Selling pressure spilled over into Wednesday's session after US inflation eased less-than-expected, raising fears the Federal Reserve could be forced to act even more aggressively to tame price pressures.
In contrast, data early Wednesday showed the UK inflation rate unexpectedly softened in August.
The FTSE 100 index was down 0.8%, or 56.98 points, at 7,328.74 early Wednesday. The mid-cap FTSE 250 index was down 88.38 points, or 0.8%, at 19,078.83. The AIM All-Share index was down 7.83 points, or 0.9%, at 872.82.
The Cboe UK 100 index was down 0.9% at 731.91. The Cboe 250 was down 1.0% at 16,418.20, and the Cboe Small Companies down 0.1% at 13,676.64.
In mainland Europe, the CAC 40 in Paris was down 0.2% while the DAX 40 in Frankfurt was down 0.3% early Wednesday.
Inflation in the UK eased in August, according to data from the Office for National Statistics. The consumer price index rose 9.9% year-on-year in August, unexpectedly slowing from 10.1% in July. Consensus, according to FXStreet, was for the rate reading to tick up to 10.2%.
‘We think [headline UK inflation] could be more-or-less back to the Bank of England’s 2% target by the end of next year, crazy as that currently seems,’ said James Smith at ING.
But Smith noted the core inflation was ‘mixed’. Core CPI - which excludes energy, food, alcohol and tobacco - edged up as forecast, to 6.3% from 6.2%.
‘The Bank of England is watching wage growth more closely, as the hawks worry that worker shortages could lead to core inflation staying more persistently above target,’ he said.
Sterling was quoted at $1.1508 early Wednesday, down from $1.1524 at the London equities close on Tuesday. The pound hit a high of $1.1739 on Tuesday before the US inflation data tanked risk-on sentiment.
Other currencies were suffering against the greenback. The euro traded at $0.9977 early Wednesday, down against $0.9992 late Tuesday. Against the yen, the dollar was quoted at JP¥143.38, up against JP¥144.23.
The annual US inflation rate for August was 8.3%, topping expectations, according to FXStreet, of 8.1%, but still easing off July's rate of 8.5%.
Likely to worry the Federal Reserve was August's core inflation rate, which excludes energy and food. It ticked up to 6.3% on an annual basis from 5.9% in July. The rate had been expected to pick up more modestly to 6.1%.
According to the CME's FedWatch tool, the market is pricing in a 66% chance of a 75 basis point rate hike next week. However, the prospect of a 100 basis point hike is now expected by a third of analysts. A day ago, no analysts were pricing in the likelihood of a 100 basis point hike.
In the FTSE 100, asset manager abrdn was down 4.4% after a downgrade to 'sell' from 'hold' by Deutsche Bank.
Ocado was down 2.3%. The online retailer was extending losses after a 15% fall on Tuesday, following a downgrade to its sales outlook for joint venture Ocado Retail. Further compounding woes, Credit Suisse downgraded the stock to 'underperform' from 'neutral' on Wednesday morning.
In the mid-caps, Dunelm was up 3.8%, as the homeware seller reported strong annual trading.
Total sales in the financial year to July 2 were up at £1.58 billion from £1.34 billion the year before, and pretax profit increased to £212.8 million from £157.8 million. Sales have been ‘robust’ in the first ten weeks of its 2023 financial year, it added, and it is on track to deliver full-year results in line with analyst expectations.
At the other end of the mid-caps was Aston Martin, down 11%, after the Financial Times reported that a lawsuit has been filed against the firm by two former car dealers.
The dealers claim they are owed around £150 million for underwriting Aston Martin's development of the Valkyrie hypercar, the newspaper said, citing two people with knowledge of the matter.
On AIM, ITM Power sunk 18%. Graham Cooley has decided to step down as the firm's chief executive after 13 years in the role. The company has started the hunt for his replacement, and Cooley will remain in the position until a successor is appointed. After this, he will assume a ‘senior strategic role’.
The update came as the energy storage and clean fuel firm reported annual results. Revenue for the year to April 30 rose to £5.6 million from £4.3 million, and pretax loss widened to £46.7 million from £27.6 million.
‘Continued investment in capability and capacity will see losses increase in the near term, with an improved position in the medium term. The cash on our balance sheet will enable us to grow capacity,’ the company said.
Gold was quoted at $1,699.78 an ounce, down against $1,704.90 on Tuesday. Brent oil was trading at $92.08 a barrel, lower from $93.12 late Tuesday.
In Asia on Wednesday, the Japanese Nikkei 225 index closed down 2.8%. In China, the Shanghai Composite ended down 0.8%, while the Hang Seng index in Hong Kong was down 2.4%. The S&P/ASX 200 in Sydney closed down 2.6%.
Other than the UK inflation data, Wednesday's economic calendar has a UK house price index at 0930 BST and eurozone industrial production at 1000 BST. US producer prices are out at 1330 BST.
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