London close: Stocks decline after hawkish remarks from Fed speakers

London stocks fell on Friday as investors assessed hawkish remarks from Federal Reserve officials and disappointing Chinese inflation data.

Boston Fed President Eric Rosengren said on Friday “a reasonable case can be made” for raising interest rates gradually as the risks facing the economy are more in balance. The dollar strengthened against most currencies following his remarks, including 0.25% against the pound.

Chris Beauchamp, chief market analyst at IG, said: “A dismal end to the week became even more dismal thanks to Eric Rosengren, who said that the Fed risks creating more problems in waiting to raise rates.

“The theme of this week, at least where US dollar traders (and many more investors) are concerned, is that a September move from the FOCM is all but impossible, while a December move is becoming more unlikely too.”

Following the ECB’s policy announcement on Thursday, when the central bank said it hadn’t discussed further quantitative easing, Beauchamp believes it is becoming “worryingly clear” that central banks might be stepping away from loose monetary policy.

He added: “Clearly, it is too early to attribute gospel truth to this view, but it makes convincing reading on an otherwise dull Friday, and has been enough to see the FTSE 100 push back to the levels last seen pre-non-farm-payrolls last week.”

Rosengren’s comments were echoed by Dallas Fed President Robert Kaplan who said on Friday the case for a rate hike has improved in the last few months.

In contrast, the usually dovish Fed Governor Daniel Tarullo on Friday told CNBC he wants to see more evidence of sustained inflation before raising rates, although he said he wouldn’t rule out a hike this year.

The market is now looking ahead to a speech on Monday by the Fed’s Lael Brainard, a leading dove.

Fed officials are lining up to speak before the September policy meeting blackout on Tuesday, which means policymakers are unable to comment until the interest rate decision. The Fed meets on 20-21 September.

Elsewhere, Chinese inflation figures were also in focus, as consumer price inflation rose 1.3% in August from a year earlier, down from July’s 1.8% and marking the lowest level since October 2015. It was also weaker than the 1.7% jump expected by economists.

The country’s producer price index fell 0.8% in August from a year ago, which was more or less in line with expectations and compared to a 1.7% fall in July.

On home soil, the UK’s deficit in trade in goods narrowed to £4.5bn in July from £5.5bn in June as exports rose, the Office for National Statistics revealed in its first trade data since the Brexit vote. Economists had expected a deficit of £4.2bn.

The exports of goods and services rose 1.9% in July from a month ago, supported by a weaker pound after the UK voted to leave the European Union. Imports dropped 0.5%.

“A major hope for the UK economy going forward is that the substantial overall weakening of the pound since the UK voted to leave the European Union in June’s referendum will increasingly feed through to boost foreign demand for UK goods and services,” said Howard Archer, chief European and UK economist at IHS Global Insight.

“While the pound has recently firmed from its post Brexit vote lows, it is still at an extremely competitive level and is likely to remain so for an extended period. Indeed, we believe that the pound could well soften further if current UK economic resilience falters over the coming months as we suspect it will.”

Separately, the ONS revealed UK construction output rose 1.5% year-on-year in July, surprising analysts who had expected a 3.4% fall and following a 0.7% drop in June.

Meanwhile, a Bank of England survey showed the proportion of Britons who believe the central bank will raise interest rates over the next year has plunged to a record low. It follows the BoE’s decision in August to cut interest rates to a record low of 0.25% after the Brexit vote in June.

The BoE said 21% of people surveyed in August expected the central bank to raise rates in the next 12 months, down from 41% in May.

In the Eurozone, data showed Germany’s trade surplus declined to €19.4bn in July from a revised €21.4bn in June. Economists had been expecting a surplus of €22bn.

Exports fell 2.6% on the month, which was the worst decline in almost a year and missed expectations of a 0.3% increase. Imports declined 0.7% on the month, missing forecasts of a 0.8% jump.

On the commodities front, oil prices retreated after surging in the previous session when data from the US Energy Information Administration showed crude inventories fell by 14.5m barrels in the week ended 2 September. Analysts had been expecting a gain of 225,000 barrels.

