Europe mixed after ECB hike and hawkish Fed

(Alliance News) - London's FTSE 100 closed higher, though equities in mainland Europe weakened, after both the Federal Reserve and European Central Bank both hinted that they are not done with rate hikes.

The Federal Reserve opted against a rate lift on Wednesday, though a key chart of projections suggested two more hikes are coming before a terminal rate is hit. The ECB lifted by 25 basis points on Thursday afternoon, and President Christine Lagarde sounded as hawkish as ever in a subsequent press conference.

Conversely, the People's Bank of China cut a key interest rate, as the economy there continues to lose steam.

The FTSE 100 index climbed 25.52 points, 0.3%, at 7,628.26. The FTSE 250, however, slipped 136.09  points, 0.7%, to 19,039.41. The AIM All-Share lost 2.63 points, 0.3%, to 791.56.

The Cboe UK 100 closed up 0.3% at 761.17, the Cboe UK 250 lost 0.5% to 16,613.49, and the Cboe Small Companies fell 0.2% to 13,893.84.

In European equities on Thursday, the CAC 40 index in Paris lost 0.5%, while the DAX 40 in Frankfurt fell 0.1%.

Shares in Europe ended off session lows on Thursday, gaining in confidence as the afternoon went on, after initially falling in the wake of the ECB decision.

The ECB lifted interest rates in the eurozone by 25 basis points, as expected, taking the rate on the main refinancing operations, the marginal lending facility and the deposit facility to 4.00%, 4.25% and 3.50%, respectively.

The Frankfurt-based central bank acknowledged in its statement on Thursday that inflation has been coming down but is nonetheless projected to remain "too high for too long".

According to the ECB's June macroeconomic projections, headline inflation is expected to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. The inflation projections were lifted from 5.3%, 2.9% and 2.1% in March.

Lagarde said a pause was not even an option for the ECB. Her words suggest a hike in July is all but assured and that the September meeting is also a live one.

Oanda analyst Craig Erlam commented: "The ECB raised interest rates by another 25 basis points today and signalled there's more to come as it significantly revised up its core inflation forecasts for this year and next. Prior to the meeting, markets were pricing in a hike today but perhaps no more after, something President Lagarde sought to actively discourage."

The euro hit a one-month high of USD1.0930 on Thursday. The single currency traded at USD1.0928 at the time of the European equities close, up from USD1.0850 on Wednesday.

The pound rose back above the USD1.27 mark for the first time since April 2022. It traded at USD1.2759 late Thursday, up from USD1.2694 on Wednesday.

Against the yen, the dollar was trading at JPY140.52, sharply higher compared to JPY139.37.

Besides an advance against the yen, the dollar has lost its post-Fed gains, suggesting currency traders are sceptical about whether the Fed will return to hiking, after Wednesday's pause.

With a median federal funds rate forecast of 5.6% for this year, Federal Open Market Committee participants are predicting two more hikes in 2023. The federal funds rate range currently stands at 5.00% to 5.25%. In the March dot-plot, the median forecast was 5.1%.

Fed Chair Jerome Powell said the July meeting will be a "live" one.

For 2024, the median forecast for the federal funds rate is 4.6%, upped from 4.3% in March. For 2025, it was lifted to 3.4% from 3.1%. The "longer run" median forecast remained at 2.5%.

Stocks in the US were higher at the time of the London close. The Dow Jones Industrial Average was up 1.0%, the S&P 500 index rose 0.8% and the Nasdaq Composite climbed 0.6%.

In London, some of the FTSE 100's heavyweights propped up the index. Pharmaceutical firm AstraZeneca, consumer goods firm Unilever and oil major Shell were among the best performers, rising 1.7%, 1.3% and 1.0%.

It was a tough day for banking stocks, however, with Barclays among the worst of the lot, down 2.4%.

Frankfurt-listed peer Deutsche Bank lost 3.0% after it warned on fixed income revenue.

