‘Hawkish’ Bank of England raises rates and US stocks plummet

The FTSE 100 gave back strong early gains on Thursday to close lower after the Bank of England delivered a “hawkish” interest rate hike and as US stocks plunged.

The London index closed down 46.55 points, 0.4%, at 10,782.66. It had earlier traded as high as 10,948.24.

The FTSE 250 ended 213.71 points lower, 0.9%, at 24,701.98, and the AIM all-share shed 3.80 points, 0.5%, at 757.09.

In Europe, the Cac 40 in Paris rose 0.3%, and the Dax 40 in Frankfurt declined 0.4%, after hitting a record high earlier.

Stocks in London made a buoyant start boosted by the lower oil price, leaving the blue chip FTSE 100 on course to post a record close, but the gains evaporated amid a sea of red on US trading screens.

Around the time of the London equities close on Thursday, the Dow Jones Industrial Average was down 2.2%, the S&P 500 was 2.9% lower and the Nasdaq Composite slumped 3.7%.

The hefty falls come amid worries that the Democrats will rein in spending on data centres which has fuelled the surge in AI-related share prices after their election win.

Chip makers AMD, Nvidia and Intel fell sharply, by 13%, 6.7% and 4.9% respectively. The losses spread to the financial sector with Goldman Sachs down 5.8% and JPMorgan Chase off 3.1%.

Elon Musk’s SpaceX shed 7.7% and traded back below its IPO price of 135 dollars, and his electric vehicle business Tesla slumped 8.9%.

In London, Polar Capital Technology Trust and Scottish Mortgage Investment Trust fell 6.6% and 4.8% respectively. Allianz Technology Trust was down 7.1%.

Analysts at ING noted energy affordability shaped the US midterm election results and a “divided government will now face pressure to shield consumers from rising data centre power costs while speeding up new energy supply”.

ING thinks there is likely to be tighter data centre regulation, including related taxes, reduced tax incentives, environmental standards and requirements for developers to bear relevant cost increases.

In London, investors were weighing the first interest rate increase by the Bank of England since August 2023.

The Bank’s Monetary Policy Committee voted by 8-1 to raise the bank rate by 25 basis points to 4.00% from 3.75%, as rising energy prices threatened to push UK inflation to around 5.0% by the middle of next year.

Catherine Mann was the sole dissenter, favouring a 50-point increase to 4.25%, arguing that a more forceful response was needed to prevent persistent inflationary pressures from becoming embedded in wage and price-setting.

Bank governor Andrew Bailey warned that the longer the Middle East conflict persists, the greater the risk of inflationary pressures becoming embedded in the economy, potentially requiring further rate increases.

“These increases should not be seen as the first of an inevitable long sequence of hikes. That is not inevitable. But unless the conflict in the Middle East is resolved, neither does it seem likely to be the last increase,” he said.

The pound was quoted at 1.3473 dollars late on Thursday afternoon, up from 1.3464 dollars at the same time on Wednesday. Against the euro, sterling firmed to 1.2001 from 1.1999.

James Smith, developed markets economist at ING, said: “Every bit of the latest Bank of England decision is more hawkish than expected.”

He noted the “two arch doves”, Alan Taylor and Swati Dhingra, voted for a hike, the Bank now sees inflation peaking at 4.9%, “above our own and indeed most other economist’s predictions”, and “some – though not all – officials are more forthright than we’d expected about a probable need to tighten policy further”.

“This all validates our call for the Bank of England to hike rates again in February – and December is clearly in play too,” Mr Smith said.

Deutsche Bank chief UK economist Sanjay Raja does not believe this is the start of a long hiking cycle and with signs of second-round effects on inflation remaining “minimal” at this juncture, retains his view for one more hike with the rate peaking at 4.25%.

“Today’s hike merely adds a dose of policy restriction to an already restrictive policy stance. Moreover, with financial conditions having tightened materially since March, the case to go much further isn’t as strong as it may have been in the Bank’s previous hiking cycle back in 2022,” he said.

Peel Hunt chief economist Kallum Pickering said four things will decide the near-term path for bank rate: the strength of economic activity in the UK, the course of the war in the Middle East, developments in services prices, and private regular pay growth.

“Markets currently price in a 51% chance of a further hike in December. In our view, that de facto coin-toss call probably correlates just as well with markets’ assessment of whether the US-Iran war will yield a positive breakthrough,” he said.

Hopes for peace between the US and Iran have increased after the Democrats’ midterms success, with leading Republicans blaming the war, and the impact on energy prices, for their defeat.

Brent oil was trading at 97.34 dollars a barrel on Thursday, lower than 99.00 late on Wednesday.

The euro was higher at 1.1228 dollars from 1.1222 late on Wednesday. Against the yen, the dollar was lower at 157.84 from 158.45.

The yield on the US 10-year Treasury was quoted at 4.84% late on Thursday afternoon, narrowed from 4.92% on Wednesday. The yield on the US 30-year Treasury was at 5.25%, down from 5.31%.

Gold prices moved higher driving gains in Endeavour Mining, up 6.2%, the best performer on the FTSE 100.

Gold was quoted at 4,116.08 dollars an ounce on Thursday, higher than 4,041.83 on Wednesday.

Elsewhere, a barrage of earnings and trading updates provided direction.

Among the winners, Diageo, up 3.2%, reiterated full-year guidance as it reported a stronger-than-expected quarter as a decline in sales in North America proved less than feared.

The London-based brewer and distiller, which owns brands including Guinness and Johnnie Walker, said net sales grew 1.2% to 4.93 billion dollars in the quarter ended September 30 from 4.88 billion the year before.

Organic sales growth was 1.4% but this was partly offset by unfavourable foreign exchange and the impact of disposals.

Revenue beat Visible Alpha consensus of 4.84 billion dollars and organic growth confounded expectations for a 0.4% decline.

Retailer Next rose 2.5% as it kept its annual profit guidance unchanged despite a faster-than-expected rise in full-price sales in the third quarter, led by its international business.

Next reported an 8.1% increase in full-price sales in the 13 weeks to October 31, ahead of its previous guidance for 5.8% growth, driven by stronger-than-expected international trading.

International online sales rose 32%, well above Next’s forecast of 21% growth, while UK full-price sales increased 2.0%, in line with expectations, despite unseasonably warm weather weighing on September trading.

In the red, Coca-Cola HBC plunged 18% after Russian business daily Kommersant reported that the Altai-based beverage company Bochkari has requested that Multon and Multon Partners be placed under an external management regime.

Multon is owned by Coca-Cola HBC. JPMorgan noted the news echoes what “we have seen for other consumer goods companies in Russia, most recently Nestle in European staples, for whom there were August headlines that a local company had asked the government to impose temporary management over their Russia operations, which was followed in September by these being placed under temporary administration”.

JPM estimates Coca-Cola HBC’s Russian business accounts for around 14% of volumes and low-to-mid 20s percent of group earnings before interest and tax.

The biggest risers on the FTSE 100 were Endeavour Mining, up 235.0p at 4,013.0p, Airtel Africa, up 10.6p at 289.2p, Diageo, up 57.5p at 1,871.5p, Imperial Brands, up 84.0p at 3,062.0p, and Next, up 385.0p at 15,990.0p.

The biggest fallers were Coca-Cola HBC, down 882.0p at 4,052.0p, Metlen Energy & Metals, down 4.32 euros at 44.56, Polar Capital Technology Trust, down 38.5p at 543.0p, BAE Systems, down 107.5p at 1,880.5p, and Scottish Mortgage Investment Trust, down 72.5p at 1,434.0p.

Contributed by Alliance News