A small move by the Bank of Japan made a big impact on the currency market on Tuesday, providing a focus for trading, as European equities followed Asian indices lower on worries about global economic growth.
The FTSE 100 index opened down 45.50 points, 0.6%, at 7,315.81. The FTSE 250 was down 183.26 points, 1.0%, at 18,465.70, and the AIM All-Share was down 2.66 points, 0.3%, at 820.88.
The Cboe UK 100 was down 0.7% at 731.68, the Cboe UK 250 was down 1.3% at 15,915.22, and the Cboe Small Companies was up 0.2% at 12,872.89.
‘A lot can change in a few weeks on the markets and investor optimism has now turned to pessimism thanks to central banks being stubborn with their monetary policy. The prospect of further interest rate rises has put equities into reverse and raised the prospect of a deeper recession than previously thought,’ said AJ Bell investment director Russ Mould.
In European equities early Tuesday, the CAC 40 in Paris was down 1.3%, while the DAX 40 in Frankfurt was down 1.0%.
In much-needed positive news for equity markets, factory gate inflation in Europe’s largest economy slowed on an annual basis in November, with prices dropping from the month before.
According to Destatis, the German producer price index fell 3.9% month-on-month in November, compared to a 4.2% fall in October from September. This was a sharper fall than expected, with FXStreet-cited consensus of a 2.6% decline.
On an annual basis, producer price inflation slowed to 28.2% in November, from 34.5% in October.
Sterling was quoted at $1.2145 early Tuesday, lower than $1.2160 at the London equities close on Monday. The euro traded at $1.0612, up from $1.0608.
The dollar dropped to JP¥132.73 versus JP¥137.00 late Monday, after Japan’s central bank tweaked its longstanding monetary easing programme.
‘Markets have been shaken from their pre-festive low volatility torpor this morning, as the Bank of Japan announced a surprising change in its yield curve control policy,’ ING analysts explained.
After a two-day policy meeting, the bank said it will widen the band in which it would allow rates for 10-year Japan government bonds to move, saying it would ‘improve market functioning’.
‘The bank will expand the range of 10-year JGB yield fluctuations from the target level: from between around plus and minus 0.25 percentage points to between around plus and minus 0.5 percentage points,’ it said in a statement.
Few had anticipated the shift, with all 47 of the economists surveyed by Bloomberg ahead of the decision saying they expected no change in policy.
‘If you thought the Fed and ECB were determined to deliver a lump of coal in everyone’s stocks, BoJ Kuroda could be considered the Grinch that stole Christmas,’ said SPI Asset Management’s Stephen Innes.
The Nikkei 225 stock index in Tokyo closed down 2.5%.
The Shanghai Composite fell 1.1%, while the Hang Seng index in Hong Kong was down 1.3%, as China’s economic outlook continued to worsen.
The World Bank on lashed its growth forecast for 2022 and 2023, as the pandemic and weaknesses in the property sector hit the world’s second largest economy.
In a statement, the institution slashed its forecast for China’s economic growth in 2022 to 2.7% from the 4.3% predicted in June. It also revised its forecast for next year down to 4.3% from 8.1%.
Both figures are well below the central government’s gross domestic product growth target of around 5.5% for 2022 a figure many analysts believe is now unattainable.
The S&P/ASX 200 in Sydney closed down 1.5%.
Back in London, there was little in the way of corporate news to sway the FTSE 100. Most of its constituents were in the red, with the worst performers being Ocado, down 3.8%, Sage, down 3.6%, and Segro, down 3.2%.
Bunzl lost 1.1%, as it announced four acquisitions and the disposal of its UK Healthcare division.
Bunzl acquired a New Zealand-based ophthalmology product distributor, and agreed to acquire an Aussie distributor of medical technology devices, as part of its expansion of its healthcare business in the region. It completed the acquisition of a Czech personal protection equipment distributor, and a Danish packaging products distributor. Bunzl also said it has agreed to sell its UK healthcare division to Mediq.
No financial details for the deals were provided.
‘Together, these transactions are expected to be profit neutral to the group and will generate a small cash inflow. They reflect Bunzl’s ongoing discipline around returns-focused capital allocation and portfolio optimisation,’ the distribution services company said.
Among London’s mid-cap stocks, AG Barr lost 0.4%.
The soft drinks maker said it has acquired the remaining 38.2% stake in Moma Foods from its founder Tom Mercer alongside other minority shareholders, for £3.4 million. It had acquired 61.8% back in December of last year, as well as an option deed outlining a path to full ownership over the following three years.
Moma will remain as a standalone, supported business unit within AG Barr.
‘Whilst modest in the big scheme of the AG Barr business, which owns major brands such as Funkin, Irn Bru and Rubicon, we welcome the completion of this deal as it does display further intent to expedite a growth strategy set upon organic and appropriate inorganic activity,’ commented Clive Black and Darren Shirley at Shore Capital, which is a broker to AG Barr.
On AIM, Velocity Composites surged 67%.
The composite material kit supplier announced a five-year work package agreement with GKN Aerospace in the US, which it expects to be worth over $100 million in revenue over five years.
To support its expansion, Velocity said it will develop its first ‘advanced’ manufacturing facility outside of the UK in the US state of Alabama.
For the financial year that ended October 31, the firm estimates sales to be £11.9 million, compared to £9.8 million the year before. Its loss before interest, tax, depreciation and amortisation is expected to have remained unchanged at £500,000.
In New York on Monday, the Dow Jones Industrial Average closed down 0.5%, the S&P 500 down 0.9% and the Nasdaq Composite down 1.5%.
Gold was quoted at $1,796.78 an ounce early Tuesday in London, higher than $1,787.77 late on Monday, while Brent oil fetched $79.59 a barrel, little changed from $79.85.
Still to come on Tuesday’s economic calendar, there is flash EU consumer confidence at 1500 GMT.
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