LONDON MARKET MIDDAY: BoE Holds As Fed Warns On Brexit "Consequences"

LONDON (Alliance News) - Stocks in London were lower Thursday midday, giving back gains made on Wednesday, after US Federal Reserve Chair Janet Yellen did little to help investor sentiment in the UK, warning of the "consequences" of Brexit for economic and financial conditions globally.

The Fed kept its monetary policy unchanged Wednesday, and the Bank of Japan and Swiss National Bank followed suit early Thursday. The Bank of England did the same at midday in London, leaving UK interest rates unchanged at 0.5% in a unanimous decision at its last meeting ahead of the country's referendum on European Union membership scheduled for Thursday next week.

The FTSE 100 was down 0.6%, or 33.41 points, at 5,933.39. The FTSE 250 also was down 0.6%, at 16,203.92, and the AIM All-Share was down 0.3% at 714.78.

"There has been little to comfort investors over the past 24 hours, which is why yesterday's gains have withered on the vine," noted IG senior market analyst Chris Beauchamp. "The Fed meeting was perhaps their best hope, but even here Janet Yellen was not able to offer much in the way of good news."

Late Wednesday, the Fed left its key interest rates unchanged, citing the slowing "pace of improvement" in the US labour market, low inflation and geopolitical headwinds, such as the possibility of Brexit.

Yellen noted in her press conference that the possibility the UK will leave the EU was "one of the factors" in the Federal Open Market Committee's decision against hiking the US benchmark interest rate, with the Fed Funds rate left at 0.25-0.50%. Brexit "could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences, in turn, for the US economic outlook," Yellen said.

IG's Beauchamp believes that, overall, the tone of Yellen's statement provided reasons for optimism, "but changes in the dot plot hint that even the limited ambitions of the Fed's hawks have been reined in yet again".

The Fed's dot-plot of FOMC members' interest rate forecasts still signalled two rate increases this year, but now six out of the 17 participants anticipated only one rate hike this year, up from one participant in March.

Early Thursday, the BoJ matched expectations by keeping its monetary stimulus unchanged as policymakers wait to the see the full impact of the negative policy introduced early this year. The board voted 8-1 to hold its target of raising the monetary base at an annual pace of about JPY80 trillion, while it decided 7-2 to maintain the -0.1% interest rate on current accounts that financial institutions maintain at the bank.

Soon after the London equities open, the Swiss National Bank left its key deposit rate unchanged at -0.75%, adding it thinks the Swiss franc remains significantly overvalued.

Data from the Office for National Statistics showed that UK retail sales rose by more than expected in May. Retail sales advanced 0.9% month-on-month, faster than the expected increase of 0.2%. However, the pace of growth slowed from 1.9% registered in April. On a yearly basis, retail sales improved to 6.0% in May from 5.2% in April, while economists had forecast a 3.9% rise.

Excluding auto fuel, sales volume climbed 1.0% month-on-month, while it was expected to grow marginally by 0.3%. Sales had increased 2.0% in April. Year-on-year, ex-fuel retail sales rose 5.7% from 4.8% in April, while they were forecast to slow to 3.8%.

"Even though there is plenty of uncertainty ahead of next week's EU referendum, consumers have still been spending on the high street which is what the government needs. Chancellor George Osborne will be encouraged by these figures, but he and David Cameron certainly have bigger fish to fry over the next seven days," said Dennis de Jong, managing director at UFX.com.

The data weren't enough to lift the pound, which has been trading around the USD1.41 line in the past days as the EU vote looms. Sterling was at USD1.4155 at midday, compared to USD1.4195 at the London equities close Wednesday, gaining no benefit from weakness in the dollar against other currencies.

Meanwhile, Eurostat data showed eurozone consumer prices fell 0.1% year-on-year in May, but this was slower than the 0.2% decline seen in April. Month-on-month, consumer prices moved up 0.4% in May, faster than the 0.3% growth expected by economists and April's flat reading. Headline inflation has been below the European Central Bank's target of 'below, but close to 2%' since early 2013.

Core inflation that excludes energy, food, alcohol and tobacco rose marginally to 0.8% year-on-year compared to 0.7% in April, matching estimates. Month-on-month, core inflation fell 0.1%, unchanged from April's reading and economists expectations.

Still in the economic calendar Thursday, US initial and continuing jobless claims are at 1330 BST, the same time as US inflation numbers and the Philadelphia Fed manufacturing survey.

European stock indices were lower, with the CAC 40 in Paris down 0.6% and the DAX 30 in Frankfurt off 0.7%.

In Asia, the Nikkei 225 index in Tokyo ended down 3.1%, the Shanghai Composite closed down 0.5%, and the Hang Seng in Hong Kong fell 2.1%.

In New York, stocks are expected to follow Europe and Asia lower, with the Dow 30 and the S&P 500 indices both seen down 0.3% and the Nasdaq 100 pointed down 0.4%.

Among individual stocks in London, gold miners Randgold Resources and Fresnillo were up 3.8% and 3.0%, respectively, benefiting from an increase in the precious metal's price. Gold was at USD1,302.92 an ounce at midday, having breached the USD1,300 line for second time so far in 2016. Late Wednesday, gold had stood at USD1,284.20 an ounce.

Berkeley Group Holdings was up 1.3%. The housebuilder was taking back the ground lost Wednesday, when it fell 1.2% after saying both its revenue and pretax profit dipped in its recent financial year.

Meanwhile, shares in BP were up 0.7%, after the oil major was upgraded to Buy from Neutral by Citigroup.

In the FTSE 250, N Brown Group was up 7.0%, the best mid-cap performer. The home shopping and catalogue retailer reported a fall in revenue in the first quarter of its financial year, but said it is trading in line with expectations and left its full-year guidance unchanged.

WS Atkins was another mid-cap gainer, up 4.1%. The design, engineering and project management consultancy posted a 23% rise in pretax profit for its financial year, which it said was ahead of market expectations despite continuing uncertainty in some of its markets. WS Atkins declared a dividend for the year of 39.5p per share, up 8.3% from 36.5p the year earlier.

Bookie William Hill was down 4.2% after Investec cut its recommendation to Reduce from Add. The broker said "internal issues not seen by competitors, technology risk and regulatory headwinds combine to create a bleak outlook" for the company.

By Daniel Ruiz; danielruiz@alliancenews.com

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