Brent crude dropped 2.5% to $48.76 per barrel and West Texas Intermediate slid 2.2% to $46.58 per barrel at 1644 BST.

On the company front, banking stocks gained - including Royal Bank of Scotland, Barclays and HSBC - as the sector stands to benefit from an end to the low interest rate environment.

Burberry shares declined after Goldman Sachs removed the stock from its Sustain Focus List, highlighting the company’s subdued outlook. It pointed out that over the last two years, Burberry has seen a weaker-than-expected financial performance, with earnings per share down 2% and group cash return on capital invested down 407 basis points to 17.7%.

Private healthcare company Mediclinic was up after it said “significant progress” was made integrating the Al Noor Hospital business, but revenues from its Abu Dhabi operations will be lower than anticipated.

JD Wetherspoon rallied after the pub operator reported record full year pre-tax profit and sales. The FTSE 250 firm’s profit before tax was up 3.6% at £77.8m with revenue rising 5.4% to £1.595bn, and like-for-like sales improving 3.4% over the prior year.

Greene King lost its fizz after the pub company sounded a cautious note on the impact of the Brexit vote as it reported a 1.7% increase in like-for-like sales in the 18 weeks to 4 September. The group said uncertainty surrounding the UK's future withdrawal from the European Union has “translated into a softening of some economic indicators and a reduction in consumer confidence”.

Market Movers

FTSE 100 (UKX) 6,776.95 -1.19%
FTSE 250 (MCX) 17,894.19 -1.64%
techMARK (TASX) 3,449.24 -1.25%

FTSE 100 - Risers

Royal Bank of Scotland Group (RBS) 206.70p 2.28%
Mediclinic International (MDC) 979.50p 1.56%
Barclays (BARC) 174.75p 0.89%
HSBC Holdings (HSBA) 578.00p 0.82%
Lloyds Banking Group (LLOY) 59.31p 0.76%
BHP Billiton (BLT) 1,017.50p 0.20%
Prudential (PRU) 1,400.00p 0.14%
RSA Insurance Group (RSA) 507.00p 0.10%
SABMiller (SAB) 4,383.50p -0.13%
Provident Financial (PFG) 3,039.00p -0.16%

FTSE 100 - Fallers

Ashtead Group (AHT) 1,233.00p -4.42%
Whitbread (WTB) 4,020.00p -3.92%
Morrison (Wm) Supermarkets (MRW) 192.50p -3.70%
Next (NXT) 5,425.00p -3.47%
Bunzl (BNZL) 2,283.00p -3.43%
Fresnillo (FRES) 1,639.00p -3.42%
Rolls-Royce Holdings (RR.) 725.50p -3.27%
CRH (CRH) 2,450.00p -3.16%
Taylor Wimpey (TW.) 155.70p -2.99%
Intertek Group (ITRK) 3,477.00p -2.96%

FTSE 250 - Risers

AA (AA.) 303.00p 4.12%
Wetherspoon (J.D.) (JDW) 945.00p 2.27%
Sports Direct International (SPD) 327.50p 2.15%
CLS Holdings (CLI) 1,599.00p 1.85%
Tullett Prebon (TLPR) 389.80p 1.17%
Caledonia Investments (CLDN) 2,463.00p 0.53%
Spire Healthcare Group (SPI) 366.90p 0.52%
BH Macro Ltd. GBP Shares (BHMG) 1,905.00p 0.47%
HarbourVest Global Private Equity Limited A Shs (HVPE) 941.50p 0.37%
Aldermore Group (ALD) 176.00p 0.28%

FTSE 250 - Fallers

Greene King (GNK) 789.00p -6.07%
Debenhams (DEB) 60.85p -5.00%
Hochschild Mining (HOC) 263.70p -4.87%
Inchcape (INCH) 678.50p -4.71%
Howden Joinery Group (HWDN) 439.50p -4.66%
Countrywide (CWD) 251.10p -4.63%
Crest Nicholson Holdings (CRST) 472.70p -4.51%
Shaftesbury (SHB) 951.50p -4.32%
Vectura Group (VEC) 137.50p -4.25%
IP Group (IPO) 182.00p -4.21%