London Report: FTSE in retreat as early interest rate hike feared

THE UK’S main equity index had its worst intraday fall in nearly two months yesterday, as strong retail sales reignited the chance of an earlier-than-expected interest rate rise that could push traders back into bonds from equities.
The benchmark FTSE 100 index fell by 1.6 per cent, or 104.09 points, to 6,483.34 points yesterday.
The index had its worst one-day decline since a three per cent drop on 20 June, and fell to its lowest level in over a month.
The FTSE extended losses after data showed a greater-than-expected jump in UK retail sales, which traders said could herald interest rates being raised off their current record 0.5 percent lows sooner than expected.
Bank of England governor Mark Carney has said rates will not rise before unemployment drops to seven per cent.
However, Brown Shipley fund manager John Smith said the strong retail sales showed unemployment could fall to that level earlier than forecast, which in turn could lead to a quicker rise in interest rates.
Higher rates could in turn draw back investors to bonds, away from equities, as returns on bonds would also increase.
“The better the economic news, the more likely it is that interest rates will rise earlier than forecast. We could reach that seven per cent unemployment target well before Carney had forecast,” Smith said.
The prospect that interest rates will eventually have to come back up off those record lows hit property stocks the hardest, since the record low rates have buoyed consumer demand for loans to buy up houses.
Housebuilder Persimmon fell 7.4 per cent to make it the worst-performing FTSE 100 stock.
Higher rates could also hit exporters as the value of Britain’s sterling currency rises on foreign exchange markets, and sterling hit a two-month high against a trade-weighted basket of currencies yesterday.
The FTSE 100 has fallen back over the last three months from a 13-year high of 6,875.62 points reached in May, although the index remains up by around 10 per cent since the start of 2013.
Despite yesterday’s fall, several traders felt the FTSE could get back to those May highs towards the end of 2013, and backed using days when the market fell to buy up stocks on the cheap.
“In the short term I would continue to run with the overall trend, and buy on dips,” said MB Capital trading director Marcus Bullus.
Alastair McCaig, market analyst at IG said: “It is always more dangerous to draw conclusions about the markets in the middle of the summer holiday season. As equity volumes struggle to reach the year averages, it can create misleading data.”