London close: FTSE ends lower on prospect of US interest rate hike

The FTSE 100 finished on the back foot on Thursday as the Federal Reserve’s hawkish policy meeting minutes continued to weigh.

Minutes from the latest Federal Open Market Committee released on Wednesday revealed that an interest-rate hike in June was a possibility, with a number of participants already angling for an increase at the April meeting.

The key phrase in the minutes was that “most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2% objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June”.

“Market pricing still suggests a rate hike in June is unlikely, but the odds have improved significantly following the minutes,” said Jasper Lawler, market analyst at CMC Markets.

“The Fed is certainty aware of market expectations and by explicitly referencing June as a ‘live meeting’ are trying to massage them in the right direction. As is often the case with communications from the Fed, these minutes were an exercise in managing expectations.”

Federal Reserve Vice Chairman Stanley Fischer tried to douse the flames, saying that the US requires faster potential economic growth before lifting interest rates.

"What we need most, now that we are near full employment and approaching our target inflation rate, is faster potential growth," Fischer told an economics conference in New York.

Fellow Fed policymaker William Dudley also spoke in New York but kept schtum on interest rates. Instead he focused on the importance of incoming data on the Fed’s policy decisions.

Closer to home, UK retail sales figures came in better than expected. Retail sales jumped 4.2% in April compared to the same month a year ago, beating estimates for a 2.5% rise and following the previous month's 3% year-on-year increase, according to the Office for National Statistics. On a month-on-month comparison, sales in April climbed 1.5%, more than the 0.7% gain that was forecast and compared to March's 0.7% fall.

The month-on-month rebound in retail sales came despite a decline in clothing sales due to unseasonably cold weather deterring shoppers from picking up new season items.

"Clothing stores remain the main drag on growth in the retail sector, with sales hampered by unseasonal weather. However, both the volume and value of sales increased in April compared with March as lower prices boosted sales," said Melanie Richard, head of retail sales at the ONS.

Meanwhile, the Labor Department said the number of Americans filing for unemployment benefits fell a little less than expected last week. US initial jobless claims dropped by 16,000 to a seasonally-adjusted 278,000 from the previous week’s unrevised level. Economists had been expecting a slightly bigger decline to 275,000.

Manufacturing conditions in the Philadelphia region unexpectedly deteriorated further in May, according to the latest report from the Federal Reserve Bank of Philadelphia. The diffusion index for current activity fell to -1.8 from -1.6 in April. Economists had been expecting the index to move back into expansion territory with a reading of 3.5.

In the eurozone, an account of the European Central Bank’s 20-21 April policy meeting said the central bank needed to assess “the extent to which structural reforms affected developments in inflation, most notably with respect to their short and long-run effects, including possibly persistent disinflationary effects arising from too slow an implementation”.

In company news, 3i Group rallied as it reported a 10% dividend increase after delivering a 17% rise in net asset value per share and a total return of 22% in the year to 31 March.

Banking stocks rallied on the prospect of higher US interest rates with Royal Bank of Scotland, Barclays and Standard Chartered in the black. Banks were also lifted by a poll on Wednesday showing the campaign to keep the UK within the European Union has taken an 18 percentage-point lead over the drive for it to leave.

Going the other way, mining stocks were the biggest fallers including Fresnillo, Anglo American and Glencore as metal prices declined.

A slump in oil prices also weighed on producers including Royal Dutch Shell, BHP Billiton and Tullow Oil. Brent crude fell 2.3% to $47.83 per barrel and West Texas Intermediate dropped 2.2% to £47.14 per barrel.

The decline came after the Energy Information Administration on Wednesday said US crude oil inventories rose 1.3m barrels to 541.3m barrels in the week ended 13 May, noting that this was a historical high for this time of the year.

Royal Mail was also under pressure after warning that the market remains challenging as it reported a 1% fall in full year revenue to £9.2bn.

Thomas Cook tanked after the tour operated posted a narrower loss for the first half of the year but said summer bookings were down 5% and underlying earnings for the year are expected to be at the lower end of market views.

Market Movers

FTSE 100 (UKX) 6,053.35 -1.82%
FTSE 250 (MCX) 16,730.11 -0.90%
techMARK (TASX) 3,026.44 -1.30%

FTSE 100 - Risers

3i Group (III) 499.70p 2.50%
Royal Bank of Scotland Group (RBS) 226.80p 1.39%
Berkeley Group Holdings (The) (BKG) 3,092.00p 1.08%
Admiral Group (ADM) 1,879.00p 0.91%
ITV (ITV) 207.30p 0.88%
Taylor Wimpey (TW.) 197.90p 0.71%
Barratt Developments (BDEV) 559.00p 0.54%
RSA Insurance Group (RSA) 480.50p 0.36%
Shire Plc (SHP) 4,112.00p 0.34%
Barclays (BARC) 170.65p 0.15%

FTSE 100 - Fallers

Fresnillo (FRES) 1,063.00p -7.08%
Royal Dutch Shell 'A' (RDSA) 1,648.00p -4.90%
Merlin Entertainments (MERL) 411.90p -4.52%
Royal Dutch Shell 'B' (RDSB) 1,663.50p -4.45%
Anglo American (AAL) 579.30p -4.42%
Royal Mail (RMG) 488.20p -3.90%
Hargreaves Lansdown (HL.) 1,251.00p -3.77%
Glencore (GLEN) 128.10p -3.65%
Bunzl (BNZL) 2,004.00p -3.51%
InterContinental Hotels Group (IHG) 2,525.00p -3.37%

FTSE 250 - Risers

Restaurant Group (RTN) 335.70p 5.53%
Entertainment One Limited (ETO) 174.30p 4.18%
Electrocomponents (ECM) 269.50p 3.65%
OneSavings Bank (OSB) 300.50p 2.84%
Grainger (GRI) 233.10p 2.28%
Daejan Holdings (DJAN) 5,825.00p 1.84%
Virgin Money Holdings (UK) (VM.) 348.70p 1.78%
Ibstock (IBST) 210.60p 1.69%
AO World (AO.) 172.60p 1.53%
SSP Group (SSPG) 314.00p 1.29%

FTSE 250 - Fallers

Thomas Cook Group (TCG) 72.60p -18.88%
Brewin Dolphin Holdings (BRW) 256.50p -7.00%
Tullow Oil (TLW) 243.00p -6.90%
Evraz (EVR) 117.10p -6.39%
Ophir Energy (OPHR) 67.85p -5.96%
Centamin (DI) (CEY) 107.50p -5.78%
Redefine International (RDI) 44.50p -4.36%
Amec Foster Wheeler (AMFW) 446.50p -4.18%
Acacia Mining (ACA) 324.70p -4.08%
Rathbone Brothers (RAT) 1,925.00p -4.04%