The FTSE 100 was in the red on Wednesday as interest rate concerns crept into markets ahead of the Federal Reserve’s interest rates decision tonight and the Bank of England’s tomorrow.
Markets seemed immune to interest rate worries earlier in the week, but a mixed UK inflation report released on Wednesday sparked a wave of selling in early trade.
“The optimism which had been simmering on financial markets is coming off the boil ahead of crunch interest rate decisions,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.
“While inflation in the UK is unchanged at 2.2%, a rise in services inflation mainly due to a big leap in airfare costs is likely to keep policymakers more reticent about reducing rates again on Thursday. The FTSE 100 has fallen back slightly in early trade as uncertainty surrounds central bank policy.”
Investors will also have one eye on the Fed and the extent they cut later today. The Federal Reserve is widely predicted to cut interest rates later. However, the big question is whether they cut by 25bps or 50bps and risk unnerving markets with a negative market assessment.
“Traders have priced in a 61% chance of the Fed cutting US rates by half a percentage point today,” said Russ Mould, investment director at AJ Bell.
“That feels like a step too far as the Fed might want to start the rate cut journey slow and steady, rather than going in headfirst with a big cut as that might send negative signals to the market that it is really worried about the state of the economy.”
Legal & General
Legal & General shares were under pressure on Wednesday after the group announced it was disposing of UK house builder CALA Group as part of their capital allocation plans. L&G’s capital allocation strategy didn’t go down well with investors when it was announced earlier this year, and its latest move hasn’t either. Shares were down 1.9%.
“Legal & General was among the top fallers on the FTSE 100 after announcing the sale of its housebuilding business, Cala. Investors might be disappointed that it isn’t getting the full £1.16 billion cash up front. Just over half the money will be paid over a five-year period,” Russ Mould said.
“Legal & General’s shares have been weak since its strategy update in June. Therefore, it’s not a surprise to see the company imply it might use some of the sale proceeds to fund share buybacks as it needs to deliver some more positive news to win back the market’s favour.”
An upgrade to ‘buy’ from Goldman Sachs analysts helped IHG to the top of the leaderboard with a 2% gain.