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LONDON MARKETS : U.K. Stocks Slump, Pound Rallies As BOE Hints Of Spring Rate Hike

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02/08/2018 | 06:29pm CEST

By Sara Sjolin, MarketWatch

Oil companies drop on back of falling crude prices

U.K. stocks closed in negative territory and the pound rallied on Thursday after the Bank of England said interest rates could rise sooner and faster than previously expected.

Resource companies were among biggest decliners, hit by a stronger dollar after U.S. congressional leaders agreed to a two-year budget deal.

What are markets doing?

The FTSE 100 index dropped 1.5% to close at 7,170.69, setting it on track for a 3.7% weekly slide, which would be its biggest since November 2016. The London benchmark tumbled to a 10-month low on Tuesday on the back of a selloff in the U.S., but then rebounded 1.9% on Wednesday .

The pound jumped to an intraday high of $1.4066, from $1.3882 late Wednesday in New York. Sterling traded at $1.3923 at the time of the London market's close.

What is driving the markets?

The surge in the pound came after the BOE struck a hawkish tone at its so-called Super Thursday, when it released its rate decision, meeting minutes and quarterly inflation report. The central bank lifted its 2018 growth forecast to 1.8% from 1.6% and said inflation is likely to overshoot its 2% target through 2020.

"Were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report, in order to return inflation sustainably to the target," the bank said.

The comments were interpreted as a rate rise could come as early as May. The market's expectations of hike in May went up to 70% from 55% before the rate decision, according to Bloomberg data.

The FTSE already started the day on a downbeat note following a weak finish in the U.S. on Wednesday ., which continued into Thursday's session on Wall Street .

The weakness follows a big push lower that started on Monday afternoon, when investors worried about rising inflation and higher interest rates dumped stocks. Bond yields in the U.S. spiked again on Wednesday after Washington hammered out a two-year budget pact to avoid a government shutdown.

The deal also pushed up the greenback , which in turn weighed on dollar-denominated commodities such as oil and metals. Crude fell 1.4% to $60.90 a barrel, while copper dropped 0.2% to $3.08 a pound.

What are strategists saying?

"Speculation has been building recently that the BOE could move as soon as May, and today's hawkish language shift will likely increase that speculation. A rate hike earlier in the year could help the pound maintain higher levels, but Brexit negotiations and political uncertainty remain a significant risk," said Alexandra Russell-Oliver, currency markets analyst at Caxton, in a note.

Which stocks are in focus?

Shares of Compass Group PLC (>> Compass Group plc) jumped 5.3% after the catering firm struck an upbeat tone for full-year revenue growth.

Among energy companies tracking oil prices lower, shares of Royal Dutch Shell PLC (>> Royal Dutch Shell Plc) (>> Royal Dutch Shell Plc) fell 2.1% and BP PLC (>> BP) (>> BP) gave up 0.8%.

In the mining space, Antofagasta PLC (>> Antofagasta) dropped 2.5%, Glencore PLC (>> Glencore) lost 3.3% and Rio Tinto PLC (>> Rio Tinto plc) (>> Rio Tinto plc) (>> Rio Tinto plc) gave up 3.2%.

Economic data

U.K. house prices grew steadily in the first month of the year, with the Royal Institution of Chartered Surveyors saying Thursday its house-price balance stood at plus 8 in January.

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