After an initial drop, UK equities crept higher in late morning deals but the midday announcement of an unexpected jump in inflation hit sentiment once again.
As such, the FTSE 100 index shed 63 points or 1.1% to close at 5,861 and the FTSE 250 index fell back 108 points or 0.9% to 11,836.
The consumer price index jumped to a two-and-a-half year annual high of 4.5% in April, up from 4.0% and notably higher than the 4.1% consensus expectation. The inflation figure was described by some as “shocking” but M&G fixed interest manager Mike Riddell pointed out that not only will this figure decline again once the effects of the January VAT rise have been fully digested but that the Bank of England still can’t afford to upset economic growth by hiking interest rates. The market is already pricing in two 0.25% rate hikes by this time next year, Riddell said, but he also pointed out that back in August 2009, the market was pricing in a UK Bank of England rate for May 2011 of 3.25%.
“With such a vulnerable consumer, housing market, and banking sector, we can't risk higher rates,” Riddell said. “With that in mind, it's not a bad idea to have a fresh look at the second part of the opening paragraph in the Bank of England's quarter Inflation Report:
‘In order to maintain price stability, the Government has set the Bank’s Monetary Policy Committee (MPC) a target for the annual inflation rate of the Consumer Prices Index of 2%.Subject to that, the MPC is also required to support the Government’s objective of maintaining high and stable growth and employment’.”
There was some more unwelcome economic news from across the pond, too. The Federal Reserve reported that US industrial production showed virtually no change in April compared with March, coming behind an expected 0.3% increase. The capacity utilisation rate fell 10 basis points to 76.9%, also behind an expected increase to 77.6%. Each reading’s March figures saw a downward revision, as well. That said, industrial production was 5.0% higher compared with the same time last year.
New-home construction in the United States last month fell by 10.6% compared with March levels, signalling that housing will continue to hinder the economic recovery. The April seasonally adjusted annual rate of 523,000 was a sharp drop from the revised March reading of 585,000, and overall new-home construction is down 23.9% year over year.
Returning our focus to British shores, only a handful of top tier stocks managed to make headway on Tuesday. Essar Energy (ESSR) was the top performer, up 3.0% after reporting a solid operating performance in the first three months of the year.
Index heavyweight Vodafone (VOD) gained 0.9% after the world’s largest mobile phone operator issued an upbeat outlook for 2012 and said it was either holding or increasing market share in most major markets.
On the downside, BP (BP.) slipped into the red but still managed to marginally outperform the broader index as investors breathed a sigh of relief following news its attempt to strike a deal with Russia’s state-owned Rosneft has eventually collapsed. BP had hoped to achieve further growth through operating in offshore Arctic fields, but a debate kicked off between the oil major and shareholders of its TNK-BP joint venture that proved too troublesome to resolve at the end of the day.
Away from news-driven moves, miners Fresnillo (FRES), Eurasian Natural Resources (ENRC) and Randgold Resources (RRS) applied pressure on behalf of the natural resources sector as commodity prices continued to tumble south. The three metal extractors closed down 3.2%, 3.0% and 2.2%, respectively, as gold, silver, light crude oil and natural gas prices shed 0.8%-3.0%.
And banks were also under the cosh as EU ministers made public comments as to the possibility that Greece will have to restructure its debt. Lloyds Banking Group (LLOY), Barclays (BARC) and Standard Chartered (STAN) fell back 1.2%-1.6%.
