London midday: Stocks slump amid Fed rate hikes fears, weak services data

London stocks were trading at eight-week lows by midday on Monday as investors fretted that the Federal Reserve might hike rates more than expected after last week's strong wage growth figures and following the release of disappointing UK services data.

The FTSE 100 was down 1.3% to 7,350.55, while the pound was off 0.2% against the dollar and the euro at 1.4086 and 1.1308, respectively. Stocks in the US tumbled on Friday, with the Dow dropping 666 points as yields jumped after data showed the strongest US wage growth in eight and a half years.

Data out on Monday morning showed growth from the UK's key services sector slowed at the start of the year.

January's purchasing managers' index from IHS Markit/CIPS fell to 53.0 from 54.2 the month before, worse than the minimal declined to 54.1 that the market expected and a 16-month services sector low.

A fall in the services PMI meant that all three of January's surveys had indicated a slowdown in growth and saw Markit's composite PMI slide to 53.5 from 54.9 in December and also below the 54.6 consensus estimate.

This points to quarterly GDP growth of about 0.3%, much lower than the 0.5% outturn from the fourth quarter of last year.

Earlier on Monday, the EY Item Club thinktank, which uses the same economic model as the Treasury, lifted its 2018 forecasts for UK growth to 1.7% from its previous 1.4% as it felt the economy is “over the worst”. It also expected the Bank of England to increase rates twice this year as it moves “towards normalising monetary policy”.

IG analyst Joshua Mahony said: "The dour UK economic picture painted by last week’s construction and manufacturing surveys has been confirmed after a sharp fall in the services completed a hat-trick of PMI disappointments. With the latest PMI surveys pointing towards Q1 growth rate of 0.3%, yet with the economic picture looking increasingly gloomy, at least this will lessen the chances of multiple rate hikes in 2018. Unfortunately for the Brexit brigade, today’s weak UK services figure came as the eurozone services PMI a decade high and manufacturing remains within touching distance of record highs."

Looking ahead to the rest of the week, the Bank of England's latest rate announcement and Inflation Report are due on 'Super Thursday' and although the monetary policy committee is expected to leave rates unchanged this time, market participants have begun to price in two rate rises this year.

Weaker sentiment at the start of 2018 will complicate the MPC assessment of the strength of the economy, said Barclays. "PMIs should provide some support to the doves on the committee, calling for moderation and time instead of rushing into the next hike. Strong employment data will likely, however, continue to fuel doubt regarding the outlook for productivity and possibly encourage other MPC members to hike sooner on the grounds that the UK’s growth potential may be much lower than previously thought."

In corporate news, Vodafone retreated, giving back gains made late on Friday when it confirmed it is in talks with Liberty Global about the acquisition of some assets in Europe. City analysts were optimistic however the talks could finally, having been off-and-on since 2015, lead to a concrete deal that would boost future earnings and cashflow.

Budget airline Ryanair flew lower, dragging peer EasyJet down with it after it posted a 6% rise in third-quarter pre-tax profit and announced a surprise share buyback, but struck a cautious note on the outlook as it warned over disruption from talks with unions. Wizz Air was also in the red despite reporting a 24% jump in passenger numbers in January.

Petrofac leaked lower after it said its directors and employees will be interviewed as part of an ongoing SFO investigation.

Tesco edged down after confirming that Booker Group boss Charles Wilson will be appointed chief executive of the group's retail and wholesale operations in the UK and Ireland when the takeover is completed.

Randgold Resources reversed earlier gains after saying it had increased annual gold production by 5%, while full year profits rose 14% to $335m.

On the upside, B&Q owner Kingfisher was in the black after Australian retailer Wesfarmers wrote off competitor Homebase for $1bn, which is more than it bought it for two years ago, and said it could close between 20 and 40 stores.

Shares in outsourcer Capita surged as a blog post on the Woodford Investment Management website suggested that its low valuation could make it a big target. In a blog dated 2 February, Neil Woodford said: "There are of course buyers of corporate assets that are not disciples of the momentum school of investing - I suspect that other businesses and private equity buyers will be circling Capita as I write."

Electrocomponents gained after it said that its “strong” underlying revenue performance in the first half has continued into the first four months of the second half, with underlying revenue growth remaining stable at the 14% seen in the second quarter.

Market Movers

FTSE 100 (UKX) 7,350.55 -1.25%
FTSE 250 (MCX) 19,682.63 -1.40%
techMARK (TASX) 3,319.16 -1.72%

FTSE 100 - Risers

Kingfisher (KGF) 355.30p 1.69%
Anglo American (AAL) 1,666.60p 1.13%
Antofagasta (ANTO) 906.60p 0.58%
Glencore (GLEN) 382.90p 0.04%
United Utilities Group (UU.) 733.20p 0.00%
Whitbread (WTB) 3,814.00p 0.00%
Mediclinic International (MDC) 585.60p 0.00%
Fresnillo (FRES) 1,335.00p -0.00%
Smurfit Kappa Group (SKG) 2,570.00p -0.00%
Barclays (BARC) 195.28p -0.14%

FTSE 100 - Fallers

Vodafone Group (VOD) 212.60p -3.14%
Rolls-Royce Holdings (RR.) 839.20p -2.98%
Old Mutual (OML) 227.30p -2.86%
Land Securities Group (LAND) 958.90p -2.79%
Randgold Resources Ltd. (RRS) 6,856.00p -2.67%
Schroders (SDR) 3,606.00p -2.57%
Scottish Mortgage Inv Trust (SMT) 444.75p -2.47%
Hammerson (HMSO) 474.20p -2.43%
NMC Health (NMC) 3,178.00p -2.40%
Reckitt Benckiser Group (RB.) 6,554.00p -2.38%

FTSE 250 - Risers

Capita (CPI) 175.43p 8.09%
Cineworld Group (CINE) 238.00p 3.79%
Polymetal International (POLY) 815.00p 2.16%
IWG (IWG) 228.70p 1.64%
Electrocomponents (ECM) 619.20p 1.28%
Millennium & Copthorne Hotels (MLC) 540.00p 1.12%
Spire Healthcare Group (SPI) 237.60p 0.68%
Rank Group (RNK) 227.00p 0.67%
SSP Group (SSPG) 605.50p 0.58%
Countryside Properties (CSP) 311.80p 0.58%

FTSE 250 - Fallers

Woodford Patient Capital Trust (WPCT) 77.16p -4.97%
Stobart Group Ltd. (STOB) 233.00p -4.90%
Dignity (DTY) 752.68p -4.18%
BCA Marketplace (BCA) 177.40p -4.11%
Unite Group (UTG) 765.00p -3.89%
Entertainment One Limited (ETO) 307.60p -3.88%
TalkTalk Telecom Group (TALK) 118.10p -3.83%
Herald Investment Trust (HRI) 1,111.35p -3.78%
Vietnam Enterprise Investments (DI) (VEIL) 462.00p -3.75%
Just Group (JUST) 144.30p -3.74%