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Cyclicals, BAT drag FTSE 100 lower ahead of Fed decision
Global Banking & Finance Review®
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By Johann M Cherian and Sruthi Shankar
(Reuters) – UK’s FTSE 100 index slipped on Wednesday, weighed down by cyclical sectors and shares of British American Tobacco, as investors awaited a key U.S. Federal Reserve monetary policy decision.
The blue-chip FTSE 100 closed down 0.6% after touching a near six-week high in the previous session.
British American Tobacco Plc tumbled 5.5% to the bottom of the index after Goldman Sachs downgraded the stock to “neutral”.
Economically sensitive sectors such as miners, oil & gas and chemicals fell between 0.8% and 2.5% as the market braced for a big U.S. interest rate rise later in the day that will stifle economic activity.
The Bank of England is also expected to tighten rates by 75 basis points on Thursday.
“They have their own reasons for raising rates, but are both facing the same issue – inflation,” said Raed Alkhedr, chief market analyst at Equiti Capital.
“It is after a certain level that interest rate hikes start hitting company results. I think that during the first quarter of the coming year, a recession will be so clear such that we are going to start feeling the impact on results.”
Third-quarter earnings for FTSE 100 companies have so far painted a mixed picture, as some firms performed better than expected as COVID restrictions eased globally, while some battled supply chain snags and surging inflation.
“We look for defensive companies that have strong balance sheets and have historically shown reliable, recurring revenues throughout economic downturns,” said Adam Avigdori and Oliver Dixon, portfolio managers at BlackRock.
“Some of these companies can be found in the healthcare sector, primarily pharmaceuticals.”
The mid-cap FTSE 250 rose 0.1%, lifted by Lloyd’s of London insurer Hiscox after it posted a 6.3% rise in gross premiums written.
Aston Martin slumped 15.3% after the luxury carmaker cut its annual deliveries and margin forecasts, blaming global supply chain issues.
Next Plc rose 1.6% after the clothing retailer stuck to its earlier guidance.
(Reporting by Johann M Cherian in Bengaluru; Editing by Dhanya Ann Thoppil and Shailesh Kuber)
Monetary policy refers to the actions taken by a central bank to manage the money supply and interest rates to influence economic activity and achieve macroeconomic goals such as controlling inflation and promoting employment.
Interest rates are the cost of borrowing money or the return on savings, expressed as a percentage of the principal amount. They are influenced by central bank policies and can affect consumer spending and investment.
Inflation is the rate at which the general level of prices for goods and services rises, eroding purchasing power. Central banks monitor inflation to make decisions regarding interest rates and monetary policy.
A recession is a significant decline in economic activity across the economy that lasts for an extended period, typically visible in GDP, income, employment, manufacturing, and retail sales.
Cyclical sectors are industries that are sensitive to the economic cycle, meaning their performance tends to rise and fall with economic expansions and contractions, such as consumer discretionary, financials, and industrials.
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