Market update - 8 January

The FTSE 100 was down 36.73 points at 4470.78 and FTSE 250 eased to 6671.58, down 90.72 points, at 12.08 pm.

Although weak, the market was firmer than in the morning after the Bank of England unveiled a 50 basis points reduction UK interest rates, taking them to a record low of 1.5 per cent from 2 per cent.

Howard Archer, chief UK economist at IHS Global Insight, said although rates were now at their lowest level since the Bank was founded in 1694, further reductions may be forthcoming in over the next few months.

“We suspect that GDP contraction deepened to around 1 per cent quarter-on-quarter in the fourth quarter of 2008 from 0.6 per cent in the third, and the prospects for 2009 currently look horrible. Consumers face serious headwinds, businesses are increasingly cutting back on their investment and employment in the face of contracting demand and sharply weakening global economic activity is limiting exports despite the weak pound,” he said,

“Meanwhile, consumer price inflation is poised to plummet even though it was still up at 4.1 per cent in November. Inflation will brought down substantially over the coming months by markedly contracting economic activity, the VAT cut, pay moderation, sharply lower oil and commodity prices, waning food prices and favourable base effects.”

Moving up

The banking sector was strong, with the Royal Bank of Scotland leading the way, gaining 4.08 per cent or 2p to 51p after saying that it was examining its 4.3 per cent stake in the Bank of China as part of strategic review of its investments. Although RBS added that no decision had been made on whether to offload the stake, the prospect of a sale was welcomed by traders.

On the second tier, house builder Persimmon advanced to 288.5p, up 3.13 per cent or 8.75p after posting a positive trading update.

In response, Panmure Gordon reiterated its “hold” recommendation on the stock, saying that the reported debt performance was ahead of its expectations.

“The key area of outperformance for Persimmon has been its cash generation. The group has ended the year with £600m of debt versus our £690m forecast,” the broker said,

“In part this is due to an earlier than anticipated tax repayment following the land write-downs earlier in the year, but nevertheless it represents an impressive performance and demonstrates that despite a significant fall in volumes, Persimmon can generate good levels of cash against the backdrop of a severely depressed market place.”

Moving down

The mining sector remained weak, trading lower as concerns about a prolonged global economic slump and its impact on the demand for commodities made a comeback.

Vedanta Resources was the worst off among the blue chips, losing 9.53 per cent or 71.5p to 678.5p, while Rio Tinto eased back to 1661p, down 8.33 per cent or 151p.

Anglo American lost 7.94 per cent or 137p to 1588p and Kazakhmys was down 7.31 per cent or 19.75p at 250.25p.