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02:49 Sat 08 Oct 2022
The UK premier share index finished Friday down around six points, or 0.08%, at 6,991
FTSE 100 closed a shade down and below the 7,000 level as markets were skittish on the prospect of interest rate rises following the strong US jobs report.
The UK premier share index finished Friday down around six points, or 0.08%, at 6,991.
On Wall Street, stocks were firmly down with the Dow Jones off 1.62% and the S&P 500 down 2.16%. The tech-heavy Nasdaq plunged around 3%.
“Those hoping for a Fed pivot have been sorely disappointed with today’s job numbers, which have confirmed that US economy continues to rumble along quite well,” noted Chris Beauchamp, chief market analyst at trading platform IG.
“The latest bear market bounce has now begun to wilt as investors wearily return to expectations of at least 125bps of tightening by the end of the year, with more to come in 2023.
“Once more we are back to buying the dollar and selling stocks, in a continuation of the themes that have been so strong throughout the year. Even the impending commencement of earnings season offers little hope, given how weak performance here has been.”
Heading to the close and the Footsie has bounced off its lows to trade close to parity as US markets also recover some of their early losses, for now at least.
At 3.40pm the FTSE 100 was trading down just 5 points at 6,992, although the broader FTSE 250 index, more exposed to the domestic economy tumbled 265 points to 17,368.
Stronger than forecast US non-farm payrolls numbers had seen the lead index head lower, following US markets down as traders concluded there was no end in sight to the aggressive path of interest rate rises being pursued by the Federal Reserve.
In London, a similar signal came from the Bank of England deputy governor, Sir Dave Ramsden, who said the Bank should “stay the course” and keep raising interest rates to cool inflation, despite the pain this will cause to households and firms.
In corporate news Marshalls PLC (LSE:MSLH) tumbled 17% after a profits warning but it was brighter story at JD Wetherspoon PLC (LSE:JDW) with shares up 17% as the pub operator reported an improving like for like sales picture despite posting hefty losses.
Britain’s central bank has bought up £786m of long-dated bonds today to avoid financial turmoil following the mini-budget.
The purchases were made through the Bank of England’s intervention, launched last week, which allows it to buy up to £5bn per day of gilts.
The BoE also turned down £239m of offers in its reverse auction.
The scheme allows the Bank to prevent disorderly conditions in the market, after plunging bond prices threatened to drive some pension funds under. But so far, policymakers have only needed to spend a fraction of the £65bn firepower at its disposal.
Kallum Pickering, senior economist at Berenberg suggested today that the Bank of England (BoE) pivot on interest rates could come earlier than expected in part as a consequence of the financial turmoil last week.
Pickering pointed out although the UK narrowly avoided a nasty financial shock last week the damage has been done with the tightening of financial conditions that occurred last week only partly reversed.
Gilt yields remain elevated and, crucially, UK commercial banks have dramatically increased the interest rates they offer on mortgages which Pickering expects will depress demand and deepen the downturn.
Pickering said rescuing the government from its self-inflicted crisis complicates the policy outlook for the BoE with investors confused about what the BoE’s monetary policy arm will do about its planned bond sales – so-called quantitative tightening (QT), especially after 14 October, when the emergency intervention in the gilts market is due to end.
Behind the scenes, policymakers may be concluding that the worse-than-expected recession due to the sharp deterioration in the mortgage market will be enough to return inflation to the 2% target once the big energy-related surge fades early next year, Pickering suggested.
This means the BoE pivot on rates could come sooner than markets think, he forecast.
Pickering still expects the BoE to meet the market’s short-term expectations for rate increases by hiking 100bps in November and a further 75bp in December.
But by the turn of the year, he forecast it should be obvious to markets that the UK is in the grip of a disinflationary recession and that less tightening is required via bank rate rises to control inflation.
As a result, he suggested it looks much more likely that the BoE will be cutting rates by the second half of 2023 in order to prevent inflation falling too far below the 2% target in 2024.
The FTSE 100 stabilised around opening levels despite some hefty falls in the US after the latest jobs report.
US stocks plunged into the red at the open as investors weighed up hotter-than-expected jobs data which showed American payrolls grew by 263,000 and the unemployment rate fell to 3.5% in September.
Just after the market opened, the Dow Jones Industrial Average had shed 298 points or 1% at 29,629 points, the S&P 500 was down 47 points or 1.3% at 3,697 points, and the Nasdaq Composite had tumbled 215 points or 1.9% at 10,858 points.
