MARKET COMMENT: UK Stocks Down, But Pound Up As Rate Setters Split

LONDON (Alliance News) - The major UK stock indices retreated Wednesday, while the pound spiked higher against other major currencies as it emerged that two of the Bank of England's rate setters had argued for an immediate UK interest rate rise at its last policy meeting.

Following two days of strong gains, equity indices mostly dropped, due partly to the news from the Bank of England and ahead of the Federal Reserve July meeting minutes due for release at 1900 BST. The markets are also cautious ahead of the Jackson Hole Symposium, at which key central bankers will deliver speeches, including Fed Chair Janet Yellen. The symposium starts on Thursday.

The FTSE 100 ended down 0.4% at 6,755.48, the FTSE 250 closed down 0.9% at 15,748.92, althoughe the AIM All-Share closed up 0.1 at 764.33.

A similar picture in major European markets saw the French CAC 40 close down 0.3% and the German DAX close down 0.2%.

After the European market close, US markets were mixed, with the DJIA up 0.2%, the S&P 500 up 0.1%, and the Nasdaq Composite flat.

The minutes of the Bank of England's August policy meeting showed that two of the nine Monetary Policy Committee members voted for an immediate 0.25% rise in UK interest rates, the first time in more than three years that there has been a split in opinion on rates. Ian McCafferty joined known hawk Martin Weale in arguing that it would be appropriate for the central bank to raise the UK interest rate from 0.5%, where it has been since March 2009. The board unanimously voted to leave the asset purchase programme unchanged at GBP375 billion.

The pound rose to an intra-day high of USD1.6679 and EUR1.2545, and was trading at USD1.6640 and EUR1.2516 late afternoon.

While the MPC members didn't have the benefit of the most recent, and weakest, wage growth data before casing their votes, Weale and McCafferty argued that monetary policy acts with a lag to the real economy and by the time the first rate hike starts to kick-in, the current slack in the labour market would likely have been used up. Moreover, a small early rise would be consistent with the bank's guidance that any changes will be gradual, they argued.

"Once members change their vote they tend to stick to their position," said Forex.com research analyst analyst Kathleen Brooks.

Housing-related stocks were hit by the news. The two FTSE 100-listed housebuilders, Persimmon and Barratt Developments, were amongst the biggest fallers on the bluechip index, down 2.0% and 2.4%, respectively.

"A good amount of the losers are tied to homebuilding, as the news of a surprise in policy-makers’ view on a rate rise puts potential pressure on expected future earnings," said Spreadex trader David White.

Balfour Beatty was the biggest faller in the FTSE 350, ending down 7.2% after it rejected another improved offer from fellow construction group Carillion, which then said it was withdrawing its interest in a merger.

Despite the synergies that analysts said existed between the construction groups, the two companies failed to agree on the treatment of Balfour Beatty's Parsons Brinkerhoff business, which Carillion wanted to be included in the takeover, but Balfour is in the process of selling as a separate entity. Carillion shares ended down 2.2%.

A number of stocks going ex-dividend Wednesday weighed on the major indices. In the FTSE 100, British American Tobacco closed down 1.8% after going ex a GBP0.475 interim dividend, Mondi ended down 1.9% after going ex a EUR0.1323 interim dividend, Hammerson lost 2.1% after going ex a GBP0.088 interim payment, and HSBC Holdings dropped 1.2% after going ex a USD0.10 second quarter payment.

In the FTSE 250, housebuilder Berkeley Group was a big faller, down 6.1%, suffering after the BoE announcement and after going ex a GBP0.90 interim dividend, while Brit PLC was down 2.9% after going ex a GBP0.0625 dividend.

The main support to the London indices came from the miners, with the FTSE 350 mining sector index gaining 0.7%. Glencore gained 0.4% as the company raised its interim dividend by 11% and announced a share buyback of up to USD1 billion over the next seven months, after reporting first-half profits that beat market expectations.

Hochschild Mining gained 3.8% after saying that its pretax loss narrowed to USD3.4 million for the six months to June 30, compared with a USD48.7 million loss in the first half of 2013 when it booked a USD61.9 million net impairment and write-off related to its Azuca project and the San Jose mine unit. The group said that lower administration and production costs helped lower is loss, although its revenue was hit by lower metal prices.

The minutes of the July Federal Reserve policy meeting will be released at 1900 BST. Any surprises will be the driver of late US trading and this may continue into the European open Thursday.

The Chinese HSBC manufacturing PMI is released overnight and also has the potential to drive markets. Economists expect Chinese manufacturing growth to have slowed slightly but to remain in expansion, with a print of 51.5 forecast for August, down from 51.7 in July.

A round of European Markit manufacturing and services PMI's are also released Thursday, while the major domestic data focus is UK retail sales data for July.

In the UK corporate calendar Thursday, interim results are scheduled from mining groups Kazakhmys, London Mining, and New World Resources, as well as high street retailer WH Smith, and one of the largest AIM stocks, Quindell.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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