LONDON MARKETS: U.K. Stocks Fall; Pound Down On Dovish Remarks

By Dow Jones Business News, 
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By Carla Mozee, MarketWatch

LONDON (MarketWatch) -- U.K. stocks declined Tuesday, as a downgrade for Aviva PLC and extended weakness in housing shares dragged the FTSE 100 to a second straight loss.

The pound, meanwhile, dropped against the U.S. dollar following dovish comments from the head of the Bank of England, Mark Carney.

The FTSE 100 index fell 0.2% to 6,787.07. It lost 0.4% on Monday, with real estate issues hurt ahead of expected proposals this week by the Bank of England aimed at paring the pace of growth in the country's booming housing market.

Figures released Tuesday from the British Bankers' Association indicated slowing in the market has already started. U.K. mortgage lending in May grew by 1.2 billion pounds ($2.04 billion), compared with April's GBP1.3 billion increase. Mortgage approvals totaled 41,757 in May, the lowest level since August.

Shares of home builder Barratt Developments PLC closed 1.6% lower, Persimmon PLC lost 0.8%, and outside of the main index shares of Taylor Wimpey PLC gave up 1%. Property developer British Land Co. , however, picked up 1.6%, wiping out Monday's 1.5% decline.

While policy makers at the Bank of England may "find it necessary to resort to rate hikes to address housing risks, it, we believe, might prove to be insufficient," said ICICI Bank economist Nikhil Gupta in a Tuesday research report. " The government must expand efforts to increase the housing supply, without which it might prove extremely difficult to contain rising housing prices."

Bank of England Gov. Carney addressed the issue of interest rates on Tuesday. Subdued wage growth means there's "room for additional spare capacity to be used up before we move [interest] rates," he said in testimony to lawmakers.

The pound (GBPUSD) fell below the $1.70 level as Carney's "dovish statements ... were a stark contrast to a week ago when he suggested that rates in U.K. could rise as early as this year," wrote Boris Schlossberg, managing director of FX strategy at BK Asset Management. The pound bought $1.6969 compared with $1.7025 late Monday.

The cautious tone of policy makers indicates that monetary authorities "remain far more concerned about stifling out the nascent recovery than about controlling any inflationary or asset bubble pressures," said Schlossberg.

A U.K. Treasury committee member during Carney's testimony in London likened the Bank of England to an "unreliable boyfriend," saying it's been giving mixed signals on the future path of interest rates. "One day hot, one day cold, and the people on the other side of the message are left not really knowing where they stand," the BBC quoted MP Pat McFadden as saying.

Back to stocks, Carnival PLC reported better-than-expected quarterly results and raised its full-year adjusted earnings outlook, but shares of the cruise operator were pushed down 1.1%.

Aviva PLC fell 1.1% after the insurer's rating was cut to neutral from buy at UBS.

"Aviva is no longer the compelling restructuring that a premium valuation deserves," wrote UBS analyst James Shuck in a research note Tuesday. With Aviva's "balance sheet now fixed and cash flow repaired, investors should be looking to earnings surprises to drive the shares higher from here."

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This article appears in: Commodities

Referenced Stocks: AV , BTDPY , BTLCY , CCL , CUK

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