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It came out of the blue, and shares ended the day lower, but investors did not seem completely shell-shocked by the Bank of England's decision today to raise interest rates for the first time in two years.
The FTSE 100 had been in the red for most of the morning and was down around 42 points before the midday announcement that rates were being raised by a quarter point to 4.75%. Following the news the index slipped 59 points lower, and the slide accelerated during the afternoon. The index finally closed down 93.7 points at 5838.4, but dealers admitted that while the rate hike had been a shock, the market reaction could have been a lot worse. The pound jumped to an eight-week high against the dollar.
Even though many analysts had ruled out a rate move today, there had been increasing signs that the Bank was worried about the growing strength of the economy. But a report this morning showed the service sector advancing at a slower pace than expected in July, which many thought would give the Bank the excuse to keep rates on hold.
Gavin Redknap, economist at Standard Chartered Bank, said: "The move, naturally, was positive for sterling and knocked equities and bonds. However, markets should take some solace from the measured language the Bank used to justify its move. While it pointed out that inflation is likely to remain above target 'for some while' and that surveys point to 'continued firm growth', the Bank gave no indication that further hikes are likely or even possible in the foreseeable future, nor told markets anything that they did not know.
"As a result, it looks like the Bank has sanctioned this move as an insurance policy against potential inflationary pressures, rather than using it as the first of more hikes."
Meanwhile, the European Central Bank raised its rates by 0.25% to 3% this afternoon, the fourth increase since December and one that was widely expected, with the continent's own service sector survey this morning showing inflationary pressures building. Wall Street opened slightly lower ahead of tomorrow's key non-farm payroll figures. The US Federal Reserve will make its own interest rate decision next week.
Otherwise, there was plenty to keep traders occupied ahead of the rate decision. The main talking point was, yes, another potential private equity bid for a listed company. This time it was jewellery group Signet which was the target, with Apax Partners and Kohlberg Kravis Roberts admitting they were considering making an offer.
They were responding to a report in the City AM newspaper that the two groups had approached the company's board with a view to bidding around 132p a share, which would value Signet at £2.3bn. Signet is due to release second-quarter sales numbers later today (it usually times its figures to coincide with the opening of the US market, since a good chunk of its business comes from across the Atlantic).
Richard Ratner, analyst at broker Seymour Pierce, said Signet was "a good business, a market leader in the UK and the US". He added that a bid at around 130p values it at 16 times earnings, comparable to its upmarket rival Theo Fennell. "We are expecting the half-year update today; this could be the first time the UK business shows like-for-like growth for some time."
Broker Panmure Gordon said a private equity bid would make sense. "The stock has an undemanding valuation and, on our calculations, could support an additional £750m of debt," said the broker. "There is a clear read over to companies such as Kesa - managements that don't manage their cash flows and balance sheets more aggressively risk being displaced by those who will."
This is not the first time this year that Signet has been involved in merger talk. In June it admitted it had held talks about a possible link-up with US rival Zale but that these had come to nothing. Signet shares jumped 15.25p to 116.75p. The electricals retailer Kesa, incidentally, was down 7.5 to 305.5p on concerns about the effect the rate rise would have on consumer spending.
Property companies were also weaker on the rate rise, with Liberty International down 49p to 1104p and British Land 54p lower at 1324p. Countrywide fell 34p to 387p making it the biggest faller in the FTSE 250.
As usual on a Thursday there was a host of corporate announcements. Unilever did some of the damage to the leading index, falling 75p to 1214p after it announced second-quarter figures. Sales at the food and household products group were up 3.9% between April and June but analysts said its margins were disappointing. Chemicals group ICI was 14.25p lower at 363p as investors took profits after a recent good run in the shares. The company said profits were up 14% in the second quarter.
Engineering group Invensys had also seen its shares perform well ahead of today's figures, which showed a 55% rise in first-quarter operating profit. So in the spirit of "buy on the rumour, sell on the fact" it lost nearly 4% - down 0.75p to 18.25p - on the earnings news.
Barclays was also lower, down 8.5p to 619p despite reporting a 37% jump in half-year profits, as investors worried about a big rise in bad debts. BP and Royal Dutch Shell fell as the oil price dipped on news that a tropical storm in the Gulf of Mexico had weakened and was unlikely to disrupt production there. BP lost 14p to 637p and Shell 38p to 1861p.
On the plus side, Wm Morrison Supermarkets headed the FTSE 100 leaderboard - one of just four risers in the leading index - and rose 7.25p to 213p after better than expected first-half sales figures. The news, which could mean the business has finally overcome the trauma associated with its takeover of Safeway, prompted broker ABN Amro to increase its target price to 250p from 200p.
PartyGaming shook off the recent worries about the American clampdown on online gaming and rose 0.5p to 110p after it bought Gamebookers, which takes it into online sports betting for the first time. It made a point of saying Gamebookers did not take bets from the US.
ITV added 2.75p to 104.25p on hopes of a private equity bid and expectations that chief executive Charles Allen will step down next week.
Still with media, publisher Trinity Mirror rose 21,5p to 468.5p after first-half results. Profits fell 12.8% to £98m due to a weak advertising market but the company launched a review of its whole business, which some speculated could lead to a sale of the Mirror newspapers. Panmure Gordon upgraded the stock from hold to buy and set a 500p price target. "We are gently encouraged by the results, have more confidence in full-year forecasts and like the promise of a 'board level' review," they said.
Among the small fry, restaurant group La Tasca, unchanged at 124p, was favoured by analysts at Teather & Greenwood. They believe good news on trading should come at the company's annual meeting on September 4, and the company could well be a bid target in a sector that is seeing a large amount of consolidation. They also say the company's US restaurants could prove valuable in the medium term.
Property Recycling Group, which buys and clears up brownfield sites to sell on to developers and other users, added 3.5p to 66p after announcing that its site at Stanton, Bury St Edmonds, had gained planning permission to be used as a distribution centre for Ikea.
Vane Minerals rose 0.5p to 9.25p after it announced it had acquired further uranium assets in northern Arizona, and that it had received permits to begin drilling on its existing prospects. Vane is one of a handful of smaller companies on Aim with exposure to uranium, and has now built up a substantial portfolio. Given the increasing consolidation among such companies in America and Australia, Vane could prove an attractive acquisition target.
Dealers said Hydrodec, the oil refining group run by John Gunn, is expected to release an update next week giving some positive news. The shares stand at 28.25p.
Finally, Ceramic Fuel Cells was steady at 27p. The company recently announced an upbeat trading statement for the fourth quarter, and is said to be doing a series of investor presentations. Traders believe a deal could be announced shortly, perhaps with a major UK utility. Some are saying the shares could reach 35-40p, unless there is a severe market downturn.
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