Market attention moved on Tuesday from the Silicon Valley Bank collapse to its implications for US monetary policy, with London shares slightly lower ahead of a key US inflaton reading.
The FTSE 100 index opened down 25.25 points, 0.3%, at 7,523.38. The FTSE 250 was down 47.34 points, 0.3%, at 18,777.74, and the AIM All-Share was up 0.03 of a point at 819.19.
The Cboe UK 100 was down 0.4% at 752.94, the Cboe UK 250 down 0.6% at 16,405.35, and the Cboe Small Companies down 0.1% at 13,618.20.
In mainland Europe, both the CAC 40 in Paris and DAX 40 in Frankfurt rose 0.2%, faring better than London’s FTSE 100.
Stocks in Asia struggled, however. The Nikkei 225 in Tokyo fell 2.2%, while the S&P/ASX 200 closed down 1.4%. Both have now suffered three successive daily declines.
In China, the Shanghai Composite ended down 0.7%, while the Hang Seng in Hong Kong tumbled 2.3%.
SVB worries continued to hit banking stocks. Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial tumbled 8.6% and 7.6% in Tokyo.
The London-listed banking sector opened lower. HSBC lost 1.6%, NatWest declined 0.6% and Lloyds shed 0.7%.
Those declines followed heavy falls for US banking stocks on Monday. First Republic and Western Alliance were among the worst of the lot, plunging 62% and 47%.
The Dow Jones Industrial Average fell 0.3%, the S&P 500 lost 0.2%, though the Nasdaq Composite rose 0.5%.
Over in Switzerland, Credit Suisse lost another 2.1%. It had dropped 9.6% on Monday as SVB concerns sent the firm’s credit default swaps sharply higher. A CDS is an instrument that an investor can turn to in order to protect themselves from payment default.
Credit Suisse’s belated annual report said it has found ‘material weakness’ in its internal control over financial reporting, adding more pressure to the troubled bank.
Eyes now turn to a US inflation reading at 1230 GMT. The US inflation rate is expected to have ebbed to 6.0% in February, from 6.4% in January.
What the inflation reading, as well as the SVB worries, mean for Federal Reserve policy will also be in focus.
‘Today’s key data release is the US February CPI. Prior to the SVB failure there had been much speculation in markets that ongoing concerns about inflationary pressures might lead the Fed to consider a larger 50 basis point interest rate hike rather than a 25bp move at next week’s policy update. That now appears much less likely. Indeed, some forecasters are now suggesting that the Fed won’t raise rates at all,’ analysts at Lloyds Bank commented.
‘However, a higher-than-expected inflation outturn today would certainly complicate the situation. We think the most likely outcome is that overall CPI inflation falls to 6.0% from 6.4%, the lowest since September 2021, but see only a marginal fall in the core rate to 5.5% from 5.6%. That would be an indication that underlying inflation remains uncomfortably high. Moreover, the risk of an upside surprise in the headline rate is not inconsiderable, particularly as energy costs may have been boosted by unusually bad weather in California.’
The dollar was on the up ahead of the US inflation data.
The pound fell to $1.2150 early Tuesday in London, from $1.2157 on Monday. The euro traded at $1.0693, down from $1.0737. Against the yen, the dollar rose to JP¥134.19 from JP¥133.25.
The UK unemployment rate was unchanged at the start of the year, beating expectations of a slowdown, figures on Tuesday showed.
According to the Office for National Statics, the UK jobless rate was 3.7% in the three months to January, unchanged from the three months to December.
The reading topped an FXStreet cited forecast of a slight rise in the unemployment rate to 3.8%.
This time last year, the jobless rate was 4.0%.
Annual growth in average total pay, including bonuses, was 5.7% and growth in regular pay, excluding bonuses, was 6.5%.
Regular pay growth came short of an FXStreet cited forecast of 6.6% and slowed from 6.7% in the three months to December. Total pay was in line with consensus and slowed from 6.0%.
Pay growth is still outpaced by inflation. The UK annual inflation rate for January was 10.1%.
Analysts at Dutch bank ING commented: ‘Momentum is fading in the UK wage numbers, and this will be welcome news for the Bank of England. The uncertainty surrounding the US banking sector does question whether the Bank of England will hike by 25bp next week, and remember the bar for pausing hikes appears to be much lower in the UK than at the Fed or ECB judging by recent official commentary.’
In London, Close Brothers dropped 6.9%. It said half-year profit declined amid provisions at Novitas, a provider of loans for legal proceedings.
Pretax profit in the six months to January 31 plunged 91% year-on-year to £11.7 million from £128.9 million. Novitas provisions during the half totalled £114.6 million.
Novitas was acquired by Close Brothers for around £31 million in 2017. In 2021, Close Brothers decided to permanently cease the approval of lending to new customers across all the products offered by Novitas and withdraw from the legal services financing market.
Close Brothers said operating income for the half edged up 0.6% on-year to £474.3 million from £471.6 million.
Shore Capital said that despite the hit, the capital position of Close Brothers ‘remains robust’, though its dividend increase - up to 22.5 pence per share from 22.0p - was ‘slightly less than we had expected’.
Shore kept its ’buy’ rating on the stock.
Infrastructure construction firm Costain jumped 10% on improved yearly earnings.
Revenue in 2022 surged 25% to £1.42 billion from £1.14 billion. It swung to a pretax profit of £32.8 million, from a £13.3 million loss.
‘Our performance in 2022 delivered strong growth in revenue and operating profits, with significant free cash flow, ending the year with a net cash position of £123.8 million. I am pleased that we have grown our core complex programme delivery revenue and further strengthened our consultancy market position. Consequently, we are seeing good opportunities emerge in our chosen sectors, at margins we aspire to,’ Chief Executive Alex Vaughan commented.
‘While we are mindful of the macro-economic backdrop, the quality and nature of our secured and preferred bidder work gives us good visibility on future revenue and we remain confident in the group’s strategy and long-term prospects.’
A barrel of Brent oil bought $79.39 early Tuesday, down from $81.23 at the London equities close on Monday. Gold rose slightly to $1,905.02 an ounce from $1,904.07.
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