Large-cap equities in Europe ended higher on Wednesday, though moves in London were more muted, with another batch of cooler inflation data in the US setting the stage for a Federal Reserve interest rate hold later.
The FTSE 100, though ending higher, underperformed blue-chip peers, amid a stronger pound. The expectation is that the Bank of England hikes next week. Smaller-cap indices in London fell, meanwhile.
Vying to take some of the attention away from the Federal Reserve, Vodafone announced a merger of its UK arm with that of CK Hutchison. WE Soda pulled its proposed initial public offering amid investor ‘caution’.
The FTSE 100 index edged up 7.96 points, 0.1%, at 7,602.74. The FTSE 250, however, slipped 13.00 points, 0.1%, to 19,175.50, though the AIM All-Share lost 0.53 of a point, 0.1%, to 794.19.
The Cboe UK 100 closed up 0.2% at 759.12, the Cboe UK 250 lost 0.1% to 16,701.80, and the Cboe Small Companies rose 0.2% to 13,917.28.
In European equities on Wednesday, the CAC 40 index in Paris rose 0.6%, while the DAX 40 in Frankfurt added 0.5%, achieving a record closing high.
Stocks in New York were largely on the up at the time of the European close. The Dow Jones Industrial Average was down 0.3%, though the S&P 500 added 0.5% and the tech-heavy Nasdaq Composite climbed 0.6%.
The Fed announces its latest interest rate decision at 1900 BST. A press conference with Chair Jerome Powell follows at 1930 BST.
Markets see a 99% chance that the US central bank will hold rates steady, according to the CME FedWatch Tool. The federal funds rate currently stands at 5.00% to 5.25%.
A tamer US inflation reading all but ensured the Fed will leave rates on hold. According to the Bureau of Labor Statistics on Tuesday, the US annual inflation rate eased to 4.0% last month, from 4.9% in April. The figure for May came in shy of FXStreet cited consensus, which had predicted an inflation rate of 4.1%. The Fed has an inflation target of 2%.
What’s more, numbers on Wednesday showed annual US producer price growth faded again in May.
Producer prices grew 1.1% on an annual basis last month, slowing from a 2.3% hike in April. The latest figure fell short of expectations of 1.5%, according to FXStreet.
The pound was quoted at $1.2694 at the time of the London equities close, higher compared to $1.2609 on Tuesday. The euro stood at $1.0850, higher against $1.0795. Against the yen, the dollar was trading at JP¥139.37, lower compared to JP¥140.05.
The pound hit its best level since April 2022. Since then, sterling fell as low as $1.05, following a disastrous UK fiscal policy statement from then-chancellor Kwasi Kwarteng. It eventually led to the resignations of Kwarteng and then prime minister Liz Truss.
But investor confidence in the UK has improved, and the prospect of more interest rate hikes by the BoE is also boosting the pound.
According to figures from the Office for National Statistics on Wednesday, real gross domestic product in the UK is estimated to have grown by 0.2% in April, after shrinking by 0.3% in March.
Bank of England Governor Andrew Bailey on Tuesday claimed the tight labour market is keeping pricing pressures elevated, but admitted inflation is falling more slowly than had been hoped.
The Monetary Policy Committee meets next week, with its interest rate decision on Thursday next week. Markets predict a 25 basis point increase in rates, although some economists believe a 50bp rise may be on the agenda.
In London, Vodafone added 0.7% after it confirmed a UK merger with CK Hutchison.
The companies will combine their UK telecommunications businesses, with Vodafone owning 51% and CK Hutchison owning 49% of the combined business.
CK Hutchison is a Hong Kong-based telecommunications, ports, infrastructure and retailing conglomerate. It owns the Three UK business.
Neither company will pay a cash price for the merger, instead, each will take on debt. Vodafone will take on £4.3 billion and Three UK £1.7 billion. The deal is expected to close before the end of 2024.
Analysts are mindful of possible regulatory setbacks the duo will face to get the deal over the line. Vodafone and CK will hope the promise of 5G rollout will be enough to win over the UK Competition & Markets Authority.
Edison Group analyst Dan Ridsdale commented: ‘The deal is obviously subject to approvals from shareholders and regulators and Vodafone’s statement gives a clear indication that it is the latter they are more concerned about. The release reads like an overt pitch to convince a broader set of interest groups leading with the benefits for customers, country and competition, before looking at deal synergies.
‘Management will have a good level of insight into the opinions of key investors regarding the deal, whereas regulators play their cards much closer to their chest. For the CMA, the equation is likely to come down to how much they take into account the consumer benefits from the promised acceleration to the rollout of 5G, gained through economies of scale versus the competitive risks from concentrating market power. They will almost certainly consult Ofcom as part of the process, who have already highlighted that Vodafone and Three’s poor return on capital under the current market structure presented a risk to future investment in the UK’s networks.’
Shell added 0.5%. The oil major said it plans to buy back shares worth at least $5 billion in the second half of 2023. This is 25% larger than the ongoing $4 billion share buyback programme that Shell had announced when it released its 2022 results in February.
Further, Shell said it aims to reduce capital spending to between $22 billion and $25 billion per year for 2025, compared to $22.60 billion in 2022.
Shell also said it will keep crude oil production steady until 2030 instead of a previously planned cut of 1% to 2% per year until the end of the current decade.
AJ Bell analyst Russ Mould commented: ‘The move by Wael Sawan will likely be welcomed by shareholders as it puts Shell more in line with its US peers. He is signalling that renewables and clean energy projects are all well and good but they must pay their own way and if the returns projected are too weak, they won’t make the cut. In principle this is good business sense, however, the situation is a little more nuanced. As the effects of climate change become more obvious, political and regulatory pressures will ramp up.’
Elsewhere in London, Robert Walters slumped 13%. The recruitment firm said profit in 2023 will be ‘significantly’ lower than current markets expectations amid reduced levels of candidate confidence and a lengthening of time to hire.
‘Reduced levels of candidate confidence and lengthening time to hire were signalled in the second half of 2022 and, contrary to the board’s prior expectations, are not yet showing sustained improvement. Conversely, recruitment market fundamentals such as job flow, candidate shortages and wage inflation remain solid, suggesting that when market confidence recovers there will likely be a return to meaningful growth,’ Robert Walters added.
WE Soda cancelled its planned initial public offering in London, with the soda ash producer explaining that UK investors are ‘extremely cautious about the IPO market’.
‘This extreme investor caution in London meant that we were unable to arrive at a valuation that we believe reflects our unique financial and operating characteristics,’ Chief Executive Alasdair Warren said.
WE Soda’s initial IPO announcement provided a boost to the City, which has recently seen high-profile names such as Arm turn to New York. However, the decision to pull the IPO is a blow to the London market.
Brent oil was quoted at $74.27 a barrel late Wednesday in London, up from $73.98 late Tuesday. Gold was quoted at $1,957.97 an ounce, higher against $1,944.33.
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