UK stock, bond and currency markets have been well prepared for an August interest rate rise in recent weeks. But previous Bank of England decisions have often gone against expectations, most recently in May – so there was always the possibility that markets could have been wrong-footed. In the end the pound rose marginally and the FTSE 100 attempted to resist the downward pressure seen since the start of trading.
An interest rate rise has been a relatively minor consideration today for the UK’s largest stocks today as a China-fuelled selloff has hit mining and commodity stocks.
Just after midday, the biggest fallers were dollar earners and those stocks heavily exposed to a possible China downturn: Antofagasta (ANTO), Rio Tinto (RIO), Fresnillo (FRES), Glencore (GLEN), and Anglo American (AAL).
The limited range of FTSE 100 winners were affected more by recent results: the London Stock Exchange (LSE) reported results today and was the biggest riser. Rolls Royce (RR) also released earnings today and was the second biggest riser.
In a falling market, defensive stocks and "bond proxies" were also among the risers. Companies like National Grid (NG.), Imperial Brands (IMB), and SSE (SSE) were higher, and these yield 5.5%, 5.4% and 7.3% respectively. Given the low interest rates seen across the developed world, income paying stocks have gained favour in recent years as an alternative to bonds, especially given their low volatility and prospect of capital gain.
The main index is still down 100 points at lunchtime at just over 7,500 points, 200 points lower than at the start of the week. The mid-cap FTSE 250, which is more exposed to the UK economy, was also sharply lower on Thursday – but the biggest falls were seen in overseas-focused commodity stocks Ferrexpo (FXPO) and Kaz Minerals (KAZ), which lost a quarter of its value.
The FTSE 100 has been held back in recent weeks because of the pound’s recent recovery against the dollar. The weakness in the pound has, since the Brexit vote in June 2016, helped boost dollar earners in the index, despite ongoing fears over the UK economy after the exit from the EU.
From April to July 2018 the pound lost ground from 1.40 against the dollar to 1.30 as the US currency regained strength. The pound is back around 1.31 against the dollar after midday today, in line with levels seen in recent days ahead of the rate rise decision. The unanimous nature of the Monetary Policy Committee’s decision, voting 9-0 to raise rates, also supported sterling initially but gains were shortlived.
David Lamb, head of dealing at FEXCO Corporate Payments, noted that the unanimity of the MPC was the biggest surprise, giving the pound an "extra lift" against the dollar and the euro in the minutes after the announcemenent.
A rate rise had already been priced in to sterling, which was given a further boost this morning by much stronger than expected construction figures for July. Manufacturing data disappointed yesterday, so today’s figures boosted the case for a rate rise – and supported the narrative of a spring and summer rebound for the UK economy, Brexit concerns notwithstanding.