US stock futures have fallen sharply after the US jobs report and Neil Wilson at Markets.com said this comes as traders realise that there “ain’t any hope” yet that the Fed will change its course.
Wilson said It may be the Fed overtightens, but they’ve made it pretty clear where they are going.
He added the non-farm payrolls data won’t stop the Fed from hiking interest rates aggressively with this report at least as hot, if not hotter, than expected.
Jobs growth slowed a touch but came in largely as expected at 263k, the weakest since April 2021, Wilson said, with the unemployment rate down to 3.5% as the participation rate ticked down.
One encouraging sign was that wages were a touch lighter at 5% but Wilson said the jobs market is plenty tight for the Fed to keep on keeping on.
Wilson concluded “So far the Fed has barely made any dent on inflation and the labour market remains incredibly robust with unemployment at its pre-pandemic low – you do the math(s).”
FTSE 100 conceded its gains following the US jobs report, which came in stronger than expected, reducing the chances of the Federal Reserve taking its foot off the pedal with regard to the pace of future interest rate rises.
Markets are now pricing in a 75% chance for a further 75bps increase in interest rates at the next FOMC meeting.
78% chance of another 75bps hike in less than 4 weeks pic.twitter.com/HoRRRjxSF0
US futures fell back as well immediately after release of the figures.
The lead index in London is now down 20 points after being up around 15 points ahead of the release.
US non-farm payrolls for September rose 263,000 above expectations for an increase of 250,000.
Notable job gains occurred in leisure and hospitality and in health care, the Bureau of Labor Statistics reported.
US futures on the news which gave little hope that the Fed will reduce the pace of its interest rate increases.
US creates a net 263,000 jobs in September, slightly more than expected 250,000
Unemployment rate falls back to 3.5%
Average hourly earnings unchanged at +0.3% m/m, dips to +5.0% y/y
Participation rate slips to 62.3% from 62.4%
Pension Fund trustees conducting liability-driven investing could face legal action following the volatility in the UK gilts market, according to RPC, the international law firm.
Rachael Healey, partner at RPC, said “Trustees of pension funds that had to unwind positions and suffered losses or did not react appropriately to instability in the gilt market, could find themselves in the line of fire.”
“Trustees are ultimately responsible for the scheme’s investment decisions. If they fail to review the investment position of a scheme or revisit their deficit reduction plans, then they could find themselves facing legal action” she commented.
In response to the volatility, the Pensions Regulator reaffirmed that trustees and advisors should monitor the resilience of their investments, risk management practices and funding arrangements.
RPC says actuaries also need to be aware of the risks that LDI strategies can pose.
Healey added “trustees and actuaries need to ensure they are well-placed to react to market volatility. While not all market moves are foreseeable, trustees and actuaries should have plans in place to react appropriately to market falls and implement solid risk management practices to limit losses in pension value.”
The Bank of England should “stay the course” and keep raising interest rates to cool inflation, despite the pain this will cause to households and firms, a senior policymaker at the Bank said.
Deputy governor Sir Dave Ramsden told the Securities Industry Conference: “However difficult the consequences might be for the economy, the MPC must stay the course and set monetary policy to return inflation to achieve the 2% target sustainably in the medium term, consistent with the remit given to us.”
Ramsden was one of three policymakers who pushed for an even larger, 75bp, hike last month, than the actual 50bp increase, but was outvoted.
Today, he suggested a larger increase hike would have helped get inflation under control.
Dave Ramsden discusses recent shocks that have hit the UK economy, including the recent financial market turbulence, and what they might mean for inflation and the setting of monetary policy.https://t.co/rh5rHNSr7I
“At the time the three of us highlighted that the recent data outturns had already registered more persistent inflationary pressures and that medium-term measures of inflation expectations remained high.”
“We welcomed the reduction of the near-term peak in inflation which will result from the Energy Price Guarantee but noted that the additional support it is providing to households will add to demand pressure.”
Ramsden also insisted that domestic factors caused the slump in UK government bonds that forced the BoE to intervene last week singling out the mini-budget as one of four shocks hitting the UK this year.
“Recently lenders have also withdrawn a large number of mortgage products from the market because of the turbulent market conditions. UK-specific factors also have had a particular effect on the price of long-dated UK government debt, which fell very sharply over a very short period, leading to dysfunction which, had it continued or worsened, would have been a material risk to UK financial stability.”
He added that the operation, to buy up to £5bn of long-dated bonds each day, is “designed to buy time”.
The other shocks he cited are Russia’s invasion of Ukraine, the fall in UK labour market participation, and financial market turbulence.
