LONDON MARKETS: FTSE 100 Drops As Skepticism Over Fed Outlook Hits Risk Assets

Bank of England decision on deck

U.K. stocks fell Thursday, with investors stepping back from risk assets following the Federal Reserve's policy decision and ahead of the Bank of England's policy meeting at a time of rising inflation and political uncertainty in Britain.

The FTSE 100 fell 0.7% to 7,423.67. All sectors fell, led by basic materials and oil and gas shares, and less than 10 constituents were moving higher.

Among battered commodity stocks, miners Fresnillo PLC (FRES.LN) and Randgold Resources Ltd. (RRS.LN) (RRS.LN) each lost 3.1%.

Oil producers BP PLC (BP.LN) (BP.LN) and Royal Dutch Shell PLC (RDSB.LN) (RDSB.LN) fell 0.6% and 1%, respectively, as oil prices languished around seven-month lows on oversupply and demand worries. (http://www.marketwatch.com/story/oil-prices-hover-near-7-month-as-alarm-bells-go-off-over-us-supply-2017-06-15)

Central bank watch: The FTSE 100 on Wednesday ended down 0.2% (http://www.marketwatch.com/story/ftse-100-logs-small-gain-but-stronger-pound-limits-advance-2017-06-14), turning lower as the pound rose against the dollar following lackluster U.S. economic data, including a decline in consumer-price inflation (http://www.marketwatch.com/story/inflation-falls-again-in-may-as-cpi-recedes-from-recent-high-water-mark-2017-06-14). The inflation report came ahead of the Fed's expected decision to raise interest rates by 25 basis points.

However, "markets were surprised by the hawkishness in the policy statement and Chair Janet Yellen's press conference. Even though projections for inflation were lowered to 1.6% from 1.9% in 2017, the dot plot didn't change," said Hussein Sayed, chief market strategist at FXTM, in a note.

"It seems the Fed is no longer as data dependent as before and wants to carry on with the [policy] normalization process despite weakness seen in some economic releases. Yesterday's CPI and retail sales were both disappointing but didn't seem to worry Yellen," he said.

Meanwhile, the Bank of England on Thursday is expected to hold interest rates steady even as inflation has climbed to near 3%. The central bank had warned of inflationary pressures stemming largely from sterling's devaluation, but has also signaled concerns about the squeeze on Britons' wages.

"As for the BOE, having just updated their economic projections, no major breakthroughs are expected this month," wrote Kathy Lien, managing director of FX strategy at BK Asset Management.

"Combined with the latest political uncertainty, there's very little reason for the BOE to express fresh optimism or alter its guidance. If [policy maker] Kristin Forbes continues her dissent in favor of a hike, we may see a shallow rally in [the pound]," she said.

The pound was buying $1.2734, down from $1.2754 late Wednesday in New York. Before the BOE's decision at 12 p.m. London time, the U.K.'s May retail sales report is due at 9:30 a.m. London time, or 4:30 a.m. Eastern Time. Sales are expected to rise 1.8% on a year-over-year basis.

Election update: U.K. Prime Minister Theresa May and her Conservative Party have been in discussions with Northern Ireland's Democratic Unionist Party about working together in the House of Commons after the Conservatives lost their majority in parliament in last week's general election.

May said this week she's still planning to begin talks about Britain's exit from the European Union, or Brexit.

On Thursday evening, Bank of England Governor Mark Carney and Treasury chief Philip Hammond are set to offer their views on the British economy at a speech at Mansion House.

Stock movers: An earnings warning from DFS Furniture PLC (DFS.LN) sent its shares sliding 17% on the FTSE All-Share index. The sofa seller said uncertainty caused by the U.K.'s general election and other economic factors has resulted in a sharp drop in customer demand.

The warning appeared to rattle some retail shares on the FTSE 100, as well as those of home builders. Apparel retailer Next PLC (NXT.LN) gave up 3.6%, DIY retailer Kingfisher (KGF.LN) lost 2.8% and home builder Barratt Developments PLC (BDEV.LN) moved 2.3% lower.

(END) Dow Jones Newswires

June 15, 2017 04:12 ET (08:12 GMT)