London close: FTSE flops after hawkish Bank of England statement
London's FTSE 100 fell almost 1.5% on Thursday as the pound spiked higher after the Bank of England signalled that interest rates may rise sooner and higher than it had indicated.
The BoE voted unanimously to leave interest rates on hold at 0.50% and the asset purchase facility at £435bn. Rates had been expected to remain on hold, but there had been some speculation that one or two policymakers would vote in favour of a hike.
The pound shot higher, spiking up more than 0.8% against the dollar and the euro before easing off to $1.394 and €1.1375 as the Bank's monetary policy committee also upped its forecasts for economic growth and said that interest rates may need to rise earlier and faster than previously forecast. It also said it expects stronger wage growth than previously and that inflation is still forecast to be above the 2% target in three years' time.
According to the minutes of the last meeting, the MPC agreed that "monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the November report".
The BoE expects the economy to expand by 1.8% in 2018 and 2019 – up from earlier estimates of 1.6% and 1.7% respectively and faster than the "speed limit" of about 1.5% Governor Mark Carney unveiled in November. If the economy grows faster than that pace it is at risk of overheating, the BoE has said.
As sterling gained, London's equities took another leg lower, losing almost 109 points or 1.49% to close at 7,170.69. A stronger pound tends to dent the top-flight index as its constituents derive around 70% of their earnings from overseas.
Analysts at BofA Merrill Lynch said they now expect a 25 basis-point hike in interest rate in May but then February 2019 for the next hike, though this was highly conditional: "If Brexit transition talks drag past March or PMIs just remain where they are we will have reconsider."
They added: "Be careful on timing. While we assume May is the most likely date for the next hike we would not go over-the-top on the BoE's hawkishness. Mark Carney kept his options open over timing. As he said 'the words are different from September'. That is worth emphasising. The BoE are keeping some optionality in a way they did not last year."
UBS rates strategists agreed that Carney was handing responsibility over to Theresa May and Brexit minister David Davis as negotiations continue on a Brexit transition deal: "The MPC has, in our opinion, effectively left it to the politicians (and of course the data) to determine the near-term course of monetary policy. Our view is that the MPC will raise Bank Rate in May if the transitional deal has been fully tied up by then, but will keep policy on hold if the negotiations over the UK's terms of engagement with the EU after the end of March 2019 are ongoing."
With the MPC inflation report showing forecasts for CPI inflation should ease to 2.2% in two years’ time, given a smooth transition, this suggests markets may not have gone far enough, a more hawkish Capital Economics argued. "As a result, today’s releases pave the way for an interest rate hike in May, and we think that the MPC will hike a further two times this year, taking Bank Rate to 1.25%."
Due to concerns over interest rates, housebuilders were on the slide, led by Persimmon, Berkeley Group, Barratt Developments and Taylor Wimpey. Analyst David Madden at CMC Markets said traders were now pricing in a 100% probability of an interest rate rise from the BoE in August, and so UK home builders were feeling the pinch ahead of a rise in mortgage costs.
Mid-cap builder Bellway declined despite saying that housing revenue for the six months to the end of January 2018 is expected to rise to around £1.3bn from £1.1bn in the same period a year ago amid strong demand.
Heavily-weighted miners fell as copper prices declined, with BHP Billiton, Antofagasta, Rio Tinto, Glencore and Anglo American all in the red. There were also calls from a South Africa mines minister for local mining industry to "shape up" and speed the transformation towards more black ownership.
The biggest faller was Sophos as the cyber security solutions provider saw its shares tumble more than 17% after reporting a 19.6% drop in adjusted operating profit for the third quarter. Billings rose 14% in the three months to the end of December, down from a growth rate of 23% in the first half.
TalkTalk also tanked almost 10% after the telecoms group revealed plans to raise £200m to bolster its balance sheet and warned that full-year EBITDA would come in below the guidance given in November.
Thomas Cook was in the red after it said it remained on track to meet full-year forecasts but warned that the market remains highly competitive.
