By Carla Mozee, MarketWatch
LONDON (MarketWatch)-- U.K. stocks dropped sharply Friday, with
real estate shares under pressure as investors assessed the
likelihood of regulatory and monetary policy changes, including the
arrival of an interest-rate increase sooner than had been
anticipated.
British retail issues also fell, moving alongside other European
equity markets as an escalation of violence in Iraq sent energy
prices soaring.
The U.K.'s FTSE 100 index stumbled 1% to 6,777.85, its worst
loss since April 11, according to FactSet data. The index fell 1.2%
for the week, its first loss in three weeks.
British economic growth "has been much stronger, and
unemployment has fallen much faster than either we or anyone else
expected," a year ago, Bank of England Governor Mark Carney told
business leaders at the annual Mansion House dinner in London late
Thursday.
With that, there's been "already great speculation about the
exact timing of the first [interest] rate hike, and this decision
is becoming more balanced. It could happen sooner than markets
currently expect," Carney said.
The benchmark rate is at a record low 0.5% and has been at that
level since March 2009.
Carney said the rate rises "will be gradual, and data-dependent,
but the qualifications won't matter to a market which prices a slow
pace of rises, starting next year," said Kit Juckes, a
foreign-exchange strategist at Société Générale, in a note Friday.
The pound jumped in anticipation of a rate hike, closing in on a
five-year high against the dollar.
Also speaking at Mansion House, Britain's finance minister
George Osborne said he would give the central bank greater power to
curb mortgage lending, in a bid to reduce any risks from the
housing market to financial stability.
Housing stocks swam in the red, with residential property firm
Persimmon PLC losing 7%, Barratt Developments PLC lower by 6.3% and
real-estate investment trust Hammerson PLC off 3.4%.
Financials struggled as Lloyds Banking Group shed 2.4% and HSBC
Holdings PLC (HSBC) fell 0.7%
Markets had been pricing in a rate hike to take place around the
second quarter of 2015, but two-year swap rates have risen more
than 15 basis points on Thursday's level, said Berenberg in a note
Friday.
The pound (GBPUSD) bought $1.6962 compared with $1.6906 late
Thursday. On Wednesday, it fetched about $1.6791.
The pound/dollar pair is retesting the $1.70 level, "and my
belief that this is pretty much the top will be sorely tested,"
said Juckes. "In the short run, U.K. data is better and Carney
sounds more willing to raise rates early than [Federal Reserve
Chairman Janet] Yellen. There isn't much point fighting the
move."
Retail stocks were crunched on Friday as a leap in oil prices
raised concerns about consumer spending and costs for businesses.
Brent crude during the day traded above $114 a barrel, at around
nine-month highs, after Kurdish forces took control of a provincial
capital in Iraq's oil-rich north and the Iraqi government launched
airstrikes on insurgent positions in Mosul. Read: 5 things you need
to know about Iraq right now.
Shares of supermarkets, apparel and consumer-discretionary
retailers were yanked lower. Next PLC fell 2.7%, Marks &
Spencer PLC was dragged down 2.5%, J Sainsbury PLC lost 0.9% and
Burberry Group PLC traded 0.8% lower.
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