A hedge fund is building its stake in Aveva Group (LSE:AVV) PLC and will join other investors in pushing Schneider Electric to up its offer for the UK industrial software company, according to Bloomberg
New York-based Davidson Kempner Capital Management, which now holds a 3.5% stake in Aveva, is pushing for the £31 per share bid to be increased to as much as £35.
French industrial giant Schneider last month agreed to buy out minority shareholders in Aveva in a deal that values the company at £9.5bn.
The bid has already been branded too low by the likes of M&G and Mawer Investment Management, with funds holding nearly 7pc of the company now said to be opposed to the current terms.
A vote on the takeover is expected in November and the deal will need the backing of 75pc of Aveva’s minority investors to go through.
Shares in Aveva are currently trading up 1% up 3,188p above the current bid level indicating the market expects the offer to be increased.
Not long until the non-farm payrolls so time to look across the pond.
Ahead of those numbers US stocks are expected to open mixed with futures for the Dow Jones Industrial Average up 0.2% in pre-market trading, while those for the S&P 500 were flat and contracts for the Nasdaq-100 were 0.3% lower.
“The US will announce its latest jobs data in a tense and volatile environment of energy crisis, persistent inflation, Fed members insisting that what they are doing is right, and markets crying that what they are doing is maybe a bit too much,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
“Investors are not totally wrong betting that the Fed may have to slow down, and even reverse policy if they go too far. And this is why the jobs data is gaining importance, yet again,” added Ozkardeskaya.
Consensus estimates point to a 275,000 rise in payrolls in September after a 315,000 increase in the previous month
Average fixed mortgage rates are continuing to climb to the highest levels in over a decade,the latest data from Moneyfacts shows.
The average new two-year fixed rate – which was 4.74% on the day of the mini-budget – has climbed to 6.16%, having started the week at 5.75%.
It is a similar story with five-year fixes, with the average rate now standing at 6.07%, from 6.02% yesterday.
Meanwhile the FTSE 100 has moved into positive territory, up 10 points, but still trading in a narrow range ahead of the US non-farm payroll numbers.
Company insolvencies in England and Wales have hit their highest level since the aftermath of the financial crisis.
The Office for National Statistics reported that 5,629 companies collapsed across England and Wales in the second quarter of 2022, the most since the third quarter of 2009.
Construction firms made up 20% of all the insolvencies, followed by the wholesale and retail trade industries at 14%.
Company insolvencies in England and Wales reached their highest quarterly level in Quarter 2 (Apr to June) 2022 since Quarter 3 (July to Sept) 2009.
➡️ https://t.co/LgtxVAgN4J pic.twitter.com/sC29gf8MMy
10.18am: Credit Suisse to buy back £2.7bn of debt
Over in Europe Credit Suisse has offered to buy back around SFr3bn (£2.7bn) of its own debt in a show of financial strength amid worries about the bank’s stability.
The offer includes euro and pound sterling debt securities worth up to €1bn and a separate offer for US dollar securities up to $2bn, the Zurich-based lender said.
Credit Suisse is locked in turmoil just weeks ahead of the announcement of a major strategic review following a series of scandals. Its shares have lost half of their value this year.
Last weekend it had to resort to phoning investors and employees in a bid to reassure them that the bank was solvent as rumours swept the market that it was in financial difficulties.
In August, the Swiss bank appointed Dixit Joshi, a former Deutsche Bank executive, as its chief financial officer to replace David Mathers.
The review is expected to include a number of asset sales.
Business confidence declined significantly in the third quarter according to a report from the British Chambers of Commerce (BCC).
The BCC’s quarterly economic survey showed a significant decline of key economic indicators, with weakening structural business conditions and confidence a cause for concern.
The BCC did point out that the survey took place before the government’s energy support package for firms and the mini-budget announcement.
????️@BCCShevaun: “As well as long-term structural challenges for businesses, recent events will have added to firms’ worries. The current volatility in the markets must be speedily addressed to return stability to the economy.”
Latest BCC biz survey ????https://t.co/XKSX29w7f3
More businesses are now seeing their cashflow decreasing, instead of increasing. One in three (32%) firms reported reduced cashflow over the last three months, while 23% reported an increase.
Indicators for business confidence have also plummeted; less than half (44%) of firms expect their turnover to increase over the next 12 months, while 25% expect a decrease.
Profitability confidence has dropped to an even lower level; only one in three (33%) businesses believe their profits will increase over the coming year, while 39% now expect a decrease.
