U.K. stocks dropped Thursday, following a five-session winning streak for the blue-chip market, with the focus on the U.S. Federal Reserve decision and its flagging of stronger inflation.
Stocks were little changed after a reading on British services activity missed expectations. Shares of Smith & Nephew posted the biggest loss in London after a revenue warning.
How markets are moving
The U.K.’s FTSE 100 index /zigman2/quotes/210598409/delayed UK:UKX +0.37% fell 0.5% to close at 7,502.69, pulling back from its highest close since Jan. 30 hit on Wednesday. In that session, the index rose 0.3%, marking a fifth straight winning session.
The pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.5339% traded at $1.3566, compared with $1.3572 late Wednesday in New York.
What’s driving the market
U.K. equity investors were getting the first chance to react to the Federal Reserve’s statement released late Wednesday, in which policy makers said readings for both headline and core inflation have moved close to the central bank’s 2% target.
But traders found little clarity in the statement about how that view would change the expected pace of rate hikes from the U.S. central bank this year. U.S. stocks /zigman2/quotes/210598065/realtime DJIA +1.09% initially rose after the statement but eventually reversed course and finished lower, leaving both the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.75% and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.09% down by 0.7%. U.S. stocks also traded sharply lower on Thursday.
The prospect of higher borrowing costs for corporations and consumers, as well as dollar strength on expectations of rate hikes, can ripple through equity markets worldwide.
Meanwhile, investors will keep watch for any developments from Beijing, where U.S. and Chinese officials have begun discussions on tariffs and other trade issues. Mining shares, which can be sensitive to developments from China — a big buyer of metals — were mixed on Thursday.
Stocks in the U.K. were relatively unfazed by the latest reading on the services sector. The services purchasing managers index for April came in at 52.8 , up from 51.7 in March, but missing forecasts of a 53.4 reading.
Stocks in focus
Smith & Nephew PLC stock dropped 7% after the medical device maker lowered its full-year guidance for revenue. The company said first-quarter revenue was flat on an underlying basis after a mixed performance.
BT Group PLC /zigman2/quotes/209006687/delayed UK:BT.A -0.21% slid 4.2% after Barclays downgraded the stock to equalweight from overweight, according to Dow Jones Newswires.
Several companies declined as they went ex-dividend, meaning they traded without the rights to the latest declared dividend. Shares of Unilever PLC /zigman2/quotes/205449809/delayed UK:ULVR -0.68% /zigman2/quotes/204685760/composite UL -0.34% dropped 0.3%, G4S PLC lost 0.3%, Kingfisher PLC /zigman2/quotes/200571451/delayed UK:KGF +1.31% gave up 1.5% and London Stock Exchange Group PLC slipped 0.9%.
Glencore PLC /zigman2/quotes/201400686/delayed UK:GLEN +1.49% /zigman2/quotes/209462106/delayed GLCNF +1.90% shares rose 0.4%. The commodity and mining company said first-quarter production was largely in line with views across all commodity groups, with full-year guidance unchanged.
What strategists are saying
“Despite some skepticism around equity valuations, there’s still little to challenge shares as an asset class and a weak pound should underpin the U.K. market,” said Richard Hunter, head of markets at Interactive Investor, in a note.
“Sterling is down over 5% from its post-referendum peak just a fortnight ago, and it’s difficult to see much of a recovery near-term following poor GDP data, falling inflation, and a period of political instability as we near Brexit in 2019. It makes a rate rise by the Bank of England next week incredibly unlikely,” said Hunter.