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Moves by the London stock market to stretch the current bull run to 11 consecutive days, were running into headwinds today amid mounting speculation that the next move in interest rates will be up.
They were marked higher at the outset with the FTSE 100 index briefly climbing back above the 4600 level for the first time since 6 January. However, later its lead turned into a deficit of 7.16 at 4569.45.
The index has now risen 463 points, or 11.2%, since 11 July, despite further evidence of a bigger-than-expected contraction in the UK economy during the second quarter.
Goldman Sachs and Deutsche Bank think Bank of England governor Mervyn King will be forced to raise rates next year to combat the highest inflation expectations in the Group of Seven industrialised nations.
Dearer money is expected to boost the pound, which has slumped about 17% against the dollar during the past year, and keep a lid on inflation as Britain's economy emerges from its deepest slump in half a century.
But such a move will be bad news for Britain's exporters, who will lose their competitive edge and suffer a dent to profits after translating profits back into sterling. A weaker currency also makes them more competitive against foreign rivals.
Life assurer Prudential firmed 2¾p to 427¼p. Like a large number of blue chips the shares have been squeezed sharply higher of late. Earlier this month they were changing hands for 353p.
Elsewhere in financials, Lloyds Banking Group firmed 3.34p to 81.36p after Japanese broking house Nomura raised its rating on the state-owned bank from reduce to buy. The price has come up from the 63.3p level since 9 July. But not everyone is bullish about the outlook for banks. Evolution has published coverage of 19 European banks with 11 of them containing sell ratings. It warns a number of them have large capital deficits and non-performing loans.
There is still no light at the end of the tunnel for the world's biggest plumbing equipment supplier, Wolseley, a penny better at 1202p. The company said it expected no signs of a pick-up in market conditions for the rest of this year and had seen pre-tax profits for the 11 months until the end of June drop by 60%. New chief executive Ian Meakins, who replaced Chip Hornsby earlier this month, says market conditions will continue to slow with trading remaining challenging.
That will not come as good news for shareholders who have had a number of profit warnings this year as well as a much-needed rights issue back in the spring.
Curiously enough, all the bad news is now fully reflected in the shares which have rallied from a low of 585p in March and subsequently regained their place in the Footsie 100 index.
Despite the gloomy outlook, broker Charles Stanley has raised its rating on Wolseley to hold and for the current financial year just about to end is forecasting pre-tax profits of £260 million. Although markets are expected to continue deteriorating, the broker looks for an increase in profits in 2010.
Another company which admits it will be passing the hat around among shareholders is tin can maker and packaging supplier Rexam, down 35¼p at 289p. The company needs to raise around £350 million in order to prevent a downgrading of its credit rating to junk status.
The fund raising is likely to co-incide with Thursday's half-year results which will contain a cut in the dividend. Rexam warns it has not seen any pick-up in current trading.
Stock market bears continued to feel the pain as they were again squeezed higher. Morgan Stanley says: “We see the sector as a way to get exposure to rising China and global growth expectations. Our China economists and strategists have turned bullish recently which bodes well for mining.”
Analysts have been encouraged by growing demand for raw materials by China which has helped push up the prices of commodities such as copper iron ore and zinc in recent weeks.
Bid target Rio Tinto put on 33p at 2463p, while Lonmin, the target of a failed bid by rival Xstrata, added 25p at 1268p.
Water supplier Seven Trent fell 12p to 1002p. JP Morgan has trimmed its target by 10p to 1030p. On Friday, UBS and Evolution Securities both raised their rating's on the shares to a buy.
