London midday: Stocks drop as pound rises on inflation data; recession fears weigh
London stocks had turned lower by midday on Wednesday as the latest inflation data boosted the pound, while an inversion in yield curves for two- and 10-year US treasury bonds prompted fears of a recession.
The FTSE 100 was down 0.9% at 7,182.75, having opened a little higher, as sterling ticked up 0.3% against the dollar to 1.2091 and 0.1% versus the euro to 1.0810 after figures from the Office for National Statistics showed inflation rose faster than expected in July, overshooting the Bank of England's 2% target.
Consumer price inflation came in at 2.1% in the year to July, up from 2% in June and coming in above expectations for a decline to 1.9%. In its August Inflation Report, the BoE had projected a drop to 1.8%.
Meanwhile, core inflation increased to 1.9% from 1.8%, coming above the no-change consensus.
Chris Jenkins, assistant head of inflation at ONS, said: "The inflation rate increased slightly, with computer games, consoles and hotel prices rising more than they did last year. Conversely, air, international rail and sea fares did not rise by as much as 12 months ago."
Ruth Gregory, senior UK economist at Capital Economics, said the figures may dampen speculation that the Bank of England may soon follow in the Fed’s footsteps and cut interest rates.
"Indeed, with the ongoing strength in pay growth and the fall in the pound likely to leave inflation above the 2% target in 2020, we still think that it is only in a no deal Brexit that the MPC will cut rates."
There were a number of factors weighing on sentiment, including weak German GDP figures for the second quarter, which sparked worries that the country is teetering on the brink of recession, and a batch of disappointing data out of China.
On top of that, an inversion in yield curves on US two- and 10-year treasury bonds for the first time since 2007 was adding to investors' concerns.
Neil Wilson, chief market analyst at Markets.com, said: "The three-month 10-year curve has been inverted for some time already but the fact that 2s10s has also gone this way is a massive red warning light for the US economy.
"Meanwhile the 30-year has slumped to a record low. The market is saying the risks are tilted very much to the downside. We are in a new phase of the cycle for markets now.
"To recap well-worn turf, this inversion been a reliable indicator of recession many times in the past, calling seven out of the last nine. There is undoubtedly a chance of this, although we must caution that so far the US data has been pretty sturdy in the face of global headwinds and the trade policies of the White House.
"This yield curve inversion is a sell signal for risk assets and should put extra pressure on equities."
UK bond markets were also in focus as the bond yield curve on government debt inverted for the first time since the financial crisis of 2008.
In equity makers, Mike Ashley's Sports Direct tumbled as it announced that Grant Thornton has quit after more than a decade as its auditor, leaving the company less than a month to find a new one.
Auto Trader was under the cosh as it emerged that Volkswagen's financial services unit is bringing its used car website, Heycar, to the UK.
On the upside, insurer Admiral rallied as it said interim pre-tax profits rose 4% to £218.2m as its UK household insurance business swung to a £4.2m profit from a £1.9m loss last year.
Balfour Beatty surged as the construction group posted a jump in first-half pre-tax profit and said it was on track to deliver a full-year performance in line with market expectations.
FTSE 250 cybersecurity company Avast gained after saying that full-year revenue growth will be at the upper end of its high single-digit percentage range following a solid first half.
FTSE 100 - Risers
Admiral Group (ADM) 2,099.99p 3.35%
Direct Line Insurance Group (DLG) 294.10p 0.51%
Unilever (ULVR) 4,930.00p 0.47%
Fresnillo (FRES) 684.80p 0.38%
Marks & Spencer Group (MKS) 184.80p 0.35%
National Grid (NG.) 839.40p 0.27%
Tesco (TSCO) 214.50p 0.19%
Diageo (DGE) 3,402.50p 0.09%
Rolls-Royce Holdings (RR.) 753.00p 0.05%
Severn Trent (SVT) 1,961.50p 0.05%
FTSE 100 - Fallers
Melrose Industries (MRO) 165.30p -4.40%
Ashtead Group (AHT) 2,088.00p -3.78%
International Consolidated Airlines Group SA (CDI) (IAG) 428.60p -3.56%
Evraz (EVR) 536.80p -3.52%
Mondi (MNDI) 1,572.00p -3.38%
TUI AG Reg Shs (DI) (TUI) 784.20p -3.21%
Anglo American (AAL) 1,812.20p -2.78%
NMC Health (NMC) 1,846.00p -2.53%
Smith (DS) (SMDS) 325.00p -2.40%
Glencore (GLEN) 230.60p -2.35%
FTSE 250 - Risers
Balfour Beatty (BBY) 217.40p 7.73%
Avast (AVST) 345.80p 5.56%
Intu Properties (INTU) 37.58p 3.53%
Man Group (EMG) 163.00p 3.20%
Sanne Group (SNN) 553.00p 2.98%
CLS Holdings (CLI) 227.33p 2.40%
Lancashire Holdings Limited (LRE) 711.00p 2.30%
Syncona Limited NPV (SYNC) 224.50p 2.05%
McCarthy & Stone (MCS) 135.30p 1.81%
Polymetal International (POLY) 1,082.50p 1.79%
FTSE 250 - Fallers
Sports Direct International (SPD) 212.80p -10.51%
Sirius Minerals (SXX) 8.92p -6.05%
Premier Oil (PMO) 70.20p -5.62%
CYBG (CYBG) 137.70p -4.51%
Hunting (HTG) 424.00p -4.07%
Dixons Carphone (DC.) 105.55p -4.05%
Wood Group (John) (WG.) 454.40p -4.01%
Amigo Holdings (AMGO) 141.00p -3.69%
Cineworld Group (CINE) 223.20p -3.63%
Investec (INVP) 404.00p -3.63%