Qinetiq fell after saying it traded as expected in the third quarter and maintaining its expectations for its overall performance in FY18, while Tate & Lyle lost ground despite saying that it's on track to deliver full-year adjusted pre-tax profit in line with guidance at constant currency.
Ashmore was weaker as it posted a drop in half-year profit but a rise in assets under management, while hotel group Millennium & Copthorne lost ground after it reported a jump in fourth-quarter pre-tax profit but cut its dividend to preserve cash for investment.
Roadside assistance and insurance group AA reversed earlier strong gains after saying full-year trading EBITDA is expected to come in at £390m to £395m, in line with the guidance provided in September.
On the upside, Compass was heading north after the contract caterer served up a tasty first quarter update showing improved revenue growth. Although UK cost pressures were "above average", margins are still expected to improve over the year as a whole.
Advertising giant WPP rose as 2017 earnings from French rival Publicis met analysts' expectations and the company said organic growth improved throughout 2017.
Beazley was up as its full-year pre-tax profit came in slightly ahead of consensus expectations and it lifted its premium income growth guidance from mid-to-high single digit to double digit.
GlaxoSmithKline advanced its ViiV Healthcare HIV venture filed patent infringement litigation against Gilead Sciences over bictegravir in the United States and Canada.
Smith & Nephew edged higher after it reported a 17% rise in annual profit as the medical products company sold more knee implants and grew strongly in emerging markets.
FTSE 100 - Risers
Compass Group (CPG) 1,513.50p 5.32%
WPP (WPP) 1,303.75p 3.35%
Just Eat (JE.) 803.60p 2.06%
Sainsbury (J) (SBRY) 246.20p 1.65%
GlaxoSmithKline (GSK) 1,303.80p 1.43%
AstraZeneca (AZN) 4,845.00p 1.16%
Royal Bank of Scotland Group (RBS) 283.60p 1.03%
Barclays (BARC) 194.10p 0.47%
Marks & Spencer Group (MKS) 289.70p 0.38%
Lloyds Banking Group (LLOY) 67.60p 0.36%
FTSE 100 - Fallers
Evraz (EVR) 336.20p -5.27%
Ashtead Group (AHT) 1,955.00p -4.91%
Sage Group (SGE) 682.00p -4.48%
DCC (DCC) 6,760.00p -4.45%
Persimmon (PSN) 2,391.00p -4.36%
Berkeley Group Holdings (The) (BKG) 3,736.00p -4.21%
Barratt Developments (BDEV) 548.20p -4.19%
International Consolidated Airlines Group SA (CDI) (IAG) 596.60p -3.96%
Taylor Wimpey (TW.) 182.40p -3.95%
Scottish Mortgage Inv Trust (SMT) 432.72p -3.84%
FTSE 250 - Risers
Beazley (BEZ) 560.50p 5.46%
Dignity (DTY) 785.50p 4.94%
Stobart Group Ltd. (STOB) 251.50p 4.36%
Hiscox Limited (DI) (HSX) 1,372.00p 2.16%
Fidessa Group (FDSA) 2,295.00p 2.00%
Ted Baker (TED) 3,054.00p 1.80%
Babcock International Group (BAB) 643.60p 1.77%
Essentra (ESNT) 485.60p 1.63%
Lancashire Holdings Limited (LRE) 660.00p 1.62%
Computacenter (CCC) 1,152.00p 1.59%
FTSE 250 - Fallers
Sophos Group (SOPH) 513.00p -17.46%
TalkTalk Telecom Group (TALK) 108.00p -9.77%
Petrofac Ltd. (PFC) 416.80p -8.58%
Tate & Lyle (TATE) 602.20p -7.84%
AA (AA.) 125.10p -6.19%
Bellway (BWY) 3,110.00p -6.13%
Redrow (RDW) 588.50p -5.92%
Sanne Group (SNN) 621.00p -5.62%
Fidelity China Special Situations (FCSS) 228.50p -5.58%
Man Group (EMG) 189.80p -5.57%