London’s FTSE 100 led declines in European bourses on Wednesday as interest rate-sensitive stocks such as housebuilders, real estate and utilities felt the force of a surprise uptick in U.K. inflation.
Britain’s Office for National Statistics said consumer prices rose in the year to December by 4%, up from 3.9% in November and a faster pace than the 3.8% forecast by economists.
It was the first increase in headline inflation for 10 months, causing the pound
GBPUSD,
to rally 0.3% to $1.2675 and U.K. government bond yields
BX:TMBMKGB-10Y
to jump as traders reduced bets on the likely pace of Bank of England interest rate cuts.
“Market expectations for interest rates have been scaled back this week, and there are now just under 5 interest rate cuts priced in for the U.K. economy between May and the end of 2024,” said Kathleen Brooks at XTB Online Trading. “If the trend in rising prices continues, then we could see rate cut expectations scaled back even further.”
Susannah Streeter, head of money and markets at Hargreaves Lansdown, noted that the trimming of U.K. rate-cut bets dovetailed with attempts by Federal Reserve officials to calm the market’s optimism over how quickly borrowing costs will be reduced this year, and this was weighing on risk appetite.
“With higher for longer rate expectations bedding back in, stocks slipped on Wall Street which extended into falls in Asia [and] there appears to be little momentum to help lift the internationally focused FTSE 100,” said Streeter.
London’s blue-chip index
UK:UKX
fell 1.7% as fears about more expensive mortgages pushed homebuilder Persimmon
PSN,
down more than 4%. Sectors deemed especially attractive for their dividend yields also succumbed, with real estate group Land Securities
LAND,
off 3% and utility Severn Trent
SVT,
also down 3%.
Resources groups struggled, led lower by Glencore
GLEN,
and Antofagasta
ANTO,
on concerns about weak China growth.
“Chinese GDP data showed a country still struggling to maintain high levels of economic growth. The economy expanded by 5.2% in the fourth quarter, below market forecasts of 5.3%.,” noted Russ Mould, investment director at AJ Bell. “Naturally, that spooked investors in mining stocks for fear that commodities demand from the Asian superpower could weaken.”
Elsewhere, the DAX
DX:DAX
in Frankfurt dipped 1% and the CAC 40
FR:PX1
in Paris shed 1.1% as benchmark German government bond yields
BX:TMBMKDE-10Y
traded near 5-week highs after European Central Bank President Christine Lagarde joined the chorus for caution on rate-cut expectations.
