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FTSE falls 1.2% as rate rise could occur in August

The UK stock market tumbled as investors took fright at the Bank of England's interest rate warning and the Iraq conflict.

 
FTSE falls 1.2% as rate rise could occur in August

The Bank of England governor’s warning that interest rates may have to rise sooner than expected hit the UK stock market, which was already rattled by a spike in the oil price caused by the insurgency in Iraq.

The FTSE 100 tumbled 84 points or 1.2% to 6,760 as investors sold house builders and property stocks. These have benefited greatly from the five-year period of near zero interest rates, which is now drawing to an end.

House builders Persimmon (PSN) and Barratt Developments (BDEV) slid 5.4% and 4.1% with real estate developers British Land (BLND) and Land Securities (LAND) both falling around 3.7%.

Ashtead Group (AHT), the tool hire company that has done well from the construction boom in the UK and the US, was the FTSE 100’s second biggest faller, down 4.3%.

New figures from the Office for National Statistics confirmed the boom in construction and the positive impact on economic growth. The ONS said construction output rose 1.2% in April compared to March and hiked its first quarter estimate from 0.6% to 1.6%.

Chris Williamson, economist at Markit, the financial data provider, said this could lift first quarter growth for the economy to 0.9%, the strongest rate of expansion in nearly four years.

Williamson said the speed of recovery and the rapid fall in unemployment, in particular, had surprised the Bank of England. In terms of timing of the first rate rise he said: ‘November seems a distinct possibility, as that is when the Bank updates its forecasts in its quarterly Inflation Report. However, perhaps we should also not rule out a hike when the August Report is published, if the economic data continue to surprise to the upside in coming months, especially in relation to wages.’

This shocked some investors. Although the Bank’s monetary policy committee has been under pressure to respond to the rapidly improving UK economy, which is good news, it was widely expected to hold off a painful increase in borrowing costs until after the general election in spring.

Expectation of the first rate rise by the end of the year pushed the pound to $1.6963 against the dollar as UK interest rates will now probably rise at least six months before they do in the US.

The price of UK government bonds, or gilts, slid with five-year yields rising to 2.1% and 10-year yields advancing to 2.74%, indicating where investors think interest rates are going.

Carney stressed that the early move on rates would not change the Bank’s overall stance of keeping the cost of borrowing lower for longer, to avoid hurting indebted households and businesses.

Stewart Cowley, manager of the Old Mutual Global Strategic Bond fund, said it was too soon to sound the all-clear for the UK’s public finances as the country still had a £100 billion budget deficit.

'Income tax receipts are lagging even as unemployment falls and the economy is growing. On top of this we are still very dependent on external financing – our overall annual deficit with the rest of the world has continued to deteriorate. No administration – even after the next general election – should take the (expected) ratings agencies verdicts as a sign that they can stop concentrating on making sure our finances are put on a sound footing,' he said.

The nervousness of markets was heightened after President Obama indicated he might order air strikes to support the Iraqi government against Islamic insurgents who are advancing towards the country’s capital, Baghdad. Iraq is the second biggest producer in the Opec oil cartel. The price of Brent crude oil hit a six-month high of $113.59 a barrel on fears supply could be disrupted.

This ensured energy stocks were in demand, with Tullow Oil (TLW), BG Group (BG), Royal Dutch Shell (RDSa) and BP (BP) dominating the FTSE leader board.

Gold firmed half a dollar to a high for the month of $1,274.1 an ounce as investors sought the safe haven amid the uncertainty. 

Look at the week with our 'Accumulator' table

Even before today's fall, it had been a tricky week for stock markets in the developed world, particularly the US.

As our weekly Accumulator table shows, in the week to the end of Thursday, the US S&P 500 fell 1.3% in sterling terms, wiht the FTSE 100 down just 0.1% before today's scare.

Brazil’s stock market rallied 3.7% in sterling terms, although this is less to do with the World Cup and more about polls showing a further decline in popularity for President Dilma Rousseff whose left-wing policies are disliked by investors.

11 comments so far. Why not have your say?

