UK equities

July 2010 (covering the month of June 2010)

Fears over the strength and sustainability of global economic growth continued to drive market volatility over June. All FTSE indices ended the month in negative territory, with the FTSE All-Share, FTSE 100, FTSE 250 and FTSE SmallCap indices declining by 4.9%, 5.2%, 2.8% and 2.1%, respectively. At the sector level, oil & gas producers was the worst performing sector in the FTSE All-Share index, led lower by BP which fell to a 14-year low following the well-documented oil spill in the Gulf of Mexico. The company agreed to US demands to place over US$20bn into a compensation fund and announced that it will not pay any dividends in 2010. In addition, news of tropical storms heading towards the Gulf of Mexico further dampened sentiment in BP shares.

Chancellor George Osborne's Emergency Budget held on 22 June contained a raft of tax and benefit measures to reduce the UK’s huge deficit. Indeed, the Budget revealed a more rapid fiscal response to the UK’s debt problems than that planned by Labour’s March budget. Highlights included a new £2bn levy on banks, a two-year pay freeze for public sector workers and downward revisions to GDP forecasts by the newly formed Office of Budget Responsibility to 1.2% and 2.3% in 2010 and 2011 respectively, versus 3.25% and 3.5% previously. The widely expected rise in capital gains tax (to 28% for higher rate taxpayers) was much less than the 40% some had been expecting. Also, as widely flagged, VAT will be increased to 20% from 17.5% (as from 4 January 2011).

Minutes from the Bank of England’s Monetary Policy Committee revealed that there was one dissenter in the decision to maintain interest rates at 0.5%. Andrew Sentance voted for a 25bps hike in interest rates at the June meeting. Elsewhere in the economy, UK inflation data, as measured by the consumer prices index, slowed to 3.4% year-on-year (y-o-y) in May from 3.7% y-o-y in April. The reading still remains well above the Bank of England's 2% target. The decline in inflation was helped by lower food prices, as well as slower rises in the price of petrol, alcohol and tobacco. Meanwhile, the retail prices index rose by 5.1% in May from 5.4% previously.

In the currency markets, sterling strengthened against the euro (and the US dollar) buoyed by the tough fiscal consolidation measures in the emergency Budget and news that one member of the Bank of England’s Monetary Policy Committee had voted for an interest rate rise. Sterling also benefited from the positive response from Fitch credit ratings agency towards the Budget, which eased fears that the UK’s AAA rating could be downgraded.

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