London midday: Stocks weaker as inflation hits three-year high

London stocks were in the red by midday on Wednesday, underperforming their European peers as sterling rallied after UK inflation hit its highest level in nearly three years.

The FTSE 100 was down 0.6% at 7,084.41, while the pound was up 0.4% against the dollar at 1.3866 as data from the Office for National Statistics showed consumer price inflation rose to 2.5% in June from 2.1% in May, increasing pressure on the Bank of England to tighten monetary policy.

The reading was above the BoE’s 2% target for the second month in a row and higher than consensus expectations of 2.2%.

The ONS said prices for food, second-hand cars, clothing and footwear, eating and drinking out, and motor fuel rose in 2021 but mostly fell in 2020, resulting in the largest upward contributions to the change in the 12-month inflation rate between May and June 2021.

Core inflation - which strips out food, energy, alcohol and tobacco - came in at 2.3% in June compared to 2.0% in May.

IG market analyst Joshua Mahony said: "The trend of higher prices shows little sign of slowing down according to the CPI readings in both the US and UK, yet some will take solace from the fact that a temporary squeeze on demand has ramped up prices for the likes of second-hand cars.

"The Bank of England has remained steadfast in their stance that above-target inflation will be fleeting, but markets will only truly breathe a sigh of relief once we see this upward trajectory reverse. UK banks have been one benefactor of today’s reading, with the rise in inflation leading many to believe we could see a more hawkish BoE, to the benefit of the banks."

Investors were also looking ahead to US Federal Reserve Chair Jerome Powell’s testimony before Congress later in the day.

Oanda market analyst Sophie Griffiths said: "Needless to say, the markets will be watching closely to see if the latest CPI print has adjusted the Fed’s thinking regarding elevated inflation being transitory. Any hint that the Fed’s position is wavering could see stocks take another leg lower."

Earnings will also be in focus across the pond, with Bank of America, Citigroup and Wells Fargo slated to report.

In equity markets, homewares retailer Dunelm fell even as it said annual profits would be ahead of forecasts as fourth-quarter sales more than doubled driven by pent-up demand after stores reopened from Covid lockdown.

Budget airline easyJet was knocked lower by a downgrade to ‘neutral’ at Davy, while British Airways and Iberia parent IAG was weaker after a downgrade to ‘market perform’ at Raymond James.

Travel-related stocks more generally were under the cosh, however, amid ongoing concerns about Covid, with engine maker Rolls-Royce and Tui both down. Leisure and hospitality shares were also on the back foot, with Cineworld and Restaurant Group lower.

IG's Mahony said: "Airlines, cinemas, restaurants, and alike are all under heavy selling pressure as investors consider the potential ramifications of another major surge in hospitalisations. The UK has gone from having the lowest cases per 100,000 in Europe, to the worst in just six weeks. Thus, while there is hope that the UK vaccination efforts will stop the rise in hospitalisations at a manageable level, there is a very tangible risk that Monday’s reopening leads to a third wave of cases and another bout of restrictions."

Travel food outlet operator SSP retreated after it said chief executive Simon Smith has quit to join an unnamed private equity-backed business.

On the upside, banks gained, with NatWest, Lloyds, and Barclays all up.

Barratt Developments rallied after the housebuilder lifted annual profit forecasts on the back of strong demand.

Industrial thread maker Coats Group advanced as it upgraded its full-year expectations following a "strong" first half.

Market Movers

FTSE 100 (UKX) 7,084.41 -0.57%
FTSE 250 (MCX) 22,772.25 -0.67%
techMARK (TASX) 4,439.47 -0.91%

FTSE 100 - Risers

Anglo American (AAL) 2,985.00p 1.34%
NATWEST GROUP PLC ORD 100P (NWG) 204.10p 1.34%
Glencore (GLEN) 317.70p 1.26%
Barratt Developments (BDEV) 705.00p 1.18%
Lloyds Banking Group (LLOY) 47.23p 1.03%
Evraz (EVR) 610.60p 1.03%
Barclays (BARC) 171.60p 0.94%
Admiral Group (ADM) 3,264.00p 0.40%
Informa (INF) 499.10p 0.30%
Entain (ENT) 1,874.50p 0.27%

FTSE 100 - Fallers

Hargreaves Lansdown (HL.) 1,630.00p -2.80%
Experian (EXPN) 2,952.00p -2.35%
Rolls-Royce Holdings (RR.) 91.42p -2.34%
Halma (HLMA) 2,792.00p -2.04%
British Land Company (BLND) 502.00p -1.88%
Land Securities Group (LAND) 675.40p -1.77%
Intertek Group (ITRK) 5,568.00p -1.76%
London Stock Exchange Group (LSEG) 7,666.00p -1.72%
International Consolidated Airlines Group SA (CDI) (IAG) 170.10p -1.69%
SSE (SSE) 1,529.50p -1.67%

FTSE 250 - Risers

Tullow Oil (TLW) 52.58p 2.66%
Trustpilot Group (TRST) 390.80p 2.46%
Helios Towers (HTWS) 163.40p 2.00%
RHI Magnesita N.V. (DI) (RHIM) 4,232.00p 1.63%
Virgin Money UK (VMUK) 191.50p 1.56%
Coats Group (COA) 68.80p 1.47%
Balfour Beatty (BBY) 314.00p 0.96%
BBGI Global Infrastructure S.A. NPV (DI) (BBGI) 172.60p 0.94%
IWG (IWG) 311.10p 0.88%
888 Holdings (888) 378.20p 0.85%

FTSE 250 - Fallers

TUI AG Reg Shs (DI) (TUI) 324.60p -6.24%
SSP Group (SSPG) 251.30p -4.95%
Cineworld Group (CINE) 65.28p -4.37%
Dunelm Group (DNLM) 1,387.00p -3.61%
Network International Holdings (NETW) 359.60p -3.49%
easyJet (EZJ) 849.20p -3.26%
Hammerson (HMSO) 36.84p -2.82%
Bytes Technology Group (BYIT) 434.60p -2.69%
Wizz Air Holdings (WIZZ) 4,429.00p -2.66%
Premier Foods (PFD) 105.80p -2.58%