Interest rate fears send markets lower
Bets on a quick-fire series of US interest rate hikes starting from next month today triggered another big market sell-off as fears grow over the impact of red-hot inflation.
Yesterday’s 40-year high for the US consumer price index of 7.5% topped Wall Street forecasts, raising the chances of an aggressive response from the US Federal Reserve.
Some traders are even considering the possibility of the Fed raising rates between scheduled meetings for the first time since 1994.
Most expect a 0.5% hike in rates in March before five more quarter point rises in 2022.
Deutsche Bank’s US economists also highlighted the increasing risk of a 2023 or 2024 recession as the pace of monetary tightening strangles the economic recovery.
The Vix ‘fear’ index rose last night to indicate more volatile market conditions, while the US 10-year bond yield went above 2% for the first time since August 2019.
Tech and growth stocks, whose valuations are built around future cash flows, were under most pressure in London trading. Fallers included Baillie Gifford’s Scottish Mortgage Investment Trust and its US Growth Trust, down by 3% and 4% respectively.
The FTSE 100 index, which has held up well in recent weeks thanks to its old economy exposure, fell 63.35 points to 7609.05 on fears over slower global growth.
Russia-focused miner Polymetal International dropped 3% after the US rates outlook put pressure on the gold price. A shortened risers board was led by a 1.5% gain for Unilever.
The FTSE 250 index fell 1.2% or 264.38 points to 21,943.37 but Tate & Lyle shares jumped 6% after the food ingredients business reported a “positive outcome” on its 2022 pricing round. With another quarter of double-digit revenues growth, shares upped 40p to 730.2p.
Price pressures set to hit UK recovery
The UK got a taste of stagflation in December after the 0.2% GDP fall combined with an inflation rate of 5.4%.
It’s possible that GDP also fell in January, although the reverse should be short-lived as Omicron fades and the economy shows it is increasingly able to cope with Covid-19.
However, inflation is set to stay around for longer in a blow to the UK recovery.
Paul Dales, chief UK economist at Capital Economics, said: “A 2% fall in real household disposable incomes this year will restrain GDP growth from April.
“With inflation soaring, we doubt this will prevent the Bank of England from raising interest rates from 0.5% to 1.25% this year and to 2% next year.”
Search engine Google will be closely monitored by the UK’s competition watchdog after agreeing commitments about the way it uses customer data.
The Competition and Markets Authority (CMA) launched a probe into Google last year amid concerns around the company’s Privacy Sandbox, which looked at how to prevent tracking of people as they browsed the web.
The CMA was worried that the changes could force more ad dollars to Google and has acted to stop Google squeezing competition when removing third-party cookies on its Chrome browser.
The search engine has now signed up to legally-binding rules to avoid growing its market dominance even further in online advertising.
Andrea Coscelli, CMA chief, said: “While this is an important step, we are under no illusions that our work is done.”
Stocks lower after US inflation shock
The FTSE 100 index has weathered the inflation storm blowing through US markets, with London’s top flight down by a respectable 32.73 points at 7639.67.
Consumer goods firms Unilever and Reckitt Benckiser rose 1% and energy giant BP also found positive territory.
Last night’s weakness for US tech stocks meant Scottish Mortgage Investment Trust fell 2% while miner Polymetal International dropped 3% after the interest rates outlook in the US put pressure on the gold price.
Tate & Lyle shares surged 8% in the FTSE 250 index after the food ingredients business reported a “positive outcome” from its annual pricing round. It follows another quarter of double-digit revenues growth for its food and beverage solutions division.
The FTSE 250 index fell 0.75% or 166.47 points to 22,041.28, with Trustpilot and Baillie Gifford US Growth Trust among the stocks down by more than 3%.
BAT reports surge in vaping revenues
Lucky Strike maker British American Tobacco has announced a £2 billion share buyback, following Shell, BP and Unilever in announcing big investor returns in the past week.
Results for 2021 showed a 2.7% higher profit of £10.2 billion on flat sales of £25.6 billion, with BAT benefiting from higher prices and growth in new categories.
BAT said global tobacco industry volumes are expected to be down 2.5% for the year, but it has been encouraged by progress on its 2025 target for £5 billion of revenues from new categories such as vaping businesses Vuse and Vype and tobacco heating brand glo.
It said its non-combustible products reached 18.3 million consumers last year, up 4.8 million on a year ago as new category losses reduced for the first time. Revenues from vaping rose 59% , with Vuse now the leading brand by value share.
Chief executive Jack Bowles said: “The BAT of tomorrow will be a high-growth, consumer centric, multi-category consumer goods company.”
BAT shares opened slightly higher today.
Services sector contracts 0.5% after Plan B hit
Plan B restrictions triggered by the Omicron variant meant the services economy contracted 0.5% in December, whereas construction continued its growth with a rise of 2%.
Hargreaves Lansdown fund manager Steve Clayton said: “The impact of Omicron might have been less in terms of overall economic activity than earlier variants, but it still knocked the consumer sectors badly, just as they were starting to claw back lost ground.”
The UK’s growth across 2021 was the fastest since the Second World War, but the outlook for 2022 appears uncertain based on expectations for a sluggish performance in January and with ongoing pressures from inflation.
Clayton added: “Longer term, the UK’s biggest challenge still seems to be productivity growth, which has been lacklustre for over a decade. Until that is fixed the UK economy is likely to have a pretty humdrum underlying pace of growth.”
Markets forecast 0.5% US rates hike
A 40-year high for US inflation has jolted stock markets amid fears that the Federal Reserve will be forced to hike interest rates by 0.5% at its next meeting.
Yesterday’s inflation reading for January of 7.5% was higher than expected, dashing hopes that price pressures in the US economy are easing.
Expectations for the first 0.5% rate rise in two decades were given added weight when Fed policymaker James Bullard called for two such rises in March and July.
Deutsche Bank’s US economists yesterday forecast a 50 basis points hike in March plus five more quarter point hikes in 2022, with increases at all but the November meeting, They also highlighted the increasing risk of a 2023 or 2024 recession.
The developments sent the 10-year bond yield above 2% for the first time since August 2019 and led to a sell-off for tech and growth stocks whose valuations are built around future cash flows.
The Nasdaq lost 2.1% yesterday and the Dow Jones Industrial Average and S&P 500 were both down by around 1%, with US futures pointing to a weak start later.
The FTSE 100 index closed lat night at two-year high, aided by its exposure to the energy, commodities and financial sectors. CMC Markets is forecasting a weaker session today, with the FTSE 100 set to fall by 82 points to 7590.