Stocks in London ended lower on Tuesday as the US Federal Reserve starts its policy meeting, which investors fear could conclude with the largest interest rate hike in 30 years to combat inflation.
The central bank is likely to discuss making its biggest interest-rate increase in almost 30 years when policymakers meet on Tuesday, as a range of new data suggest that inflation is coming in hotter and proving more stubborn than they had anticipated.
The Fed raised rates by half a percentage point in May and officials had suggested for months that a similar pace of increases would be warranted at their meetings in June and July if data evolved as expected.
However, as inflation continues to run riot, Fed Chair Jerome Powell and company will likely contemplate whether to raise interest rates by three-quarters of a percentage point on Wednesday, when they are set to release both their decision and a fresh set of economic projections.
Just before the US market close on Monday, the Wall Street Journal reported Fed officials were actively considering surprising markets with a larger-than-expected 0.75-percentage-point interest rate increase.
According to the CME’s Fedwatch Tool, expectations for a 75 basis-points hike at the June meeting jumped to 93.2% on Tuesday from only 3.9% a week ago. Conversely, expectations of a 50 bps rate hike on Wednesday have sunk to less than 4.0% from a slam dunk bet a week earlier.
The last time the Fed hiked rates so substantially was in 1994 when then-Fed Chair Alan Greenspan lifted the Fed funds rate to 5.5%.
The FTSE 100 index closed down 18.35 points, or 0.3%, at 7,187.46. The FTSE 250 ended down 115.18 points, or 0.6%, at 19,045.03, and the AIM All-Share closed down 9.02 points, or 1.0%, at 915.04.
The Cboe UK 100 ended down 0.2% at 717.20, the Cboe UK 250 closed down 0.6% at 16,775.98, and the Cboe Small Companies ended down 0.6% at 14,175.69.
In European equities, the CAC 40 stock index in Paris ended 1.2% lower, while the DAX 40 in Frankfurt ended down 0.9%.
In the FTSE 100, Standard Chartered and HSBC ended the best performers, up 3.5%.
The Asia-focused banks benefited from an upbeat report from ‘Big Four’ accounting firm KPMG over the China banking sector.
‘The forthcoming interest rate increases by the Fed in 2022 are likely to raise revenues at Hong Kong banks. But a slowdown in economic activity could cloud the outlook for the entire sector and loan growth may be impacted by the confidence of corporations to invest,’ said Paul McSheaffrey, partner, Financial Services, KPMG China.
Oil companies ended in the green, with BP up 2.0%, Shell up 1.1% and Harbour Energy up 2.3%, tracking spot oil prices higher.
Brent oil was quoted at $124.93 a barrel at the equities close, surging from $119.33 at the close Monday.
At the other end of the large-caps, Ashtead Group closed down 4.0%, even as the equipment rental firm posted double-digit revenue and profit growth.
Revenue for the financial year that ended April 30 rose 19% to $7.96 billion from $6.64 billion the year before. Pretax profit jumped 35% to $1.67 billion from $1.24 billion. Adjusted pretax profit of $1.82 billion, up 38% on the year before, was in-line with analyst consensus of $1.81 billion.
Gross capital expenditure for the year amounted to $2.40 billion. Ashtead expects this figure to rise to between $3.3 billion and $3.6 billion for the current year, as it executes its Sunbelt 3.0 strategic plan.
Elsewhere, Go-Ahead closed up 17%. Kelsian Group urged the shareholders of the transport operator to take no action on a rival takeover offer, saying it is in talks with Go-Ahead for a cash bid of its own.
Newcastle, England-based peer Go-Ahead on Monday said it had agreed to a takeover offer from Gerrard Investment Bidco, a subsidiary of a consortium consisting of Kinetic Holding Co and Globalvia Inversiones. Kinetic is a bus operator in Australia and New Zealand, while Globalvia is a Madrid-based transport infrastructure firm.
Kelsian is an Adelaide-based ferry, bus, and light rail operator in Australia, Singapore and the UK.
The dollar was higher across the board as the Fed meeting got underway. The pound was quoted at $1.2011 at the London equities close, down sharply from $1.2150 at the close Monday.
The euro stood at $1.0414 at the European equities close, down from $1.0425. Against the yen, the dollar was trading at JP¥134.88, up from JPYJP¥133.90.
On the economic front, data from the Office for National Statistics showed the UK unemployment rate unexpectedly rose in April.
The jobless rate rose to 3.8% in the three months to April, ticking up slightly from 3.7% in March and confounding market expectations for an improvement to 3.6%.
At the same time, average earnings excluding bonuses rose 4.2% on an annual basis, in line with the reading for March and ahead of consensus of 4.0%. Including bonuses, wages grew 6.8%, below consensus of 7.6% and softening from 7.0% in March.
After accounting for soaring inflation, average pay including bonuses rose 0.4%, but when stripping bonuses out, pay fell 2.2% in real terms.
Stocks in New York were attempting to rebound at the London equities close following a sell-off on Monday.
The DJIA was flat, the S&P 500 index up 0.2% and the Nasdaq Composite up 0.4%.
On Wall Street, Oracle jumped 9.8% after reporting strong revenue on robust demand for cloud services on Monday.
Gold stood at $1,814.44 an ounce at the London equities close, lower against $1,826.77 late Monday, as the dollar strengthened.
The economic events calendar on Wednesday has eurozone industrial production at 1000 BST and US retail sales at 1330 BST. The US Federal Reserve interest rate decision is at 1900 BST followed by a press conference with Powell at 1930 BST.
The UK corporate calendar on Wednesday has annual results from online appliances retailer AO World and trading statements from books and stationery retailer WH Smith and hospitality firm Whitbread.
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