Stocks in Europe closed in the red on Thursday after the European Central Bank confirmed its intentions for a historic rate hike in July, with a more substantial hike of 50 basis points potentially on the cards in September, making it the latest central bank ready to act aggressively to tame inflation.
The FTSE 100 index closed down 116.79 points, or 1.5%, at 7,476.21. The FTSE 250 ended down 237.59 points, or 1.2%, at 20,073.40, and the AIM All-Share closed down 11.41 points, or 1.2%, at 965.22.
The Cboe UK 100 ended down 1.4% at 745.34, the Cboe UK 250 closed down 1.2% at 17802.86, and the Cboe Small Companies ended down 0.5% at 14761.96.
In European equities on Thursday, the CAC 40 in Paris ended down 1.4%, while the DAX 40 in Frankfurt ended down 1.7%.
The Frankfurt-based central bank kept the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25% and -0.50% respectively in June. The key interest rates have been at these lows since September 2019, back when now-Italian Prime Minister Mario Draghi was at the helm.
The ECB said it will lift its key interest rates by 25 basis points in its July 21 meeting. A hike in July would be the ECB's first since 2011.
After this, it plans to hike again at the next meeting in September.
‘The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting,’ the central bank added.
A larger, 50 basis point hike would see the ECB join the likes of the US Federal Reserve and Reserve Bank of Australia, who have both recently enacted chunky rate hikes amid soaring inflation.
‘We agree with ECB's risk assessment, but find it a bit puzzling that monetary policy normalisation is expected to help cool inflation, while at the same time seemingly not doing much damage to growth. Hence, we think ECB continues to underestimate near-term inflation pressures and also expect a more subdued growth outlook with an increasing recession risk for 2023,’ commented Danske Bank.
The euro failed to make headway following the ECB decision. The single current stood at $1.0657 at the European equities close Thursday, down against $1.0737 at the same time on Wednesday.
While the euro bounced initially at the prospect of a 50 basis point hike, Dutch bank ING noted, it quickly gave up these gains.
‘We think that rising peripheral spreads and a grim growth outlook in the eurozone are keeping the euro at check, and that a return to $1.0500 remains likely,’ said ING.
The dollar was broadly stronger on Thursday amid a risk-off tone. The pound was quoted at $1.2536 at the London equities close Thursday, soft compared to $1.2545 at the close on Wednesday. Against the yen, the dollar was trading at JP¥134.16, up compared to JP¥133.94 late Wednesday.
Gold suffered at the hands of a stronger dollar. Gold was quoted at $1,842.36 an ounce at the London equities close Thursday, down against $1,858.48 at the close on Wednesday.
Brent oil was quoted at $123.37 a barrel at the London equities close Thursday, up from $122.00 late Wednesday.
Stocks in New York were lower at the London equities close, with the Dow Jones down 0.5%, the S&P 500 index down 0.6%, and the Nasdaq Composite down 0.6%.
With the ECB out the way, focus shifts to Friday's US inflation figure.
The data is expected to show the annual inflation rate remained steady at 8.3% in May, according to FXStreet-cited consensus.
However, on Wednesday, the White House said it expected the inflation reading to show the rate was still ‘elevated’.
UBS believes there are upside risks to the inflation print.
‘Looking ahead to Friday's CPI and the likely guidance out of the FOMC at their June meeting, we now expect the string of 50 bp rate hikes to be extended to include the September FOMC meeting,’ said UBS.
In London, J Sainsbury and WPP ended at the bottom of the FTSE 100 as both stocks went ex-dividend, meaning new buyers no longer qualify for the latest payouts. Sainsbury's closed down 5.6% and WPP shed 4.5%.
Melrose Industries continued its strong week, ending Thursday's session 4.2% higher to take its week-to-date gain to 24%.
In the FTSE 250, CMC Markets tumbled 21% after posting a sharp drop in annual profit.
For the financial year that ended March 31, net operating income was down 31% to £281.9 million from £409.8 million in financial 2021 and pretax profit plunged to £92.1 million from £224.0 million.
CMC said it saw a decrease in market volatility, particularly in the first half, compared to ‘exceptional’ levels seen in 2021. This resulted in lower client trading activity and lower client income retention throughout the period which hurt leveraged and non-leveraged businesses, it explained.
Mitie Group rose 6.3% on a swing to annual profit and a share buyback.
Mitie said in the year ended March 31 total revenue, including the share of joint ventures and associates, was up 58% to £4.00 billion, from £2.53 billion. It swung to a pretax profit of £52.3 million, from a loss of £13.7 million the year prior.
It will be reinstating a final dividend with a 1.4p per share payout, which takes the total dividend for the year to 1.8p per share. It did not pay a dividend in the previous financial year. Mitie also said it has started an initial £50 million share buyback scheme.
It was another difficult session for retailers. AO World shares closed down 2.9% on news it will shutter its German business, potentially booking cash costs of up to £15 million in the process, and losing roughly 10% of group revenue.
The online electricals retailer had kicked off a strategic review of the German operation back in January, as fortunes there weakened with pre-pandemic shopping trends re-emerging and the competitive landscape ‘intensifying’. The German business also suffered from a ‘constrained supply chain’.
‘Having evaluated a range of strategic options during the review process, the board has decided that closure of the German business is the best course of action. This decision was based on the continuing deterioration in the outlook for the German business, as well as the board's responsibilities to shareholders and other stakeholders,’ AO World said.
DFS Furniture fell 12% after saying it has seen a reduction in orders in its fourth quarter.
For its third quarter, which ended March 27, it saw double digit growth in the volume of orders versus the same period in financial 2019, which was pre-pandemic.
But it added: ‘Moving into the fourth quarter the UK furniture market has seen a change in demand patterns with recent data from Barclaycard suggesting about 2.1% reduction in transactions in April relative to pre-pandemic periods. We have seen a similar change in order volumes across our group.’
The corporate calendar on Friday has full year results from Industrials REIT.
Friday's economic calendar has Chinese inflation overnight and US inflation at 1330 BST.
By Lucy Heming; lucyheming@alliancenews.com
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