London close: Housebuilders lead retreat after BoE's hawkish surprise

London stocks gave back two days' gains on Thursday as the pound rebounded after the Bank of England took a surprisingly more hawkish turn, which also hit housebuilding stocks.

The FTSE 100 lost almost 71 points or 0.9% to end at 7,556.44 as sterling popped up 0.6% against the dollar at 1.3250 and 0.4% versus the euro at 1.1424 after it emerged that the BoE's monetary policy committee voted 6-3 to keep interest rates at 0.5%, and left its asset-purchase programme unchanged.

Andy Haldane unexpectedly joined dissenters Ian McCafferty and Michael Saunders in voting for a 25 basis points hike, in a move that was not expected and marked the first time a BoE chief economist has dissented since 2011.

This meant the BoE meeting, which had been pencilled in a somewhat of a non-event, grabbed the headlines as the shift from the BoE chief economist raised the likeliness of an August rate hike.

"By shifting his vote in favour of a rate rise, Andrew Haldane managed to swing expectations for an August rate rise from 2% to 68%," said Joshua Mahony, market analyst at IG, "with the MPC largely happy to write off Q1 weakness as being weather induced.

"Arguably Haldane’s vote is hugely important given that he typically votes with the pack, and is perceived as the top economist on the committee."

Earlier, figures from the Office for National Statistics showed that public borrowing in the first two months of the financial year fell to the lowest level since 2007 as the government received more in tax revenue. Britain borrowed £11.8bn in April and May - £.41bn less than a year earlier and the best start to a financial year since shortly before the financial crisis started.

The government borrowed £5bn in May - about £2bn less than a year ago and the lowest figure in May since 2005. Economists on average had expected borrowing of £6.3bn. In April and May the government spent £123.6bn, roughly the same as a year earlier. The government’s income increased 3% to £112.9bn including £82.6bn in taxes.

In corporate news, housebuilders Barratt, Berkeley, Taylor Wimpey and Persimmon all continue their recent tumble, with markets now adding in the potential impact of rising interest rates.

"The Brexit uncertainty and second home clampdown has already proven detrimental to the UK housing market, and with an August rate hike potentially on the cards, we are seeing investors fear that yet another negative story is building for the housebuilders," said Mahony.

Defence contractors were also a drag on the FTSE 350 after Prime Minister Theresa May was reported to have questioned the Ministry of Defence's spending plans. In a tense meeting, May told defence secretary Gavin Williamson he needed to rethink what was needed by modern armed forces and appeared to question the UK’s position as a 'tier one' military power, the Financial Times reported, sending shockwaves through the MoD. Shares in Melrose fell almost 4%, BAE Systems fell 2%, Rolls-Royce were down slightly, while shares of contractors Babcock and QinetiQ also were lower.

EasyJet was flying lower amid comments from CEO Johan Lundgren that the company has no plans to develop its own low-cost long-haul arm. The company aims be a part of industry consolidation, but will only do so if it makes sense strategically, commercially and operationally, he told newswire reporters on the sidelines of the Paris Air Forum.

Marks & Spencer was slightly lower in spite of a partnership with Microsoft aimed at improving its digital credentials. Engineers from the US company will work with the retailer to test the integration of artificial intelligence technologies into M&S "customer experience, stores and wider operations", which boss Steve Rowe said was part of the plan to transform into a "digital first retailer, at a time when the sector is undergoing a customer-led revolution".

Fellow retailer Dixons Carphone was bouncing back a tad as final results filled in the gaps after it announced the key points of a disappointing year in a profit warning three weeks ago. Investors were pleased nothing more was lobbed in with the kitchen sink, with the dividend kept steady and the new CEO Alex Baldock giving some encouraging words about a push in a "new direction".

Over-50s specialist Saga was also higher after saying it traded in line with expectations in the first four months of its financial year as it wrote more motor and home insurance policies.

Shire got a shot in the arm as Japan's Takeda, which has agreed to buy the Dublin-based drugmaker, climbed on the back of an UBS upgrade. Shire also won expanded paediatric approval for its hereditary angioedema in the US from the US Food & Drug Administration. Shire also later announced the FDA had also approved its new plasma manufacturing facility will add 30% capacity for Shire’s once fully operational, supporting production of immunoglobulin for its immunology business.

