Interactive Investor

Scary week for UK stocks

16th June 2017 10:11

Lee Wild from interactive investor

What a week. Wall Street made a new record, and the UK began in sight of fresh all-time highs. Now, the FTSE 100 is heading for its worst week since mid-April. And with plenty of equity valuations looking stretched, traders are watching for any sign that a long-predicted correction may be about to strike.

There have been plenty of stockmarket casualties. Recognisable brands like DFS Furniture, down a fifth after a grim profits warning, Majestic Wine and high street bellwether Next have taken some punishment.

A weak pound has already driven inflation near to four-year highs - up at 2.9% during May, greater than the City had expected. More expensive overseas holidays and expensive computer games took the blame.

Then we hear that domestic retail sales grew at their slowest pace in four years last month. A sharper than anticipated decline in sales volume meant sales increased just 0.9%, according to the Office for National Statistics. That's the worst number since April 2013.

And just hours after the ONS data, it emerged that Bank of England policymakers were split on whether or not UK interest rates should increase from a record low of 0.25%. The vote was 5-3 in favour of no change rather than 7-1 the City predicted. Rates haven't risen since July 2007.

Yes, inflation is above the Bank's 2% target, but there's a good chance the cost of living will fall back through 2017 as last year's low oil prices wash through.

It's unlikely the Federal Reserve will raise rates much further from here near-term. But question is whether the beginning of UK interest rate tightening is approaching, or whether fears around inflation are overdone.

With weak retail sales data, a minority government and looming Brexit negotiations, an already nervous UK consumer is in no fit state to absorb an increase in borrowing costs now.

"We suspect that there is an undercurrent of hawkishness which transcends the three members who actually backed a hike," says Investec economist Philip Shaw.

"Our own view is that we struggle to see a sound rationale for tightening policy given that we cannot be sure the consumer downturn is transitory, that weakness is not confined to households (construction currently looks fragile) and wage growth is falling.

"We continue to see rates being held throughout this year and next, but our reading of the minutes is that there is a material risk of the MPC raising the Bank rate by 0.25% in August, reversing the move it made a year previously and joining the Fed in raising rates (at least once)."

 

 

This fear caused sterling to rally one cent to $1.279 as the rates news broke, sending the FTSE down a quickfire 35 points to a five-week low at 7,377.

But it was the FTSE 250 that suffered most damage. Having topped 20,000 mid-week, the mid-cap index traded as low as 19,403 the session after, down 3%.

Housebuilders took another whack, less than a week after a post-election pounding. Crest Nicholson lost 6%, while selling among retailers was indiscriminate - curtain and cushions seller Dunelm, Pets at Home, Ted Baker, Dixons Carphone, AO World and Halfords all turned south.

The sector remains vulnerable until investors are convinced consumers are not about to stop spending en masse, although buyers began nibbling away again Friday.

However, ahead of the general election and this week's data, star fund manager and long-term investor Neil Woodford looked to add to positions in the likes of Barratt Developments, Taylor Wimpey and high street lender Lloyds Banking Group.

"All of these additions are a product of our contrarian view on the UK economy, which we believe is well situated for a prolonged period of benign growth and low inflation."

Followers of Woodford will be reassured.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.