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Gilts fall, pound rises as City bets on rate rise
by Gavin Lumsden on Sep 05, 2013 at 14:12
- Marks & Spencer (MKS.L) leads FTSE 100 higher;
- Consumer stocks buoyed by services sector report and analyst upgrades;
- Bank of England and European Central Bank both keep interest rates at 0.5%;
- Market questions Bank of England governor Mark Carney's commitment to low interest rates;
- All eyes on tomorrow's US jobs report as latest employment stats are good.
Britain’s dominant service sector rose at its fastest rate for over six years last month, confirming the sense of an accelerating recovery and increasing the pressure on Bank of England governor Mark Carney, who wants to keep interest rates down.
The FTSE 100 jumped 36 points or 0.5% to 6,509 in early trading, reassured by comments by the US Federal Reserve overnight that it will probably start to ‘taper’ its emergency support of the economy later this month.
The FTSE gains were also in response to a survey by Markit and the Chartered Institute of Purchasing and Supply. Its business activity index compiled from 700 services firms hit 60.5, way ahead of the 50 mark separating contraction from growth.
This was the eighth month in a row the survey has shown growth in new business, prompting IHS Global Insight economist Howard Archer to say the ‘very strong’ figures indicated the services sector, which accounts for three quarters of the economy, would ‘make an even larger contribution to GDP growth in the third quarter.’
Pressure on Carney
The new data is in line with other recent encouraging news that the UK economy is mending quicker than Carney said in his Inflation report last month.
After a strong start the blue chip index settled back ahead of the Bank of England’s midday announcement that interest rates were held at 0.5% with no additional asset purchases to stimulate the economy.
Although this was expected there was some disappointment there was no statement to accompany the rate news, as in July when Carney took up his post and warned that rising market rates were inappropriate.
The market continued to test Carney's mettle with UK government bonds falling and the yields (or market interest rates) on 10-year gilts hitting 2.958%, a two-year high. Anticipating a rise in interest rates the pound rose to $1.5644 from $1.5624 against the dollar. Gold gained $7.60 to $1,397 an ounce.
Kathleen Brooks of forex.com expressed frustration at having to wait for the minutes from the monetary policy committee (MPC). ‘The lack of a statement today could make the Bank of England’s job harder. It had an opportunity to further explain its stance on forward guidance in the face of better economic data, it could have also used rhetoric to push rates down.’
Mike Amey, head of sterling portfolios at Pimco, the fund manager, agreed: 'By issuing no statement the MPC do not see the back up in yields as being sufficient to risk the recovery, and as such the market has continued to sell off to new yield highs. Given governor Carney’s comments this suggests that the committee remains divided with the governor at the dovish end.
'Historically the MPC has paid great attention to the purchasing managers indices, and with these hitting new highs there are likely to be committee members wondering whether it will indeed take until 2016 to hit the 7% unemployment threshold,' he added.
ECB holds, US jobs data
In Europe the FTSEurofirst 300 index rose and fell and then edged 0.6% higher at 1,222.5 as the European Central Bank also kept its main rate at 0.5%. ECB president Mario Draghi is in a similar quandary to Carney as eurozone prospects improve. As he started his press conference the CAC 40 index in France rose 0.6% to 4,003 and the German Dax 30 gained 0.5% to 8,234. Against the dollar the euro fell to $1.3144 from $1.3207.
US markets were set for a positive start to trading after the number of Americans filing for new unemployment benefit fell to 323,000 last week, more than the 330,000 expected. However, all eyes are on tomorrow's monthly employment report which could influence the Fed's decision on whether and when to start reducing its level of economic stimulus.
Marks & Spencer leads consumer stocks higher
In London, shares in a raft of consumer-facing companies rose in response to the positive news on the UK economy.
Marks & Spencer (MKS.L) advanced 16p or 3.3% to 494p after HSBC analysts warmed to the department store group, upgrading their rating to 'overweight' from 'neutral' and raising its target price for the share to 550p from 490p. They believe MKS is the most operationally geared retailer in the FTSE 100 to a consumer recovery.
HSBC's influence extended to Persimmon (PSN.L), up 30p or 2.7% to £11.41, after the bank upped the housebuilder's price target to £13.95 from £13 in a positive report on the sector.
InterContinental Hotels (IHG.L) gained 39p or 2% to £18.75 after an upgrade to 'buy' from 'neutral' by UBS, which raised its earnings forecasts and reacted to recent share price weakness.
Dixons Retail (DXNS.L) was prominent among the risers in the mid cap FTSE 250, up 3.25p or 7.3% to 47.5p, after paying €69 million (£58 million) to mutares, a German industrial holding company, to take away its loss-making PIXmania e-commerce business. The news was accompanied by a positive first quarter statement.
Supergroup (SGP.L), the owner of the Superdry fashion chain, leapt 58p or 5% to £12.17 after expressing confidence in its full-year forecasts after achieving strong first quarter sales. The shares have more than doubled this year.
On the Aim market, Monitise (MONI.L) dropped 2.2p or 4.2% to 51.5p as annual losses increased to £19.3 million from £10.4 million following a rise in capital expenditure. Shares in the mobile banking technology company hit an all-time high yesterday after Goldman Sachs raised its price target for the shares on the announcement of two new contracts. The stock has soared 51% this year.
See our FTSE data pages for the day's other risers and fallers
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- Monitise PLC (MONI.L)
- SuperGroup PLC (SGP.L)
- Dixons Retail PLC (DXNS.L)
- InterContinental Hotels Group PLC (IHG.L)
- Persimmon PLC (PSN.L)
- Marks and Spencer Group PLC (MKS.L)
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