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LONDON (Alliance News) - UK stocks are lower across the board Friday, while the price of Brent oil has risen to a nine-month high, as investors show concern over the deteriorating situation in Iraq, where radical militants have taken control of part of the country and are threatening to attack the capital.
Stocks are also being driven by interest rate expectations, with the housebuilders underperforming, after Bank of England Governor Mark Carney gave his clearest warning yet, at a Mansion House dinner Thursday, that UK interest rates may rise sooner than previously guided.
By mid-morning Friday, the FTSE 100 is down 0.7% at 6,798.93, the FTSE 250 is down 1.7% at 15,855.37, and the AIM All-Share is down 0.7% at 789.41.
Major European markets are also firmly lower, with the French CAC 40 down 0.5%, and the German DAX down 0.6%.
Until now, the market impact from the situation in Iraq had been mostly contained to oil prices and to those stocks with direct exposure to the conflict. However, events appear to be moving fast and the market impact is broadening. Local reports Friday say that Kurdish military forces have repelled an offensive by radical Sunni militants, who are surging towards Baghdad after having seized cities in the north of the country from fleeing government troops.
"Equities finally appeared to sit up and take notice of the chaos in Iraq yesterday," said Rabobank analyst Michael Every.
Brent oil has risen by more than 4% over the past three days since the situation in Iraq stated to rapidly deteriorate, with the black stuff up almost 1% Friday alone, reaching a nine-month high of USD114.04 per barrel.
Most of the top gaining stocks are oil producers, with Tullow Oil leading the FTSE 100 gainers, up 1.8%. BG Group is up 1.4%, BP up 0.9%, and Royal Dutch Shell up 0.8%. Premier Oil is one of the top gainers in the FTSE 250, up 0.9%.
The housebuilders and real estate investment trusts are weighing heavily on UK indices Friday, after comments from Governor Carney on Thursday. Speaking alongside Chancellor George Osborne at the annual Mansion House dinner, the BoE governor said that the first UK interest rate rise "count happen sooner than markets currently expect."
"Carney would have been well aware of the probable impact of his words. He would not have chosen the words lightly, which makes them significant," said Berenberg chief UK economist Rob Wood.
The immediate market reaction was to sent the pound up to a near five-year high against the dollar, peaking so far at USD1.6992. Against the euro, sterling has made further gains, peaking at EUR1.2520, the highest level since mid-November 2012.
Real estate investment trusts, which are particularly sensitive to interest rate expectations, have been sent tumbling. The FTSE 350 REIT sector is down 2.8%, with British Land the worst performer, down 3.5%, while Land Securities is down 3.2%, and Hammerson is down 2.2%.
Osborne and Carney also proved that you can't have dinner in London without talking about house prices. "If London prices were to continue growing at these rates, that would be too fast for comfort," Osborne said. "And the rate of price rises is beginning to spread beyond London."
For this reason, the Chancellor said the BoE will be given formal powers to rein-in mortgage lending.
Next week will be important for Bank of England watchers, with the minutes from the latest Monetary Policy Committee meeting released on Wednesday, while the Financial Policy Committee holds its quarterly meeting on Tuesday, with the financial stability report then published on June 26.
"The central bank is gearing up to take action," says economist Wood. Berenberg expects the bank to further tighten mortgage lending criteria this month, and to cut back the Help to Buy scheme in September.
While the timing of the first interest rate rise is debatable, depending on whether the BoE can slow house price inflation with such macro-prudential measures alone, it seems likely that times are likely to get a little tougher for the housebuilders in the near-term, one way or another.
Persimmon leads the FTSE 100 fallers, down 4.5%, with fellow blue-chip housebuilder down 3.4%. In the FTSE 250, Berkeley Group is down 4.5%, Taylor Wimpey is down 4.2%, and Bovis Homes is down 4.2%.
Petra Diamonds is a stand out individual mover Friday. The FTSE 250-listed diamond miner had jumped almost 7% to the top of the top of the index after saying that it has recovered another exceptional 122.52 carat blue diamond at the Cullinan mine in South Africa. The news comes after the company announced in January that it had recovered a 29.62 carat blue diamond from the same site. It sold the diamond for USD25.6 million in February.
The travel groups and airlines are underperforming, in light of the higher oil price. Thomas Cook is the heaviest FTSE 250 faller, down almost 5%, while in the FTSE 100 Easyjet is down 3.5% and International Consolidated Airlines is down 3.3%.
Eurozone employment change data has shown a marginal improvement in the single currency block over the first quarter of the year. The amount of people employed rose by 0.1% quarter-on-quarter, and by 0.2% year-on-year, after having fallen by 0.4% year-on-year in the fourth quarter of last year.
Still to come Friday, US producer price inflation data is due at 1330 BST, followed by the Michigan consumer sentiment index for June at 1455 BST. Economists expect a rise in the index to 83.0 from the 81.9 recorded in May.
Ahead of the data, futures trading indicates that US stocks are set for a slightly firmer open, with the DJIA and the S&P 500 both pointing marginally higher.
By Jon Darby; jondarby@alliancenews.com; @jondarby100
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