London close: Jump in Sterling hits stocks

London stocks closed in the red on Tuesday as data showing inflation spiking to a six-year high in August sent the pound higher against both the dollar and the euro.

The FTSE 100 was down 0.17% to 7,400.69 as the pound surged 0.87% against the dollar to 1.3278 - its best level since September 2016 - and up 0.77% versus the euro to 1.1098 after consumer price inflation came in ahead of forecasts.

A stronger pound tends to dent the index as around 70% of its constituents derive their earnings from overseas.

The consumer price index picked up 0.6% month-on-month in August, the Office for National Statistics announced, after the 0.1% decline in July, even more than the 0.5% rise economists had predicted.

This lifted CPI 2.9% year-on-year to its highest level since 2011, jumping from the 2.6% in the previous two months and ahead of the 2.8% the market consensus and the 2.7% the Bank of England was expecting.

Core CPI inflation, which excludes more volatile prices such as those for food and fuel, was up 2.7% from 2.4% a month earlier versus the consensus estimate of 2.5%.

Neil Wilson, senior market analyst at ETX Capital, said the data builds a stronger case for the Bank of England to look at hiking rates but it is not yet strong enough for the monetary policy committee to act this week.

"Andy Haldane may now choose to vote for a hike, suggesting a 6-3 split on the MPC is now more likely than before with confirmed hawks Ian McCafferty and Michael Saunders likely to vote for a hike.

"The MPC has stressed that rates may need to be tightened by a somewhat greater extent than financial markets are suggesting, while governor Mark Carney has said that one hike over the next three years would not be enough to tame inflation. The data today supports the Bank’s view that the market may be overestimating the Bank’s tolerance of above-target inflation. The CPI report suggests that Mr Carney and the MPC will lean more heavily on this kind of hawkish rhetoric," said Wilson.

Market participants were also digesting news that MPs backed the EU Withdrawal Bill - often referred to as the Repeal Bill - by 326 votes to 290 overnight, though the bill now passes to the committee stage, where amendments can be made.

The bill's aim of transposing relevant EU law onto the UK statute book when the UK eventually leaves the block in 2019 was called a "power grab" by some ministers, with Labour calling it an "affront to parliamentary democracy". There are concerns over the so-called Henry VIII powers in the bill, which grant ministers power to amend the law without normal parliamentary scrutiny.

In corporate news, the AA rallied as it confirmed that it held "preliminary talks" with insurer Hastings over a potential merger of the motor association's insurance business.

Banks, led by Barclays, Lloyds and Royal Bank of Scotland, were all on the front foot as the spike in CPI raised interest rate hopes, and following a rally for peers on Wall Street overnight.

JD Sports Fashion surged after it reported "another record result" for its half year, with sales up 41% to £1.4bn and pre-tax profit up 33% to £102.7m, while construction equipment specialist Ashtead racked up healthy gains as it reported strong growth in rental revenue and profits in the first quarter of its financial year.

Wood Group and Amec Foster Wheeler were in focus after the Competition and Markets Authority approved their merger plans.

Housebuilders were in the red, with Taylor Wimpey, Persimmon, Barratt Developments, Berkeley and Bellway all lower. But it was Redrow dragging the sector down, after The Steve Morgan Foundation - a charitable trust founded by the housebuilder's chairman - and Morgan's investment vehicle, Bridgemere Securities, sold 25.9m existing ordinary shares at 590p each, representing around 7% of the issued share capital.

Traders also pointed to news that Cairn Homes founders Michael Stanley, Kevin Stanley and Alan McIntosh have sold a 2.1% stake in the housebuilder, saying the placings could suggest a market top for housebuilders.

Costa and Premier Inn owner Whitbread was under the cosh after Citi downgraded its stance on the stock to 'sell' from 'buy', with SSP Group downgraded too.

Market Movers

FTSE 100 (UKX) 7,400.69 -0.17%
FTSE 250 (MCX) 19,665.87 -0.14%
techMARK (TASX) 3,469.14 0.10%

FTSE 100 - Risers

Ashtead Group (AHT) 1,759.00p 4.45%
Barclays (BARC) 191.35p 2.52%
Royal Bank of Scotland Group (RBS) 249.70p 2.42%
Smurfit Kappa Group (SKG) 2,386.00p 2.36%
Ferguson (FERG) 4,650.00p 2.06%
Lloyds Banking Group (LLOY) 64.84p 1.90%
Johnson Matthey (JMAT) 2,908.00p 1.54%
Mondi (MNDI) 2,080.00p 1.46%
Next (NXT) 4,400.00p 1.34%
BHP Billiton (BLT) 1,438.00p 1.30%

FTSE 100 - Fallers

Randgold Resources Ltd. (RRS) 7,765.00p -2.94%
Fresnillo (FRES) 1,570.00p -2.30%
Persimmon (PSN) 2,503.00p -2.04%
British American Tobacco (BATS) 4,798.50p -2.02%
Unilever (ULVR) 4,441.00p -1.88%
Antofagasta (ANTO) 1,008.00p -1.75%
Barratt Developments (BDEV) 596.00p -1.65%
Sky (SKY) 937.50p -1.63%
United Utilities Group (UU.) 904.50p -1.58%
Convatec Group (CTEC) 267.60p -1.55%

FTSE 250 - Risers

JD Sports Fashion (JD.) 373.40p 8.99%
Carillion (CLLN) 44.76p 4.15%
Ferrexpo (FXPO) 323.20p 3.79%
AA (AA.) 168.40p 3.44%
Restaurant Group (RTN) 312.00p 3.14%
Vectura Group (VEC) 100.30p 3.03%
Evraz (EVR) 315.80p 2.87%
Virgin Money Holdings (UK) (VM.) 270.20p 2.85%
Howden Joinery Group (HWDN) 415.60p 2.85%
Sophos Group (SOPH) 565.00p 2.82%

FTSE 250 - Fallers

Redrow (RDW) 580.00p -8.30%
Clarkson (CKN) 2,726.00p -3.94%
Daejan Holdings (DJAN) 5,855.00p -2.99%
Ascential (ASCL) 364.00p -2.64%
Melrose Industries (MRO) 207.00p -2.27%
Assura (AGR) 64.55p -2.20%
Unite Group (UTG) 674.00p -2.03%
Homeserve (HSV) 776.50p -2.02%
Great Portland Estates (GPOR) 608.00p -2.01%
Thomas Cook Group (TCG) 120.00p -1.96%