Market update - 5 February

The FTSE 100 was down 39.72 points at 4188.88 while the FTSE 250 eased to 6320.32, down 1.49 points, at around 12:45pm. All eyes were on the Bank of England, which reduced UK interest rates to a record low of 1 per cent at noon, a move which Charles Stanley chief economist Edward Menashy attributed to “exasperation” amongst members of the rate-setting Monetary Policy Committee.

“It must be asked, why, if a total of 375 basis points of rate cuts have not arrested the decline in demand, that a further 50 basis points should suddenly kick start the UK economy?,” he said

Howard Archer, chief economist at consultancy IHS Global Insight, while hopeful that the cut should “still benefit the economy overall”, was also sceptical.

“We very much doubt whether further reductions will do much good. Indeed, we expect to see rates cut again in March and to come down to a low of 0.25 per cent in the second quarter. Indeed, it is far from inconceivable that interest rates could come all the way down to zero. Consumer price inflation has already retreated to 3.1 per cent in December from 5.2 per cent in September, and it is poised to fall sharply further over the coming months,” he said,

“Inflation will be brought down by sharply diminished pricing power of companies amid contracting economic activity, deepening pay moderation, sharply lower oil and commodity prices and favourable base effects. These factors should markedly outweigh the inflationary impact of the very weak pound. Indeed, annual consumer price inflation seems set to move below the Bank of England’s 2 per cent target level in the near term and it is very possible that deflation will be seen in the second half of the year. Consequently, there is a very real danger that consumer price inflation will undershoot the Bank of England’s 2 per cent target level over the medium term, as the statement accompanying the interest rate cut acknowledged.”

Moving up

The banking sector was strong, with Barclays gaining 1.3p to 98.2p after Collins Stewart moved the stock to “hold” from “sell”.

“Comparing our sum-of-the-parts valuation with the current [share] price, the market appears to be discounting a 36 per cent chance of Barclays being nationalised, even with Barclays Capital [the group’s investment banking arm] in the valuation at zero,” analyst Alex Potter said,

“If we assume some value for Barclays Capital, this probability moves past 50 per cent, we estimate. Bearing in mind management’s repeated assertions surrounding write-downs and [the division’s] profitability, this is already such a bearish valuation that we cannot pursue our sell recommendation.”

Moving down

Unilever was sent tumbling to the bottom of the benchmark index, losing over 7 per cent or 104p to 1379p, after withdrawing its guidance for the year ahead, with chief executive Paul Polman saying that “it would be inappropriate” to provide an outlook in light of the uncertain economic picture.

On the second tier, Arriva lost 16.5p to 444.25p as the market weighed up a recent “sell” note from Goldman Sachs.

“We expect profitability at Arriva’s three divisions to suffer from rising unemployment across Europe, higher fuel costs (in 2009) and falling inflation (due to inflation-linked fares), and for consensus estimates to fall as a result,” the broker said,

“The rise in the Euro vs. sterling and [the] likely significant pension deficit increase over the past six months also adds to the balance sheet strain.”