Unsurprisingly, firms are not upping investment in their business. Only 22% reported an increase to plant/equipment investment in the past three months, while 57% reported no change, and 22% reported a decrease.
Today’s fall in house prices reported in the Halifax house price survey is a sign of things to come according to analysts.
Martin Beck, chief economic advisor to the EY ITEM Club, said rising interest rates will push down demand, and restrict what lenders will offer.
“Weakness in prices in September is likely to be a sign of things to come, reflecting cost of living pressures and the recent rise in market interest rate expectations and mortgage rates.”
“Combined with the weakening economic outlook and squeezed household incomes, the EY ITEM Club expects property values to fall by 5% or more over the next year or so.”
Myron Jobson, senior personal finance analyst, interactive investor said: “The spike in mortgage rates in tandem with rampant inflation could result in a more acute property market slowdown in the coming months.”
But he said “The evidence points to house prices dampening rather than tumbling as the laws of supply and demand are likely to continue to prevail. The weaker pound could also fuel interest from foreign investors which could exacerbate the supply-demand mismatch.”
Tom Bill, head of UK residential research at Knight Frank said: “It’s a fairly safe bet that UK house prices have now peaked. The impact of rising mortgage rates will begin to hit demand and spending power in coming months, which we believe will lead to a fall of 10% over the next two years for UK prices.”
FTSE 100 is pretty lacklustre early on, down a touch, looking ahead to the US non-farm payrolls numbers due later today.
At 9.00am the lead index was down 7 points at 6,990 and the FTSE 250 was down 88 points at 17,545.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown: “The reason this data set is a big one, arguably the biggest since markets began to unravel, is because the data will show if the Fed’s enthusiastic interest rate hikes are now being felt in the jobs market.”
“Today’s news will shape the Federal Reserve’s monetary decision in November.”
A report from Halifax pointing to a softening in the UK housing market sent shares in Rightmove PLC (LSE:RMV) down 1.8%.
Halifax said house prices fell 1% in September with the annual rate of increase slowing to 9.9%.
JD Wetherspoon PLC (LSE:JDW) cheered investors, with shares rising 9.3%, despite reporting a loss before tax in the first half of £30.4mln.
Brokers pointed out that whilst losses were worse than expected there had been an upturn in the trend of like for like sales which were up 10.1% in the In the first 9 weeks of the current financial year, to 2 October 2022 compared to 2021.
The latest survey of the UK labour market showed a further slowdown in recruitment activity across the UK in September.
The KPMG and Recruitment and Employment Confederation (REC), UK Report on Jobs showed that permanent staff appointments and temp billings expanded at the weakest rates in over a year-and-a-half, as uncertainty over the outlook and limited staff supply hampered growth.
The latest REC and KPMG Report on Jobs is out today, showing softer increases in perm and temp staff appointments, slower growth in vacancies, and the fastest rise in temp pay since July 2007 pic.twitter.com/krQPMj3nGF
The weaker economic outlook led some firms to be more cautious about hiring, and also discouraged some people from changing jobs, while a generally low unemployment rate, skills shortages and Brexit also weighed on candidate availability, the survey showed.
Shares in recruiters PageGroup PLC (LSE:PAGE) and Hays PLC (LSE:HAS) slipped by around 1% on the news.
The rising cost of living and competition for scarce workers drove further marked increases in starting pay for both permanent and short-term workers in the latest survey period.
This was despite the rate of starting salary inflation moderating further from March’s all-time record to a 15-month low. Temp wage growth also edged down to its weakest since June 2021
Claire Warnes, head of education, skills and productivity at KPMG UK, said some firms are bracing for a downturn.
“Some employers, even those who anticipate that the recession may be short, are taking steps now to contain costs, including hiring freezes.”
“Those employers who continue to invest in their workforce, particularly upskilling, may find they weather the recession better and will be in a stronger position to benefit from the upturn as and when it comes.”
FTSE 100 little changed in early trading with investors nervously awaiting US non-farm payrolls figures due later today.
Economic news failed to lift spirits with BDO reporting slowing growth in retail sales in September and the Halifax house price survey showing a fall in prices in September too, pointing to a colling in the housing market.
By 8.10am the FTSE 100 was down 3 points at 6,994 although the FTSE 250 slipped 71 points to 17,562.
Sterling was also little moved in early trading, down 0.05% against the US dollar at US$1.119.
Marshalls PLC (LSE:MSLH) tumbled 22% after it warned that full-year profits will be slightly below market forecasts following a drop in demand for landscaping products from struggling households hit by soaring energy prices and inflation.
