Despite high expectations of an unusually large 75-basis-point interest rate hike by the US Federal Reserve late Wednesday, stock prices were rising, while the dollar was easing back, as the big move was already in the market; however, analysts said there is still room for a shock.
The Fed unveils its interest rate decision at 1900 BST, followed by a press conference with Chair Jerome Powell at 1930 BST.
‘While a 75bp move is not certain, we doubt such potential 'leaks' to the media are a coincidence, and they do appear to us as a (successful) attempt to adjust expectations during the blackout period and prepare markets for the larger increase,’ said ING.
The FTSE 100 index was up 94.28 points, or 1.3%, at 7,281.74 midday Wednesday. The mid-cap FTSE 250 index was up 262.44 points, or 1.4%, at 19,307.47. The AIM All-Share index was up 0.94 points, or 0.1%, at 915.98.
The Cboe UK 100 index was up 1.2% at 725.82. The Cboe 250 was up 1.3% at 16,991.21 and the Cboe Small Companies down 0.4% at 14,125.26.
In mainland Europe, the CAC 40 in Paris was up 0.9%, while the DAX 40 in Frankfurt was up 1.1%.
Having spent the past few sessions in turmoil, as markets repriced the Fed's rate tightening path, European stocks charged uphill into Wednesday's US interest rate decision and Wall Street was pointed higher as well.
The Dow Jones was called to open up 0.3%, the S&P 500 up 0.4% and the Nasdaq Composite up 0.6%.
The dollar even softened. Sterling was priced at $1.2090 on Wednesday, up against $1.2011 at the London equities close on Tuesday. The pound earlier Tuesday was trading at levels not seen since the start of Covid lockdowns in March 2020.
The yen recovered after hitting fresh multi-decade lows, with the dollar quoted at JP¥134.38, down from JP¥134.88. Earlier Wednesday, the dollar hit a high of JP¥135.56, its highest level against the Japanese currency since 1998.
The euro traded at $1.0478, higher than $1.0414 late Tuesday.
Gold was quoted at $1,825.20 an ounce on Wednesday, up against $1,814.44 on Tuesday amid dollar weakness.
‘Clearly the bar for a hawkish surprise at this evening's FOMC meeting is now sky-high, and a 75 basis point hike alone may not even be enough to satisfy the dollar bulls. We believe that the Fed would have to strike an ultra-hawkish tone in order to trigger any additional dollar strength from current elevated levels,’ said Matthew Ryan, senior market analyst at Ebury.
The Fed is not the only central bank meeting on Wednesday. European Central Bank policymakers have gathered for a surprise meeting as more indebted eurozone members came under stress from rising borrowing costs.
‘The Governing Council will have an ad-hoc meeting on Wednesday to discuss current market conditions,’ a spokesperson for the Frankfurt-based institution had said Wednesday morning.
A more hawkish shift in central bank policy has raised the spectre of ‘fragmentation’ in the eurozone, where the borrowing costs for some, more indebted members rise faster than for others.
In Paris, lenders Credit Agricole, Societe Generale and BNP Paribas were amongst the best performer as the ECB met. In Madrid, BBVA and Santander was towards the top of the IBEX 35. In London, Barclays was up 3.3%, Lloyds up 2.7%, HSBC up 3.0% and NatWest up 3.4%.
In London, Whitbread was leading the large-cap gainers, up 5.3% at midday. The hospitality firm said sales remain ahead of their pre-Covid level, boosted by strong trading in the UK, though the Premier Inn owner warned it faces higher costs stemming from a tight labour market.
The hotel company plans to invest additional spending of £20 million to £30 million in the current financial year. It is still confident on margins, however, given its ‘strong sales performance’.
In the first quarter ended June 2, Whitbread said sales were up more than four-fold year-on-year. Compared to pre-virus times, they were 22% higher. UK total sales alone were 18% above pre-pandemic times.
London Stock Exchange Group advanced 5.2% on an upgrade to Buy from Neutral at UBS.
Shares in BP and Shell dipped 0.7% and 0.8% respectively on lower oil prices. Brent oil was trading at $119.70 a barrel, dropping from $124.93 late Tuesday.
WH Smith topped the mid-caps, rising 7.4% as it reported sales growth on pre-pandemic levels for the first time.
For the 15 weeks to June 11, total revenue was just above its pre-pandemic level for the first time, driven by the Travel arm, which saw sales at 123% of 2019 levels. The Travel rebound was led by North America, where sales were 111% of 2019, while they were 104% in the UK and only 88% in the Rest of the World region.
Ferrexpo rose 6.2% after saying it remains a ‘long term’ investor in Ukraine despite disruption from the war.
The iron miner explained that with Ukraine's Black Sea ports closed, it has been reliant on rail and barging operations to get its production out of the country. As a result, it has had to modify its output, producing in accordance with the sales it can access logistically.
Elsewhere, Motorpoint shares slid 6.0%. While the company reported substantial annual earnings growth, its stock price fell as the vehicle retailer cautioned on an uncertain outlook as supply chain challenges put pressure on new car output and consumers see their wallets squeezed.
Revenue for the financial year ended March 31 jumped 83% to £1.32 billion from £721.4 million the year before, which the company chalked up to market share growth and vehicle price inflation. This helped pretax profit more than double to £21.5 million from £9.7 million.
The outlook appears shaky, with Motorpoint noting that rising inflation is putting pressure on consumer spending, something which is likely to reduce overall sales in its markets. Further, supply chain issues will continue to limit new car production, which in turn constrains used-car supply.
Aside from the Fed decision, the economic events calendar on Wednesday has US retail sales at 1330 BST.
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