By Simon Kennedy
LONDON (MarketWatch) -- U.K. stocks finished higher on
Wednesday, as investors took in stride details of the government's
plan to slash spending.
The benchmark FTSE 100 index ended up 0.4% at 5,728.93.
Chancellor of the Exchequer George Osborne gave more details on
his plan to cut government spending in a bid to eliminate the
nation's structural deficit. He said government departments will on
average see their budgets cut by 19%. See more on U.K. government's
plan to stick to deficit-reduction timetable.
"George Osborne finally wielded the axe this afternoon,
announcing budget cuts that hit public spending hard," said Will
Hedden, sales trader at IG Index, in a note to clients. "The
markets, however, barely flinched, with the FTSE 100 staying more
or less flat all afternoon."
"BAE Systems, the defence and security major, was one of the few
directly influenced by the austerity measures," Hedden said.
Shares of BAE Systems fell 2%, with the firm expected to suffer
from cuts to U.K. defence projects.
John Anderson, head of credit at fund manager Gartmore, said he
doesn't expect a double-dip recession in the U.K., but that the
danger of the proposed budget cuts is that they could further
dampen economic growth, putting pressure on the Bank of England to
keep interest rates low, which could push inflation higher.
Any further quantitative easing could also prove inflationary,
which would be a concern as the U.K. is already suffering from
inflation that has been persistently above the 2% target level, he
added in an email.
Also Wednesday, minutes from the Bank of England's October
meeting showed seven members of the rate-setting committee voted to
leave both interest rates and asset repurchases unchanged. One
called for an increase in the bank's quantitative-easing program,
however, while another wanted rates raised by a quarter of a
percentage point.
The central bank said that some of its members felt there was an
increased likelihood that further monetary stimulus would be
necessary but that "evidence was not sufficiently compelling" to
imply such a course of action should be undertaken at once.
Among stocks on the move Wednesday, shares of oil and gas
companies traded lower, with BG Group dropping 0.8%.
However, mining giants BHP Billiton (BHP) and Rio Tinto (RIO)
helped offset that impact on the FTSE 100. BHP Billiton gained 2.5%
and Rio Tinto rose 2.7%.
The moves came after BHP Billiton reported a 6% rise in iron-ore
output. Also, The Wall Street Journal reported that the company's
$39 billion bid for Potash Corp. of Saskatchewan (POT) is expected
to be rejected by the Saskatchewan government. See story on
BHP.
Separately, Rio Tinto announced it would invest $3.1 billion to
boost its iron-ore production in Australia.
Dolmen Securities analyst Brian Gallagher said Rio Tinto's
Australia investment is another sign that emerging markets will
continue to outpace their developed peers over the coming decade,
fuelling strong demand for raw materials.
Gallagher also said his view on the broader sector remains
positive even after China's unexpected rate hike on Tuesday, which
hurt mining stocks. Gallagher said China's decision was "a
necessary move which the Chinese had to make in order to temper
inflation and cool a hot property market."
Among mid-cap companies, shares of Hansen Transmissions
International slumped 14.5% as the company slashed its revenue
forecast. The maker of gearboxes for wind turbines said revenue for
fiscal 2011 will fall about 10% as customers delay deliveries, as
opposed to its previous projection calling for revenue to rise
between 5% and 10%.
Stobart Group was another big decliner in the mid-cap FTSE 250
index. The stock dropped 8.6% after the transport and logistics
company trimmed its profit forecast for the fiscal year amid rising
finance costs and concerns that an increase in the rate of
value-added tax could hurt volumes.