Banking stocks were the main fallers on the FTSE 100 this morning, as worries over the state of the US economic recovery sent investors into a risk-averse frame of mind.
A Federal Reserve statement which left open the possibility of a resumption in quantitative easing caused the UK banking sector to lose ground in morning trading. The US central bank left interest rates unchanged at 0-0.25%, in a sign that it still views the economic recovery as an uncertain prospect. This cautious outlook prompted investors to shift away from the heavyweight UK banks as risk appetite receded slightly. Lloyds, whose chief executive Eric Daniels announced his retirement earlier this week, was the biggest faller, losing 2.42% to 75.04p. RBS dropped by 1.71% to 47.75p and Barclays fell 1.41% to 307.20p.
Increasing risk aversion hit oil stocks as well, with BP falling 1.86% to 408.85p and Shell losing 0.87% to 1878.50p. However, the rising gold price, which hit $1293.63 per ounce during the morning and looks set to break the $1300 per ounce mark, buoyed miners like Randgold Resources and African Barrick Gold. Randgold advanced 1.66% to 6415p and African Barrick gained 1.79% to 597p.
By 10.40am (London time), the FTSE 100 had lost 30.28 points (-0.54%) to 5545.82 and the FTSE 250 was 82.43 points lower (-0.78%) at 10,462.64.
Imperial Tobacco said that it remained on track to meet forecasts for the year, despite a slowing in tobacco growth over the past six months. Net revenues are expected to grow by 3% for the half year to 30 September, compared to 4% for the six months to 30 March. The company has been boosted by an increase in sales of loose tobacco as recession-hit smokers opt to roll their own cigarettes instead of buying the so-called 'white stick' variety. Imperial Tobacco shares rose 1.43% to 1920p.
Bid target Dana Petroleum announced that it had received permission from the Dutch authorities to go ahead with its Medway oil and gas development in the North Sea. First production from the site is expected in the fourth quarter of 2011, adding around 4100 barrels of oil per day to Dana's output in 2012. Field reserves at the site amount to 11.8 million barrels. Dana shares edged back 0.11% to 1790p.
The Confederation of British Industry (CBI) issued a gloomier forecast for the UK economy as it revised its growth predictions lower for next year. The CBI expects a growth rate of 2% in 2011, down from its June forecast of 2.5%, although it said that the prospect of a return to recession in the UK was 'unlikely'. The body added that the outlook for consumer spending in 2011 was also weaker than expected, and repeated its call for the government to focus 'scarce resources on those areas which most galvanise growth, namely infrastructure and capital investment'.
As expected, the minutes of the September meeting of the Bank of England's (BoE) Monetary Policy Committee showed that Andrew Sentance continued to be the lone voice calling for higher interest rates. The committee voted 8-1 to keep interest rates at 0.5% and to hold the asset purchase plan at £200 billion. As before, the minutes said that the committee remained 'ready to respond in either direction as the balance of risks evolved', although the minutes suggested that more members were beginning to feel that greater easing might be required. Mr Sentance had said yesterday that the base rate should be raised slowly in order to combat inflation. He added that it was important to distinguish between the 'unevenness of the rate of growth which [economies] often get at this stage of the economic cycle and a genuine double-dip recession', with a double-dip not a likely outcome either for the UK or the global economy.
The prospect of additional stimulus in the US caused the dollar to lose ground against its major counterparts. Sterling fell back temporarily after the release of the BoE minutes as markets became jittery over the prospect of another round of quantitative easing in the UK, but recovered to stand at $1.5670 by 10.30am (London time). The euro advanced to $1.3356 and the dollar fell back to ¥85.11, and the Dollar Index, which measures the US currency against six of its major trading partners, dropped by 0.5% to 80.013, its lowest level since 18 March.
Ahead of this afternoon, September futures for the Dow and S&P 500 are pointing to a fall at the Wall Street open, with the Dow down 0.16% and the S&P 500 0.24% lower. Later today the US will release its official House Price Index for July and Treasury Secretary Tim Geithner will give a speech on the US Treasury's current view of the American economy.