In a trading statement, Marshalls said it “now anticipates that the outturn for the group as a whole will be slightly below the bottom end of the current range of market expectations” of profits of £95.1mln-£101.0mln.
Peel Hunt slashed its price target to 470p from 830p but kept its buy rating.
On a brighter note, Superdry PLC (LSE:SDRY) saw its shares bounce nearly 10% to 112p after reporting a return to profit in the year to April 30 although it remained cautious in the near term citing economic factors including high inflation and the impact of these on consumer spending.
Superdry made an adjusted profit before tax of £21.9mln compared to a loss of £12.6mln in the previous year, revenues rose 9.6% to £609.6mln.
The retailer said it had made an encouraging start to this financial year but forecast profit would fall to between £10mln and £20mln pounds, as cost inflation puts pressure on margins.
Broker Liberum said it would leave its forecasts unchanged and reiterated a buy rating.
With a price target of 500p the broker said “The shares remain too cheap.”
“Superdry’s return to profit in full year 2022, despite COVID’s impact, marks an inflexion point that gives confidence in its positive long-term trajectory” Liberum said.
The UK housing market is slowing, according to the latest house price data from Halifax today, with average house prices down 0.1% in September, leaving the average property now costing £293,835.
The annual house price inflation rate slowed for the third month in a row, to 9.9% from 11.4%, the lowest rate since January.
UK House Price Index UK (Halifax) announcement – Actual: -0.1%, Expected: pic.twitter.com/ucngddKtxD
Kim Kinnaird, director at Halifax Mortgages, commented that house prices have been largely flat since June, as the markets entered “a more sustained period of slower growth.”
Kinnaird warned that house prices will come under heavier downward pressure in the months ahead, from rising borrowing costs and the cost of living crisis:
“While stamp duty cuts, the short supply of homes for sale and a strong labour market all support house prices, the prospect of interest rates continuing to rise sharply amid the cost of living squeeze, plus the impact in recent weeks of higher mortgage borrowing costs on affordability, are likely to exert more significant downward pressure on house prices in the months ahead” Kinnaird.
Royal Mail rushed forward the monthly payment into its pension scheme to help prevent a cash crunch, according to a report in The Telegraph, after the mini-budget sent crucial money markets into a tailspin.
The company responded to a request from the trustees of the Royal Mail Pension Plan to provide emergency liquidity, amid fears across the City that a run on pension funds driven by products known as Liability-Driven Investments (LDIs) would leave major funds insolvent.
The Royal Mail scheme has 124,000 members and liabilities of £11bn.
Retail sales grew at their slowest pace in September since shops reopened after COVID due to a combination of inflation, cost of living pressures and an unexpected bank holiday.
Figures from the BDO’s High Street Sales Tracker showed in-store and online sales increased by just 2.8% in September on last year.
It comes after a similar poor set of results in August, which was the previous lowest post-COVID performance for retail sales.
The month began with sales up 3.9% and peaked in the second week at 4.9%, before falling to 2.8% and 1.3% in the third and fourth weeks respectively, the report said.
The fourth week saw a bank holiday to mark the Queen’s funeral.
Fashion sales were up just 6.7% on last September, when retailers would normally expect shoppers to be spending on their autumn and winter wardrobes.
Lifestyle sales were up a meagre 1.2%, but homewares sales fell by 6.3%.
Sophie Michael, head of retail and wholesale at BDO, said: “While the overall like-for-like is not quite going backwards across all discretionary spending categories, it’s clear that it’s trending downwards.
“The one bright spot is that with the pound’s weakness, the UK becomes an attractive destination for overseas tourists doing their Christmas shopping.”
“However, this is unlikely to provide much of a boost to retailers beyond flagship stores in major cities.”
FTSE 100 is expected to make a weak start on Friday with investors nervously awaiting the US non-farm payrolls numbers due later today.
Spread betting companies are calling the lead index down by around 14 points.
In Asian trading sterling was quoted at $1.1168, lower than $1.1191 at the London equities close yesterday.
In the US markets closed lower on Thursday with investors nervously awaiting today’s non-farm payrolls numbers to see if the Fed’s aggressive interest rate moves are finally denting the jobs market.
By the close the Dow Jones Industrial Average was down 347 points, or 1.15%, to 29,926.47, the S&P 500 fell 39 points, or 1.03%, to 3,744.40, and the Nasdaq Composite slipped 75 points to 11,073.
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