HICL Infrastructure ticked up as it announced Diamond Transmission Partners, a consortium comprising the firm and Diamond Transmission Corporation - a subsidiary of Mitsubishi Corporation - has been selected by Ofgem as the preferred bidder to own and operate the offshore transmission link to the Race Bank Offshore Wind Farm project.

As is usual on a Thursday, ex-dividend stocks were shaving some points off the FTSE 350, with United Utilities, Big Yellow, Tate & Lyle, Compass, Experian and NewRiver REIT in the frame.

On the broker note front, CYBG gained after JPMorgan Cazenove upgraded the stock to ‘neutral’ from ‘underweight, saying the merger with Virgin Money was "highly accretive" with cost synergies of £120m. JPM upped its price target on CYBG to 310p from 270p. Virgin Money was cut to ‘neutral’ by the same analysts as the recommended offer will only add 4% upside to the price.

Crest Nicholson climbed as Liberum initiated coverage of the housebuilder at ‘buy’ and with a 528p price target, saying the share's long-term attractions are undervalued after its recent decline. Pagegroup was in the black as Citi upped its price target to 650p and reiterated its ‘buy’ stance on the recruiter.

Market Movers

FTSE 100 (UKX) 7,556.44 -0.93%
FTSE 250 (MCX) 20,729.05 -0.94%
techMARK (TASX) 3,524.46 -0.79%

FTSE 100 - Risers

Ocado Group (OCDO) 1,041.50p 3.84%
Shire Plc (SHP) 4,088.00p 1.95%
Sky (SKY) 1,405.00p 1.81%
British American Tobacco (BATS) 3,839.00p 1.59%
Next (NXT) 5,936.00p 1.26%
Smith & Nephew (SN.) 1,383.00p 0.51%
BT Group (BT.A) 215.50p 0.35%
GVC Holdings (GVC) 1,024.00p 0.29%
ITV (ITV) 173.45p 0.29%
Antofagasta (ANTO) 1,008.50p 0.15%

FTSE 100 - Fallers

United Utilities Group (UU.) 740.30p -6.17%
Melrose Industries (MRO) 223.00p -3.75%
Barratt Developments (BDEV) 517.80p -3.75%
Persimmon (PSN) 2,535.00p -3.07%
Taylor Wimpey (TW.) 178.25p -2.94%
Berkeley Group Holdings (The) (BKG) 3,780.00p -2.90%
Ashtead Group (AHT) 2,246.00p -2.81%
HSBC Holdings (HSBA) 708.10p -2.59%
Johnson Matthey (JMAT) 3,670.00p -2.32%
AstraZeneca (AZN) 5,255.00p -2.31%

FTSE 250 - Risers

CYBG (CYBG) 318.40p 3.78%
RPC Group (RPC) 682.00p 3.18%
Pagegroup (PAGE) 562.00p 2.56%
Virgin Money Holdings (UK) (VM.) 365.00p 2.38%
Dixons Carphone (DC.) 194.45p 2.36%
Bakkavor Group (BAKK) 184.00p 2.22%
Telecom Plus (TEP) 1,112.00p 2.02%
Convatec Group (CTEC) 222.60p 1.78%
Ascential (ASCL) 430.00p 1.42%
Card Factory (CARD) 195.30p 1.24%

FTSE 250 - Fallers

Ferrexpo (FXPO) 188.65p -7.06%
FDM Group (Holdings) (FDM) 1,044.00p -4.74%
NewRiver REIT (NRR) 270.50p -4.59%
Bovis Homes Group (BVS) 1,150.00p -4.58%
Redrow (RDW) 545.15p -4.23%
Bellway (BWY) 3,051.00p -4.12%
Galliford Try (GFRD) 916.50p -3.99%
McCarthy & Stone (MCS) 101.30p -3.98%
Centamin (DI) (CEY) 114.10p -3.92%
Fidelity China Special Situations (FCSS) 247.00p -3.70%