Jonathan

Jun 13, 2014 at 12:51

Well same old story. The BoE announce that rates MAY rise sooner rather than later and the value of the GBP shoots up against other currencies. The fact that share prices are falling is an incidental effect of the pound rising. The real value of the shares remains about the same. This guidance from Mark Carney is the monetary policy no other action needs to be taken. Interest rates will not rise until the deficit is under control. This is because the BoE ensure that government borrowing is the same rate as the Base Rate and the government doesn't want to (can't afford to) borrow money at a higher rate.

The announcement has achieved the desired effect (a high pound) I very much doubt that interest rates will rise certainly not until the deficit is very much smaller.

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alan thorburn

Jun 13, 2014 at 13:31

So exports will fall ?

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Jonathan

Jun 13, 2014 at 14:30

"So exports will fall ?"

But imports will be cheaper so we won't need to export as much [joke]

But really this is how the BoE are now propping up the pound, just with Mark Carney's announcements. It would not be good if the pound became worthless The main danger of all this money printing (QE) to keep interest rates low is that the pound will fall too low so their aim is to maintain its value and this announcement by Mark Carney is a successful attempt to do that. I they ever thought the pound was too high they could just print a load of money but they are already doing that to fund the deficit.

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thinblackduke

Jun 13, 2014 at 15:17

Who are these investors that "took fright"! What's wrong with them!!! A more normal base rate is around 5.5% - that's what it was when the ftse 100 hit it's record high in 1999 - so how scared are they going to be when it's gone up 5%? Get a grip frightened investors!

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Jonathan

Jun 13, 2014 at 15:28

@thinblackduke

If the price of shares halves but the value of the pound doubles are you better off or worse off?

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Anonymous 1 needed this 'off the record'

Jun 13, 2014 at 15:55

Agree with thinblackduke

First sign that the economy is possibilty going to return to a normal balance between borrowers and savers and these so called professionals in the city run scared.

All of the very positive economic news this week is forgotten in a flash. Unemployment down, growth up, inflation remaining subdue, both manufacturing and services growing, China, The US, India etc still growing, wages starting to pick up albeit slowly.

Carney has said that any rise will be small and future rises measured.

Yet he still thinks the economy has spare capicity and he could cool down property growth by asking the banks to hold more capital.

Professional equity managers ha! If I could invest my pension fund in a decent buy to let I would move every penny away from this bunch as I sure thouands of ordinary investors would do too.

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thinblackduke

Jun 13, 2014 at 16:01

I'm the same but only if my pound can buy twice as much of the thing I want to buy. The thing I have to "buy" in 5 years time, is my fixed outstanding mortgage amount, so I need the pound value of my shares to keep rising. If the price of shares halve, I will be unable to repay my mortgage, regardless of what else my pound can buy.

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Jonathan

Jun 13, 2014 at 16:34

thinblackduke, agreed - it affects different people differently but my point is that whenever the pound increases in value the value of share falls. This article is biased it mentions the FTSE "tumbling" but when it comes to the GBP rising the statement is: "Expectation of the first rate rise by the end of the year pushed the pound to $1.6963 against the dollar". What does that mean? Well you have to know the value of the pound before the announcement, something that isn't mentioned and who knows that off the top of their head?.

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thinblackduke

Jun 13, 2014 at 16:37

Oh, I see, he was just saying the base rate might go up a teeny, tiny bit some time in the future. I was expecting it to stay at 0.5% for the rest of time, so I panicked a bit then and thought we were heading into a deep recession. Darn it, now I've gone and sold off all of my housebuilders after they dropped 7%. Doh! Oh well, I can buy them all back again on Monday!

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Jonathan

Jun 13, 2014 at 16:53

@thinblackduke " I see, he was just saying the base rate might go up a teeny, tiny bit some time in the future"

Yes, this announcement is a monetary policy in itself and this is how the market reacts. My bet is though unless the deficit falls there will certainly be no change in interest rates anytime this year. Any yes the market has probably overreacted and you will see a bit of a correction on Monday. So if you're into spread betting by some FTSE shares now and sell them on Monday and make a packet.

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joe stalin

Jun 14, 2014 at 15:13

Anonymous1 you are assuming that they are rational investors who are running scared. In fact it is probably a few dumb bot traders with algorithms programmed to respond to key terms such as rates etc . Rationality might return on Monday as the bots' masters take advantage of the carnage mr Carney's loose comments caused . Easy money for the few at the expense of the many

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