28th Nov 2013 14:02
LONDON (Alliance News) - UK stocks indices have given up significant gains but still trade positively Thursday, despite markets being caught off-guard by a dramatic move by the Bank of England to turn down the fire under UK housing market.
Meanwhile, the pound is pushing towards yearly highs, and economic data has calmed eurozone disinflation fears.
With the FTSE 100 having risen to a morning high of 6,697.51, UK investors seemed to be taking advantage of the light Thanksgiving holiday trading to push higher prices higher. BOE Governor Mark Carney put a stop to that by sending housebuilding stocks tumbling.
Carney said the Funding for Lending scheme would no longer apply to mortgages. In a joint decision between Carney and UK Chancellor George Osborne, Carney said the lending programme now will be directed solely at small businesses rather than home buyers, as the UK housing market no longer needs the support.
By early afternoon Thursday, the FTSE 100 has given up most of its gains to trade just 0.1% higher at 6,654.61. The FTSE 250, which actually contains the majority of listed UK housebuilders, is still up 0.4% at 15,472.47, while the AIM All-Share is up 0.2% at 821.23.
"The Bank of England surprised the few market participants hanging around their desks today amid the US holiday," said Daily FX analyst Christopher Vecchio.
Along with the announcement from Carney, which came as part of the central bank's Financial Stability Review, were some new rules on mortgage lending, including that, from April 2014, banks will be required by the FCA to conduct an affordability assessment, including an interest rate test to gauge borrowers? resilience to rising rates. The affordability assessment is already being applied to mortgage lending under the Help to Buy mortgage guarantee scheme, but will now be applied to all new mortgage lending.
House builders did not take well to the news. Persimmon now leads the blue chip fallers, down 4.9%, while in the FTSE, four out of the five heaviest fallers are house builders: Taylor Whimpey, down 6.9%; Bovis Homes, down 8.9%; Barratt Developments, down 3.6%; and Bellway, down 3.6%.
The pound, on the other hand, reacted strongly to the news as traders took the announcement as a positive sign for the UK economy. "It means that the BoE may be underestimating the pace of economic recovery, which could warrant tighter policy sooner than anticipated", Vecchio said.
The pound has pushed to fresh 11-month highs against the dollar, peaking at USD1.6353 so far. Cable is now in view of the USD1.6380 2013 high made on the first trading day of the year.
European data has continued to be received well by the market. The latest German inflation data exceeded economists expectations, with CPI for November coming in at 1.3% year on year, up from 1.2% in October and higher than the expected unchanged reading. On a monthly basis the inflation reading was 0.2%, higher than the 0.1% expected.
The inflation data should go some way to allaying deflationary fears that were sparked by negative readings across the eurozone last month and led to an interest-rate cut by the European Central Bank. In early afternoon trade, the German DAX is the best performing of major European equity indices, up 0.3%, while the French CAC40 is marginally higher, up 0.1%.
Save any further surprises, a busy day so far should calm down in the afternoon as the US is on holiday for Thanksgiving Day.
By Jon Darby; [email protected]; @jondarby100
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