike in the US was back to being the market’s most expected outcome of the next Federal Reserve policy meeting, following strong comments by the central bank’s head on Tuesday.
The FTSE 100 index opened down 20.94 points, or 0.3%, at 7,898.54 on Wednesday in response. The FTSE 250 was down 113.01 points, or 0.6%, at 19,843.60, and the AIM All-Share was down 2.11 points, or 0.35, at 857.95.
The Cboe UK 100 was down 0.2% at 790.65, the Cboe UK 250 down 0.6% at 17,376.83, and the Cboe Small Companies down 0.3% at 17,376.83.
In remarks to a US Senate panel on Tuesday, Fed Chair Jerome Powell said US interest rates will likely peak at a higher level than previously anticipated due to economic data coming in stronger than recent trends suggested.
He noted that January figures for employment, consumer spending, manufacturing production and inflation pointed to a partial reversal of earlier softening trends.
‘If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,’ he said.
According to the CME FedWatch tool, markets now expect a 71% change of a 50 basis point hike at the US central bank next meeting. On Tuesday, before Powell’s testimony, markets thought there was a 72% chance of a smaller 25 basis point lift.
Danni Hewson, head of financial analysis at AJ Bell, said: ‘He didn’t say anything surprising or anything we didn’t know already, but there was a steely quality to his testimony and no sign of the dove some investors had been hoping to see fly. It’s made markets nervous, with that new year optimism now thin on the ground and [Tuesday’s] comments pretty much obliterating it for now.’
Wall Street ended sharply lower on Tuesday in the wake of Powell’s testimony. The Dow Jones Industrial Average closed down 1.3%, the S&P 500 down 1.5%, and the Nasdaq Composite down 1.3%.
The dollar rose against rivals as markets priced in US interest rates staying higher for longer.
The pound was quoted at $1.1831 at early on Wednesday in London, lower compared to $1.1861 at the close on Tuesday. The euro stood at $1.0547, down against $1.0577. Against the yen, the dollar was trading at JP¥137.56, higher compared to JP¥136.87.
Powell’s testimony to the US Congress continues on Wednesday, this time presenting his semi-annual monetary report to the House of Representatives, appearing before the House Financial Services Committee.
In London, Hiscox was one of the best blue-chip performer in early morning trade, up 0.8%.
The insurer reported its highest underwriting profit since 2015 but a steep drop in annual profit, as its chair, Robert Childs, announced his retirement.
In 2022, Hiscox reported a pretax profit of $44 million, down sharply from $190.8 million in 2021. Meanwhile, underwriting profit totalled $269.5 million, up from $215.6 million.
Gross premiums written totalled $4.42 billion, up from £4.27 billion, while net premiums earned totalled $2.93 billion, up slightly from $2.92 billion.
Looking forward, Hiscox Chief Executive Aki Hussain said the outlook for 2023 was ‘very positive’ thanks to ‘favourable’ market conditions in all its key markets.
In contrast to Hiscox, insurance peers Admiral and Legal & General were amongst the FTSE 100’s worst performers on Wednesday morning.
Legal & General shares slipped by 1.8% despite reporting a solid increase in annual profit and a record solvency II ratio in 2022.
The life insurance and pension provider reported pretax profit of £2.66 billion, up 7% from £2.49 billion in 2021. Operating profit climbed 12% to £1.26 billion from £1.15 billion.
L&G said it achieved a record Solvency II coverage ratio of 236%, up sharply from 187% in 2021. At March 3, L&G estimates its coverage ratio was 240%.
Admiral dropped 4.9% to the bottom of the blue-chip index in London. The home and motor insurer said it delivered ‘resilient’ results in 2022, against a backdrop of high inflation, but reported a steep fall in annual profit.
Admiral reported a pretax profit of £469.0 million last year, down 39% from £769.0 million in 2021. The company’s return on equity was 35%, compared to 56% in 2021. Its solvency ratio, post dividend, was 180%, down from 195%.
Admiral proposed a final dividend of 52.0p per share, down 28% from 72.0p the year prior, for which it also had paid a special dividend of 46.0p from the sale of Penguin Portals. This brought the total 2022 dividend to 112.0p, down 40% from 187.0p paid for 2021.
Jefferies said Admiral’s pretax profit was 5% below market consensus, with the miss driven by the International Insurance business. This was due to low market premiums in Italy and Spain and high auto claims in the US.
The investment bank said Admiral’s dividend was 7% below consensus.
In the FTSE 250, Hill & Smith lost 3.7% despite posting record annual revenue on the back of strength in its US-focused business.
In 2022, the infrastructure construction company said pretax profit increased by 62% to £69.3 million from £42.8 million in 2021. Revenue totalled £732.1 million, a record figure and up sharply from £625.2 million.
Executive Chair Alan Giddins noted 2022 was a year of ‘significant progress,’ particularly for its US business which now represents 64% of the company’s operating profit.
Elsewhere in London, Restaurant Group plunged 7.6% as its annual loss widened amid a ‘challenging’ year for the casual dining sector.
The Wagamama-owner reported a pretax loss of £86.8 million in the year ended January 1, widened significantly from £35.2 million the year prior. Sales, meanwhile, rose to £883.0 million from £636.6 million.
‘We entered the year with the Omicron variant still impacting our business, shortly followed by the war in Ukraine which significantly impacted utility and supply chain costs and resulted in increasing cost-of-living pressures for our customers,’ said Chair Ken Hanna.
Hanna added that, whilst it is still early days, the company’s trading performance in the first eight weeks of financial 2023 have been ‘very encouraging’.
Even so, Restaurant Group said it plans close about 35 ‘potentially loss-making locations’ in its Leisure business over the next two years. The Leisure business includes Frankie & Benny’s and Chiquito but not Wagamama.
On AIM, construction materials firm Breedon rose 4.8% after its reported positive annual results and said intends to move its listing to the premium segment of the London Main Market from AIM.
Breedon said it will seek admission ‘in the coming months’ and does not intend to raise funds in connection with change of trading venue. Breedon expects admission during the second quarter of this year.
Separately, Breedon reported full-year results ahead of expectations. Pretax profit was £135.8 million in 2022, up 19% from £114.3 million in 2021. Revenue rose 13% to £1.40 billion from £1.23 billion.
In European equities early Wednesday, the CAC 40 in Paris was down 0.2%, while the DAX 40 in Frankfurt was marginally lower.
In Asia on Wednesday, stocks were broadly lower, though the Nikkei 225 index closed up 0.5%.
In China, the Shanghai Composite closed down 0.1%, while the Hang Seng index in Hong Kong closed down 2.4%. The S&P/ASX 200 in Sydney finished 0.8% lower.
Brent oil was quoted at $83.23 a barrel at early in London on Wednesday, down from $83.83 late Tuesday. Gold was quoted at $1,814.46 an ounce, lower against $1,818.73.
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