London midday: Stocks extend losses as pound pops higher on BoE split

London stocks dropped sharply just after midday on Thursday as the pound popped up after the Bank of England stood pat on interest rates, but with three rate-setters voting for an immediate 25-basis points increase.

The FTSE 100 was down 0.8% to 7,413.67, while the pound reversed course, trading up 0.8% against the euro at 1.1454 and 0.2% versus the dollar at 1.2779.

The central bank kept its main policy rate unchanged at 0.25%, as widely expected, but market participants were caught out by the vote, which came in at 5-3 versus the previous and expected 7-1. Kristen Forbes, Ian McCafferty and Michael Saunders were the three members opting for a hike to 0.5% and this marked the closest the policymakers have to come to lifting rates since May 2011.

Meanwhile, policymakers were unanimous in their decision to leave the asset purchase programme unchanged at £435bn.

Ben Brettell, senior economist at Hargreaves Lansdown, said: "Set against a backdrop of disappointing retail sales, slowing growth, shrinking real wages and heightened political uncertainty, it was somewhat surprising that three MPC members voted for higher rates at this week’s policy meeting.

"It seems the willingness of the MPC to ‘look through’ higher inflation and leave rates on hold is wearing thin, and if inflation continues to surprise we could see higher rates by the end of the summer."

Investors were also continuing to mull over the Fed's policy announcement on Wednesday. US interest rates were lifted for the second time this year by 25 basis points to between 1.00 and 1.25%, as expected, with Chair Janet Yellen reiterating that inflation is expected to return to target and forecasting one more hike this year. However, she added that policymakers will be watching low inflation numbers closely after some disappointing readings.

Ahead of the announcement, weak inflation reports had led traders to rethink the view that there would be another rate hike this year. They were also caught off guard by the Fed's plans to shrink its $4.5trn balance sheet as this was more aggressive than anticipated.

Disappointing UK retail sales also took their toll, with data from the Office for the National Statistics showing sales shrank much more than expected in May. Retail sales excluding automotive fuel fell 1.6% month-on-month in May when a 0.9% decline had been expected after a revised 2.2% improvement the previous month.

Compared to May last year, retail sales were up only 0.6%, which was short of the consensus forecast for a 1.9% gain after a revised 4.6% increase from April.

Including auto fuel sales were down 1.2% on a monthly basis, versus a 0.8% estimate and after a 2.5% rise the prior month.

On a yearly basis retail sales including fuel were up 0.9% compared to the market's expectation of a 1.6% gain after a revised 4.2% improvement from April.

The UK retail sales, excluding auto fuel, contracted by 1.6%, worse than -1.0% expected by analysts and 2.0% printed a month earlier.

It wasn't just the weak retail sales figures denting the retail sector. DFS furniture warned that its full-year earnings will be below market expectations due to a weakened trading environment, knocking the stuffing out of its shares and dragging the likes of Next, Kingfisher, and Marks & Spencer down with it. Next was also hit by a downgrade at Credit Suisse.

Elsewhere, Drax was in the red as its new dividend policy left investors disappointed, while engineer WS Atkins ticked down despite reporting a rise in full-year profit and revenue in its last set of results before it gets taken over by Canada's SNC-Lavalin.

PZ Cussons fell after it said its overall performance in the year to the end of May has been in line with expectations.

NewRiver REIT slumped as it announced a proposed firm placing and placing and open offer to raise gross proceeds of at least £200m, at between 330p and 340p per share, while self-storage provider Safestore slid after the release of its interim results.

Persimmon, Severn Trent and Restaurant Group retreated as their stock went ex-dividend, while InterContinental Hotels was knocked lower by a downgrade from Morgan Stanley.

On the upside, Petrofac gushed higher as Jefferies lifted the stock to 'buy' and JP Morgan started it at 'overweight'.

Investors will also be awaiting Chancellor Philip Hammond's annual Mansion House speech on Thursday evening, in which he is expected to argue the case for a softer, more pragmatic Brexit that will protect jobs and economic growth. He will also, according to reports, outline the Treasury's plans to ensure that infrastructure projects and business start-ups that current receive support from European Union funds will be able to get UK support instead.

Sticking with politics, the Leader of the House of Commons has confirmed that the opening of parliament and Queen's speech has been pushed back two days to Wednesday 21 June. With talks over a potential agreement between Prime Minister Theresa May's Conservative party and the DUP stumbling, commentators suggested the announcement on the Queen's speech was intended as a message that the Tories are prepared to form a minority government without a deal if the talks break down.

Market Movers

FTSE 100 (UKX) 7,413.67 -0.81%
FTSE 250 (MCX) 19,624.66 -1.75%
techMARK (TASX) 3,553.85 -1.20%

FTSE 100 - Risers

HSBC Holdings (HSBA) 685.80p 0.75%
London Stock Exchange Group (LSE) 3,645.00p 0.36%
Unilever (ULVR) 4,241.50p -0.01%
Ashtead Group (AHT) 1,576.00p -0.06%
Standard Chartered (STAN) 755.40p -0.09%
Shire Plc (SHP) 4,276.50p -0.09%
Carnival (CCL) 5,085.00p -0.10%
Experian (EXPN) 1,618.00p -0.12%
British American Tobacco (BATS) 5,437.00p -0.17%
WPP (WPP) 1,680.00p -0.24%

FTSE 100 - Fallers

Persimmon (PSN) 2,265.00p -6.48%
Anglo American (AAL) 996.60p -5.89%
Next (NXT) 4,090.00p -4.91%
Fresnillo (FRES) 1,606.00p -4.40%
Marks & Spencer Group (MKS) 355.40p -3.76%
Randgold Resources Ltd. (RRS) 7,190.00p -3.68%
Severn Trent (SVT) 2,397.00p -3.46%
Kingfisher (KGF) 300.10p -3.29%
Barratt Developments (BDEV) 576.00p -3.03%
International Consolidated Airlines Group SA (CDI) (IAG) 588.50p -2.65%

FTSE 250 - Risers

Petrofac Ltd. (PFC) 439.90p 8.59%
CLS Holdings (CLI) 201.40p 2.76%
IP Group (IPO) 139.30p 2.58%
Acacia Mining (ACA) 298.00p 1.46%
Riverstone Energy Limited (RSE) 1,287.00p 0.86%
Mitchells & Butlers (MAB) 236.40p 0.77%
HarbourVest Global Private Equity Limited A Shs (HVPE) 1,275.00p 0.63%
Keller Group (KLR) 914.50p 0.49%
Savills (SVS) 879.50p 0.46%
JPMorgan Indian Investment Trust (JII) 735.00p 0.41%

FTSE 250 - Fallers

Restaurant Group (RTN) 324.40p -7.31%
Wizz Air Holdings (WIZZ) 2,264.00p -6.64%
Howden Joinery Group (HWDN) 425.50p -6.34%
Hochschild Mining (HOC) 263.70p -6.19%
Dunelm Group (DNLM) 601.00p -6.09%
NewRiver REIT (NRR) 348.00p -5.69%
Polymetal International (POLY) 920.00p -5.40%
Petra Diamonds Ltd.(DI) (PDL) 116.80p -5.19%
Evraz (EVR) 176.40p -5.16%
Intermediate Capital Group (ICP) 842.00p -5.07%