Revenue in its Fixed Income & Currencies division, part of its wider Investment Bank unit, is expected to fall between 15% and 20% on-year in the second quarter. FIC revenue had jumped 32% year-on-year to EUR2.4 billion in the second quarter of 2022. FIC revenue fell 17% in the first-quarter of 2023.

Deutsche Bank Chief Financial Officer James von Moltke told a Goldman Sachs European banking conference: "We came into the year expecting at some point there would be a trailing off of the very strong macro product environment we had, especially last year. It was just a record year for the industry for macro products."

In Paris, BNP Paribas and Societe Generale lost 2.1% and 1.8%.

Back in London, Asos jumped 15%. The online retailer's stock got a boost after a promising update suggests its turnaround is progressing. Meanwhile, Sports Direct owner Frasers continued to scoop up shares in the firm.

The company said it returned to profit in the three months to May 31, a period it labels as 'P3'.

Adjusted earnings before interest and tax during the period improved more than GBP20 million on-year, while its Ebit margin rose by 250 basis points. It means it is on track to deliver on adjusted Ebit guidance of GBP40 million to GBP60 million for the second half alone.

Asos said revenue in P3 fell 11% to GBP858.9 million from GBP964.1 million. For the nine months, it weakened 9.1% to GBP2.70 billion from GBP2.97 billion. The weaker top-line reflects "deliberate actions on capital allocation to improve profitability".

Frasers picked up a 5.1% stake in Asos back in October, according to a regulatory filing. It then lifted this to 7.4% in May and in a series of transactions this month, most recently on Monday, it has upped its holding to 10.6%.

"Green shoots of recovery could be the trigger for renewed takeover chatter as the recent progress helps to lower the risks of the equity story, yet the valuation of the company is still cheap should someone be prepared to look through near-term pains and focus on the longer-term opportunity," AJ Bell analyst Russ Mould commented.

Frasers shares fell 2.1%.

Elsewhere in the retail sector, Warpaint shares surged 9.3%. The Buckinghamshire-based supplier of colour cosmetics and owner of the W7 and Technic brands said sales for the five months that ended May 31 were up 45% to GBP29.7 million from GBP20.5 million a year prior.

Margins continued to be robust and ahead of those achieved in 2022, Warpaint added.

"Accordingly, driven by the continued strong start to the year, the board now expects that the group's full year 2023 performance will be significantly ahead of its prior expectations," Warpaint said.

Brent oil was quoted at USD74.81 a barrel late Thursday in London, up from USD74.27 late Wednesday. Crude rose despite poor data out of China, which lifted the prospect of stimulus measures.

China's urban jobless rate was unchanged last month, though worryingly, youth unemployment hit a record high.

The unemployment rate for Chinese between the ages of 16 and 24 years rose to 20.8%, up from what was already a record 20.4% in April, the National Bureau of Statistics said. Overall urban unemployment remained at 5.2%, the NBS said in a statement.

The bearish data did not end there. Industrial production growth weakened to 3.5% on-year in May, from 5.6% in April and short of the already downbeat FXStreet-cited expectation of a 3.6% rise.

China is an industrial powerhouse, but its consumer spending is also a key measure of the economy's strength. But yet again, retail sales fell short.

Though rising 12.7% year-on-year in May, growth slowed from 18.4% in April and was shy of the FXStreet cited forecast of a 13.6% rise.

Analysts at ING commented: "Weak activity data mean that this is probably not the end of the stimulus, though the more important measures are likely to be fiscal."

The People's Bank of China decided on its one-year and five-year loan prime rates on Monday. China's central bank cut a key interest rate and injected USD33 billion into financial markets on Thursday. The one-year medium-term lending facility rate was lowered 10 basis points to 2.65%.

Gold was quoted at USD1,955.88 an ounce late Thursday, slightly lower against USD1,957.97 on Wednesday.

In Friday's economic calendar, the central bank action continues as the Bank of Japan decides on interest rates. There is also a eurozone inflation reading at 1000 BST.

The local corporate calendar has a trading statement from grocer Tesco.

By Eric Cunha, Alliance News news editor

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