FTSE dips as inflation hits 10-year high, and SSE commits to clean energy but stops short of split

“Inflation at a 10-year high of 4.2% makes for uncomfortable reading and goes to show the punishing effects of higher energy and food prices on family finances. It almost certainly means the Bank of England will raise interest rates soon, potentially as soon as next month,” says Russ Mould, Investment Director at AJ Bell.

“The prospect of higher rates has given some support to the pound, but the movement is only mild which suggests that rising inflation is a surprise to no-one. Sterling gained 0.1% against the US dollar at $1.3440.

“What really matters to markets is the scale of any interest rate hikes over the next year, and that will be guided by the longevity and ferocity of inflation. There is a real chance that rates keep going up by small increments and after a while this starts to make life more difficult for consumers and companies as the cost of borrowing becomes more expensive.

“The FTSE 100 dipped 0.2% to 7,310 as the small strength in the pound is bad for the large number of companies who generate their earnings in foreign currencies.

“NatWest and Lloyds were among the biggest risers on the FTSE as the banking sector should be a beneficiary of rising interest rates. It creates scope for them to increase net interest margins which is the difference between the interest they earn on loans and the interest they pay on savings deposits.”

SSE

“SSE’s pivot towards renewables has been well-timed. Having sold its household energy supply and services firm at the beginning of 2020, it is not directly exposed to the current energy crisis, where even the larger operators will be running many loss-making accounts as the wholesale cost of gas and electricity soars above fixed tariffs.

“The company’s first half results saw the company double down on its commitment to clean energy as it outlined plans for a multi-billion pound investment funded by the sale of a 25% stake in its network distribution arm.

“This is unlikely to be sufficient to get activist investor Elliott off its back, which having joined the shareholder register earlier this year has been reportedly pushing for SSE to take more radical action and separate the renewables assets from the grid business.

“The rationale for such a move is that it could see SSE lifted to the more elevated market valuations enjoyed by other firms which concentrate purely on renewables.

“However, today’s first-half results perhaps offered an indication why SSE is resisting such a move, at least for the time being.

“Renewable output dropped sharply due to unfavourable weather conditions – essentially it just wasn’t windy enough – but the company benefited from higher volumes through its regulated networks division.

“The unpredictability associated with renewables has also affected their role in providing baseload power and perhaps SSE might be tempted to revisit a more dramatic shake-up of the business once the storage technology needed to smooth out the contribution of renewables has developed further.”

These articles are for information purposes only and are not a personal recommendation or advice.