A strong close in the US and a positive first US tech earnings report gave European markets an early boost on Wednesday, but a higher-than-expected UK inflation reading raised expectations of an outsized rate hike by the Bank of England.
Monetary policy decisions from the Bank of Japan and European Central Bank on Thursday will keep market focus on interest rates this week.
US tech earnings also will be key, after streaming service Netflix impressed overnight. Tesla reports after the New York close on Wednesday, and Twitter, jilted by the electric car maker’s founder, Elon Musk, takes centre stage on Friday.
The FTSE 100 was up 40.13 points, or 0.6%, at 7,336.41 early Wednesday. The FTSE 250 index rose 90.38 points, or 0.5%, at 19,372.97. The AIM All-Share index added 3.64 points, or 0.4%, at 892.34.
The Cboe UK 100 index was up 0.6% at 731.47. The Cboe 250 was up 0.6% at 16,903.12, and the Cboe Small Companies was up 0.1% at 13,308.61.
In mainland Europe, the CAC 40 stock index in Paris was up 0.2%, while the DAX 40 in Frankfurt was 0.5% higher.
In Tokyo on Wednesday, the Nikkei 225 closed up 2.7%, while the S&P/ASX 200 in Sydney ended 1.7% higher. In China, the Shanghai Composite rose 0.8%, while the Hang Seng in Hong Kong was 1.4% higher in late trade.
‘Market risk tone brightened during the Asian trading session. It followed positive closes in Europe and the US yesterday. However, it remains to be seen whether the latest equity market rally continues, as markets assess how quickly and how far interest rates will rise, and whether the impact on economic growth is appropriately reflected in asset prices. Meanwhile, media reports suggest Russian energy supplies to Europe via Nord Stream will restart, albeit at reduced capacity,’ analysts at Lloyds Bank commented.
Market sentiment was bolstered by a Reuters report on Tuesday that Russian gas flows via the Nord Stream 1 pipeline are seen restarting on time on Thursday after the completion of scheduled maintenance. Reuters cited two sources familiar with the export plans.
Since last week Monday, Nord Stream 1 has not been delivering gas due to scheduled maintenance work. The work is scheduled to last until Thursday.
However, in a sign the situation is still tense, Russian President Vladimir Putin threatened a further reduction in gas deliveries to Europe through the Nord Stream 1 pipeline Tuesday night, according to news agency TASS.
Putin said if a gas turbine sent to Canada for repairs is not returned to Russia soon, the daily volume delivered by Nord Stream 1 could drop to as low as 33 million cubic metres by the end of July.
The pound was lower after UK inflation data. Sterling was quoted at $1.2016 early Wednesday, down from $1.2030 at the London equities close on Tuesday.
The UK inflation rate raced to 9.4% in June, figures on Wednesday showed, beating market forecasts and hitting a series high.
The annual pace of price increases accelerated from 9.1% in May and also topped FXStreet-cited market consensus of 9.3%.
According to the Office for National Statistics, the June reading was the hottest annual inflation rate in its latest series, which began in 1997. Inflation was last this high in 1982, the ONS added.
A year earlier, the UK inflation rate was 2.5%.
The latest inflation reading puts the Bank of England under the spotlight.
Governor Andrew Bailey on Tuesday mooted a possible 50 basis point interest rate hike next month.
At the annual Mansion House speech in the City of London on Tuesday, Bailey said a 50 basis point rise - from 1.25% to 1.75% - would be one of the options for the Monetary Policy Committee.
So far, the UK central bank has opted for smaller interest rate rises, although some of the MPC members have argued for quicker rate rises.
Announcing monetary policy decisions on Thursday are the BoJ and ECB.
The BoJ is expected to stand pat, while the ECB, as previously guided, will lift rates, its first hike since 2011.
According to Reuters on Tuesday, ECB policymakers are considering raising interest rates by a bigger-than-expected 50 basis points at their meeting to tame record-high inflation, two sources with direct knowledge of the discussion told the agency.
Half-percentage point increases by the BoE and ECB still would be less aggressive than the 75-basis-point increase already made by the US Federal Reserve last month.
The euro stood at $1.0252 early Wednesday UK time, up from $1.0245 at the European equities close on Tuesday. Against the yen, the dollar was trading at JP¥138.10, up from JP¥137.77.
Also on the economic events calendar on Wednesday is the latest UK ONS house price data at 0930 BST.
In London, Royal Mail shares fell 5.1% in early dealings. It unveiled plans for a name change and said it will consider a separation should its UK arm continue to struggle, while its GLS distribution unit shines.
The FTSE 250 constituent said it will change its name to International Distributions Services PLC. It is a move that reflects the importance of GLS, on which the company said it has become ‘increasingly’ reliant.
GLS, Royal Mail’s international parcel arm, reported revenue growth during the first quarter ended June, while the eponymous Royal Mail unit in the UK saw a double-digit decline.
It is that sort of underperformance which may prompt the parent to mull a separation.
Chair Keith Williams said: ‘Whilst GLS delivered a solid performance in the first quarter, the performance of Royal Mail was disappointing with an adjusted operating loss of £92 million resulting from of a decline in parcel volumes post the pandemic and a lack of progress in delivering efficiencies.
‘The pandemic boom in parcel volumes bolstered by the delivery of test kits and parcels is over. Royal Mail is currently losing one million pounds per day and the efficiency improvements which are needed for long term success have stalled. We can however be a long-term success story. We have advantages in scale and reach and a strong balance sheet and asset base which are the foundations for a successful future. We need to act now in moving to that future in the interests of all stakeholders, employing those advantages to the maximum.’
Morses Club plunged 42%. The AIM listed home collected credit provider has turned to a scheme of arrangement to deal with customer redress claims for unaffordable lending.
The company said it has ‘adequate liquidity for the immediate future’ though its future could be jeopardised without a scheme, due to the amount of redress claims.
Morses said it has ‘tightened’ lending policies and warned it will not make a profit in the 12 months ended February 25, 2023, which it dubs a transitional year as it resolves ‘legacy issues’. In addition, it will not recommend a final dividend for recently-ended financial 2022.
‘The board is confident that the group can return to profitability during FY24,’ it added.
Costain rose 11%. The infrastructure construction firm said revenue for the first-half of 2022 was ahead of expectations.
Costain said it has increased prices to cope with inflation. Revenue for the full-year is also expected to top market expectations.
Adjusted operating profit in the first half was in line with board expectations.
‘We expect first half 2022 adjusted operating margin to be flat year-on-year, reflecting the continuing progress in the business offsetting inflation impacts. Supply chain pressures have been well managed, ensuring a strong and robust operational performance across our contracts,’ Costain added.
Brent oil was quoted at $105.59 a barrel early Wednesday, down slightly from $105.85 at the London equities close on Tuesday. Gold stood at $1,707.88 an ounce, down from $1,714.05.
In New York on Tuesday, the Dow Jones Industrial Average closed up 2.4%, the S&P 500 closed up 2.8%, and the Nasdaq Composite surged 3.1%.
Netflix shares climbed 7.9% after hours, following a 5.6% rise during the main trading session.
After the close, Netflix reported a rise in second-quarter earnings, hailing the success of smash hit Stranger Things, as the streaming services provider lost fewer subscribers than anticipated.
For the three months to June 30, revenue was $7.97 billion, up from $7.34 billion in the second quarter last year.
Second quarter net income was $1.44 billion, or $3.20 per diluted share, up from $1.35 billion, or $2.97 diluted EPS last year.
The Los Gatos, California-based firm reported 220.7 million paid subscribers as of March end, down from 221.6 million in the first quarter, but up from 209.2 million in the second quarter last year.
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