UK indices remained in the red at midday on Thursday but with water companies bucking the trend following UK regulator Ofwat green lighting a substantial industry investment package.
Interest rate calls on either side of the Atlantic dominated events with the Bank of England leaving rates unchanged, after a ’hawkish’ cut by the US Federal Reserve on Wednesday.
The BoE’s Monetary Policy Committee voted 6 to 3 for the status quo, opting not to follow the European Central Bank and US Federal Reserve in easing monetary policy.
The vote was more divided than expected with three MPC members, Swati Dhingra, Dave Ramsden and Alan Taylor, arguing for a further quarter point point cut.
The BoE pointed to ‘progress in disinflation, particularly as previous external shocks have abated, although remaining domestic inflationary pressures are resolving more slowly.’
‘A gradual approach to removing monetary policy restraint remains appropriate,’ the BoE said.
‘Monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.’
The FTSE 100 index was down 94.00 points, 1.2%, at 8,105.11. The FTSE 250 was down 215.78 points, 1.1%, at 20,386.21, and the AIM All-Share was down 6.68 points, 0.9%, at 712.74.
The Cboe UK 100 was down 1.1% at 813.44, the Cboe UK 250 was down 1.0% at 17,913.47, and the Cboe Small Companies was down 0.4% at 15,900.14.
The pound was quoted lower at $1.2600 at midday on Thursday in London, compared to $1.2692 at the equities close on Wednesday. It traded at $1.2638 shortly before the BoE’s rate call.
The euro stood at $1.0402, down against $1.0498. Against the yen, the dollar was trading higher at JP¥156.73 compared to JP¥153.57.
In European equities on Thursday, the CAC 40 in Paris was down 1.6%, while the DAX 40 in Frankfurt was 1.2% lower.
The downbeat tone across Europe was set by the Federal Reserve which on Wednesday lowered interest rates but pointed to a slower pace of easing ahead.
US markets fell heavily on the news, with the Nasdaq Composite slumping 3.6% alone, although some respite is expected at Thursday’s open.
The Dow Jones Industrial Average is expected to open 0.3% higher, as is the Nasdaq Composite, while the S&P 500 is seen 0.4% to the good.
‘Markets are normally good at reading the signs, but the sell-off on Wall Street last night would suggest investors had started on the Christmas sherry a bit early and were caught out by the Fed‘s announcement about where rates might go in 2025,’ said Russ Mould, investment director at AJ Bell.
‘The prospect of a slowdown in interest rate cuts was front and centre days before the Fed’s latest update, but investors seemed to miss the signs.’
The latest 25bp reduction brings the target range for the federal funds rate to 4.25% to 4.50%. The US central bank had cut rates by 25bp in November and by 50bp in September.
The vote was not unanimous. Cleveland Fed President Beth Hammack, who joined the Fed this summer, preferred to maintain the target range for the federal funds rate at 4.5% to 4.75%.
‘Today was a close call but we decided it was the right call,’ Fed Chair Powell said.
In the accompanying summary of economic projections, the Fed’s ’dot plot’ of rate forecasts showed the median official expects to lower rates by a half percentage point in 2025, implying just two quarter-point cuts next year. In September, the median forecast was for four quarter point cuts in 2025.
Bank of America called it an ‘unabashedly hawkish cut’.
‘This was as hawkish a rate cut as one could imagine,’ BofA commented. ‘For us, this opens the door to the possibility that the cutting cycle is (nearly) over.’
Powell stressed the Fed was still on track to cut rates in 2025, although further progress on inflation would be required.
‘Inflation has once again underperformed relative to expectations...we really want to see progress,’ he said.
In London, US exposed stocks bore the brunt of falls. Scottish Mortgage Investment Trust, which invests heavily in US tech firms fell 3.0%, Barclays which has investment banking exposure in the US declined 3.4% while Ashtead which conducts the vast majority of business across the pond dipped 2.8%.
Only three blue-chip stocks were in the green at midday, two of which were water firms, Severn Trent and United Utilities, up 1.8% and 0.8% respectively. In the FTSE 250, Pennon climbed 3.7%.
The gains followed news UK water regulator Ofwat will allow utilities in England and Wales to raise customer bills by an average of 36% by 2030, a larger increase than it earlier indicated.
Water companies are required to reach settlements with the regulator every five years covering bill increases, the amount they can invest and the returns their investors can make.
RBC Capital Markets explained Ofwat’s final determination allows a return on equity of 5.10% and a weighted average cost of capital of 4.03%, which compares to consensus at 5.11% and 4.00% respectively. RBC noted the allowed cost of debt improved to 3.15%, although the share of new debt declined to 24% versus 26% previously.
The broker described it as a ‘material improvement’ versus the draft determination.
Elsewhere, Serco advanced 6.6% after stating the outlook for 2025 is ‘positive’, after an improved second half performance in 2024 led it to issue improved free cash flow and debt guidance.
For 2024, the Hampshire-based outsourcer expects revenue of £4.8 billion, in line with guidance, down 1.4% from £4.87 billion in 2023. It would represent an organic revenue decline of around 3%, Serco said.
The company noted an improving trend through the year with a second half organic revenue decline of 1% compared to the 5% drop seen in the first six months of 2024. This improvement was led by North America, Serco noted.
Free cash flow guidance was increased to £170 million from £150 million, while Serco now expects adjusted net debt to be £145 million, £20 million better than prior guidance.
Serco flagged a ‘much improved’ order intake in the second half resulting in an expected book-to-bill for the full year of around 100%.
Costain perked up 1.4% after its joint venture with Siemens Mobility won an up to £300 million contract for HS2. A separate 7-year maintenance contract could be worth an extra £32 million, the firm said.
Brent oil was quoted at $73.23 a barrel at midday in London on Thursday from $74.01 late Wednesday.
Gold was quoted at $2,614.97 an ounce against $2,637.13.
Still to come on Thursday’s economic calendar a US GDP print, quarterly personal consumption expenditures figures and weekly initial jobless claims data.
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