FTSE100 slips back as Bank of England hikes by 25bps

Europe

European markets have struggled for gains today, trading in negative territory for most of the day due to the poor handoff from the US overnight after US Treasury Secretary Janet Yellen’s comments that there were no plans to commit to extending banking deposit insurance beyond the current $250k cap. This overshadowed the Fed’s decision to push rates up by another 25bps, and Powell’s more cautious outlook for the US economy.

We’ve also seen more rate hikes today, from the Swiss National Bank, who hiked by 50bps, the Norges Bank who hiked by 25bps and signalled another 25bps in May, and lastly from the Bank of England who pushed the base rate to 4.25%, as expected.

As the day has progressed stocks have recovered off their lows, slowly edging into the green as we head towards the close, although the FTSE100 has lagged.

The FTSE100 in particular has struggled on a combination of ex-dividends, and a weak performance from banks. British American Tobacco is the worst performer on an ex-div basis, while HSBC and Standard Chartered have also slipped back after posting 2 successive days of gains.

Some might suggest that a stronger pound might be acting as a bit of a drag, but that seems doubtful given it is only modestly higher on the day against the US dollar and is well below its highs this year. 

B&Q owner Kingfisher shares is underperforming on the back of a negative read-across from sector peer Wickes who revealed statutory profits fell by 38.4% to £40.3m, despite a 1.8% rise in annual revenues, which hit a record £1.56bn. Total full year like for like sales rose by 3.5%, with the growth very much skewed towards the second half of the year, with current trading showing that core sales are moderately lower than the same period last year. Wickes warned that energy costs would also be £10m higher than in 2022, with efficiency savings to be made to offset some of this. 

US

After slipping back sharply yesterday, US markets have opened higher with the Nasdaq 100 leading the way, with yields near their lows of the past few days, and the US dollar under pressure, trading down at 6-week lows.

US weekly jobless claims came in at 191k, a modest decline from 192k last week and in line with the baseline average over the last few months. There still seems little evidence of a deterioration in the US labour market.

We’re seeing strong gains in the likes of Netflix, which is seeing its biggest one-day rally in 4 months, while social media companies are also surging with Snap and Meta leading the way. 

Coinbase shares have fallen sharply after receiving a notice of intent from the SEC to bring an action against them with respect to potential violations of securities law. The SEC is claiming that crypto assets should be classified as securities while Coinbase has pushed back.

Block shares have also slumped after Hindenburg Research said it was taking a short position in the business.

After their falls yesterday US regional banks have stabilised with First Republic Bank shares flat on the day along with PacWest and New York Community Bancorp.

FX

The US dollar has continued to come under pressure in the wake of yesterday’s 25bps rate hike from the Federal Reserve, sliding to 6-month lows against the euro, as markets bet that the Federal reserve could be done when it comes to further rate hikes. 

The Norwegian Krone is the best performer after the Norges Bank raised its benchmark rate by 25bps taking it to 3% while also flagging the prospect that we would be seeing another 25bps in May.

The Swiss National Bank also raised rates today by 50bps to 1.5%, despite the recent turbulence in the Swiss banking sector. The bank went on to say that further rate rises were possible, while raising its inflation forecasts for this year to 2.6% from 2.4%.

The Bank of England finished off the cycle of rate hikes with a 25bps rate hike of its own, after yesterday’s surprise spike in headline inflation forced its hand. The vote was a 7-2 split with Tenreyro and Dhingra predictably voting to keep rates unchanged, with the bank also saying that they expected the UK economy to avoid a recession in Q2.

The reaction of the pound was fairly muted, and overshadowed slightly by the euro which continues to benefit from increasingly hawkish rhetoric from various ECB governing council members about the prospect for further rate hikes. UK 2-year gilt yields on the other hand slipped sharply, reversing most of yesterday’s rise as markets priced out the prospect of more hikes in the near future.  

Commodities

The recent weakness in the US dollar appears to be supporting crude oil prices for now, as it looks to close higher for the fourth day in a row. While economic risks remain a concern, optimism over a pickup in Chinese demand appears to be helping to support prices from their recent lows. Nonetheless rising inventory levels in the US does appear to show that demand is still a little on the soft side.

Gold prices look set to gain for the second day in a row, as a weak US dollar and softness in US yields helps to support prices. The prospect that we could be close to the end of the Fed’s rate hiking cycle is also helping prices rebound as we look to retest the $2,000 an ounce level.

Volatility

Banks appear to have moved out of the spotlight – at least for now – but one large cap stand out in terms of stock specific movers on Wednesday was Tesla. The share price fell noticeably running into the close although it’s important to point out that solid gains were posted earlier in the week, helped along by a debt upgrade. One day vol on Tesla came in at 113.63% against 85.45% for the month.

Yesterday’s US rate hike may have been widely expected but there had been a growing minority who were thinking the Fed may hold fire given the recent market turmoil. That didn’t happen and the resulting move saw gold prices advance, heading back towards the $2,000 mark.

Notably that drove price action in CMC’s proprietary basket of gold producers, pushing one day vol to 79.99% against 50.12% for the month. That rate hike saw major US equity indices tip lower heading into the close. The S&P was the standout here, with one day vol ticking up to 23.37% against a one month print of 21.11%, whilst the Dow 30 wasn’t far behind either.

Despite the talk from the Fed yesterday being that there’s still a long way to go in the fight against inflation, the dollar index slipped back to levels not seen in almost two months, suggesting that the market is somewhat unwilling to buy into the rhetoric.

The Kiwi Dollar saw the most pronounced movement, with one day vol against the greenback printing 20.66% against 13.38% on the month..