Equity markets weaker ahead of BOE rate decision

Equity markets started the day in negative territory ahead of the Bank of England’s rate decision despite impressive numbers from Rio Tinto and Smith & Nephew.
Traders sold out of heavyweight mining and banking stocks on Thursday, forcing the FTSE 100 lower by as much as 35 points in early trading. We had a strong finish to US markets overnight, and so today’s early morning falls can be attributed more so to traders removing risk ahead of the Bank of England interest rate decision at noon GMT.

Rio Tinto, the world’s third largest mining company, confirmed that profits had tripled to $14 billion for 2010 and that it will initiate a $5 billion share buyback. It also stated that it will increase its dividend to 63 cents per share, from 45 cents last year, an increase of 40%. The positive update seems to have given investors a welcome opportunity to take some money off the table as Rio traded -50p (-1%) to 4612p at 9am GMT.

The FTSE was also dragged lower in early trading by Diageo, the world’s largest distiller, after it confirmed first half revenue and profits had not met estimates. Sales were £5.32 billion versus £5.21 billion, with operating profit at £1.72 billion versus £1.54 billion. Diageo confirmed that it will raise its dividend to 15.5p from 14.6p. Analysts and investors alike were expecting more from Diageo but it seemed that declines in Europe outweighed growth in developing markets. At 9am GMT Diageo was trading -52p (-4.15%) to 1200p.

The two biggest gainers on the day were Smith & Nephew and Autonomy.

Smith & Nephew, Europe’s largest maker of shoulder and knee implants, was trading +12p (+1.69%) after strong fourth-quarter results beats forecasts.
Autonomy, the software development company, was trading +43p (+2.74%) after being raised to ‘buy’ from ‘neutral’ by UBS, who also raised its price target to 1800p from 1700p.

At 10am GMT the FTSE was trading -47 points at 6005 (-0.47%), with the DAX -37 points at 7285 and the CAC40 at 4053, down 37 points.
UK Manufacturing Production unexpectedly fell in December, whilst Industrial ouput rose thanks to cold weather related energy production. The manufacturing number surprised the market, with many expecting gain of 0.4%, weaker than Novembers gain of 0.6%. The equity market reaction was however minimal.

All eyes now turn to the Bank of England’s rate decision at midday. With most assuming rates will remain unchanged at 0.5%, investors will look to the release of the minutes on February 23 with more interest. The minutes give investors the opportunity to examine the detail of the vote in the hope of finding a shift in sentiment from policy members. Pressure is mounting to raise rates sooner rather than later and with that in mind, future rate decisions may prove more exciting than the one today.