Stock markets on Monday were pricing in an expected pause in monetary policy tightening by the US central bank this week, but the risk that a key inflation reading on Tuesday could change all that was keeping trading activity in check.
The FTSE 100 index was up 1.14 points at 7,563.50 midday Monday. The FTSE 250 was up 81.11 points, or 0.4%, at 19,172.77 and the AIM All-Share up 0.75 of a point, or 0.1%, at 794.09.
The Cboe UK 100 was flat at 754.16, the Cboe UK 250 was up 0.5% at 16,716.28, and the Cboe Small Companies was up 0.1% at 13,227.55.
The US Federal Reserve will announce its next interest rate decision on Wednesday. Markets see a 76% chance of the central bank holding US interest rates steady, with the balance expecting another 25 basis point hike, according to the CME FedWatch Tool.
Russ Mould, investment director at AJ Bell, warned that a ‘last-minute shift in the plan’ cannot be ruled out, however, given the Fed is taking a ‘data-driven approach’ and the latest US inflation figures are out on Tuesday.
‘A higher-than-expected number could set the cat among the pigeons,’ he said.
According to FXStreet-cited consensus, the annual US inflation rate is expected to have cooled to 4.1% in May from 4.9% in April. This remains double the Fed’s 2% target, however.
The European Central Bank announces its own interest rate decision on Thursday, the day after the Fed, with markets widely expecting another 25 basis point lift from the Frankfurt-based central bank amid stubbornly high inflation in the eurozone.
The Bank of Japan will reveal its decision the same day as the ECB, though Japan’s central bank is expected to keep its loose monetary policy unchanged.
The following week, the Bank of England will take centre stage with an interest rate decision.
Mould said: ‘The calculus is different for the Bank of England, given the UK’s more persistent inflation alongside warnings from a Bank of England official of further rate hikes, which felt like a parent telling a sickly child they need to take their bitter medicine. Unwelcome, but not unexpected. Its meeting next Thursday is expected to see another hike, barring anything dramatic.’
Bank of England policymaker Jonathan Haskel wrote in The Scotsman on Monday that further interest rate rises ‘cannot be ruled out’ amid decades-high inflation in the UK. Consumer price inflation was running at 8.7% in April.
Haskel said: ‘My own view is that it’s important we continue to lean against the risks of inflation momentum, and therefore that further increases in interest rates cannot be ruled out.’
The dollar was slightly lower ahead of the data and interest-rate decisions.
The pound was quoted at $1.2585 at midday on Monday in London, higher compared to $1.2577 at the equities close on Friday.
The euro stood at $1.0779, higher against $1.0750. Against the yen, the dollar was trading at JP¥139.16, lower compared to JP¥139.33.
Gold was quoted at $1,965.54 an ounce, higher against $1,961.75 on Friday, with the yellow metal benefited from a softer US dollar.
In London, Ocado remained the best blue-chip performer at midday, up 10%. The stock got a boost after Exane BNP raised the online grocer and warehouse technology firm to ’neutral’.
Segro was the FTSE 100’s worst performer, down 1.8% after Goldman Sachs cut the asset manager and warehouse and industrial property developer to ’neutral’ from ’buy’.
Shares of oil majors remained on the back foot as oil prices continued to decline. Shell and BP were 1.0% and 1.3% lower.
Brent oil was quoted at $73.20 a barrel at midday in London on Monday, down from $76.12 late Friday.
Ricardo Evangelista, senior analyst at ActivTrades, said: ‘Should the Fed hint at further rate hikes later in the year, as many now expect, there could be further downside for the price of the barrel.
‘This is because crude is priced in dollars, and a stronger greenback means a lower nominal value. At the same time, US monetary policy is important not just for the world’s largest economy but also for the rest of the world. Should the Fed continue to focus on fighting persistently high inflation through stringent monetary tightening, it will eventually achieve its objective, but the side effect will be an economic slowdown. It’s this perspective of a Fed-driven decline in demand that is now being discounted by investors, creating a downside for oil prices,’ he explained.
In the FTSE 250, Darktrace added 2.3% as it launched new artificial intelligence risk and compliance models to address the threat of intellectual property loss and data leakage.
Wizz Air climbed 3.7% to 2,825.00p, following price target upgrades from Bank of America and JPMorgan.
BofA raised its price target on Wizz Air shares to 4,200p from 3,600p, while JPMorgan raised its price target to 4,050p from 3,750p.
Elsewhere in London, AO World jumped 6.4% after Frasers announced it had bought a stake in the online electricals retailer.
The Sports Direct-owner said it bought a 19% stake in AO World through the purchase of 109.4 million shares at a price of 68 pence each, for a total investment of £75 million.
Bradley Hughes and Clive Black at Shore Capital said the investment by Frasers is ‘a vote of confidence’ in AO World’s ‘pivot to profitability story’.
Shares in Frasers were up 0.5%.
On AIM, Futura Medical surged 20% after the sexual health-focused pharmaceutical company announced that the US Food & Drug Administration granted over the counter sale marketing authorisation for MED3000.
MED3000 is now legally marketed in the US as the first topical treatment for erectile dysfunction available over the counter without the need for a prescription.
In European equities on Monday, the CAC 40 in Paris was up 0.5%, and the DAX 40 in Frankfurt was up 0.6%.
Stocks in New York were called higher amid the growing confidence that the Fed will hold steady and the US inflation rate will continue to ease. The Dow Jones Industrial Average was called up 0.1%, the S&P 500 index up 0.1%, and the Nasdaq Composite up 0.2%.
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