London close: Stocks fall on bank tax concerns, US inflation

(Sharecast News) - London stocks ended lower on Friday as banking shares slumped after a think tank suggested a potential windfall tax on the sector, while investors assessed the latest US inflation data.

Russ Mould, investment director at AJ Bell, noted: "The UK stock market ended the week on a sour note amid suggestions that the government could help to fill its fiscal hole with a new tax on the banking sector.

"Some of the biggest names in the FTSE 100 are lenders so if they're out of favour on the stock market, it acts as a drag on the whole UK blue-chip index."

The FTSE 100 index fell 0.32% to close at 9,187.34 points, while the FTSE 250 shed 0.64% to 21,605.72 points.

Sentiment was dented by the renewed political debate over taxing bank profits, which weighed on financial stocks across the board.

In currency markets, sterling was last down 0.04% on the dollar to trade at $1.3507, as it weakened 0.21% against the euro, changing hands at �1.1541.

US data paints mixed picture, UK business prospects rise

On the economic front, US data painted a mixed picture during the afternoon, with strong income and spending growth offset by signs of stubborn inflation and weakening consumer sentiment.

Patrick Munnelly, market strategy partner at TickMill, said: "Inflation risks remain skewed to the upside in the near term, a concern that [Federal Reserve] chair [Jerome] Powell has acknowledged.

"A modest increase in underlying inflation for July, however, is unlikely to alter market expectations regarding US interest rate cuts."

According to the Department of Commerce, personal incomes rose 0.4% in July while spending increased 0.5%, both in line with expectations.

The headline personal consumption expenditures price index climbed 2.6% year-on-year, also as forecast, but the core PCE measure - the Federal Reserve's preferred inflation gauge - picked up to 2.9%, a tenth of a point above expectations.

Mould added: "Fed chair Jerome Powell has already indicated that the central bank has had a slight shift in thinking, with the market now expecting an 85% chance of a 25-basis point interest rate cut at September's meeting.

"Today's inflation figure will play a crucial role, alongside jobs data, in determining whether the Fed cuts at this meeting, and if so, by how much."

The personal savings rate was unchanged at 4.4%, while consumer sentiment deteriorated as the University of Michigan's final August index fell to 58.2 from 58.6 in July, with the current conditions index dropping sharply to 61.7 from 68.0.

The survey showed buying conditions for durable goods at their weakest in over a year and a 7% fall in current personal finances.

Inflation expectations for the year ahead rose to 4.8% from 4.5%, with the long-run outlook edging up to 3.5%.

Manufacturing data meanwhile added to concerns over growth, as the Chicago Business Barometer plunged to 41.5 in August from 47.1 in July, its lowest since late 2023 and well below forecasts of 46.0.

Elsewhere, the US goods trade deficit widened sharply to $103.6bn in July, its largest in four months, as importers front-loaded shipments ahead of Donald Trump's reciprocal tariff deadline.

Imports surged 7.1% to $281.5bn, while exports slipped 0.1% to $178.0bn.

On home shores, the Lloyds Business Barometer rose to 54% in August, a fourth consecutive monthly gain and the highest level since 2014 for UK trading prospects.

However, optimism about the broader economic outlook fell three points to 44%.

Hann-Ju Ho, senior economist at Lloyds Bank, noted that "UK firms remain optimistic about their own trading prospects while there is a modest cooling of confidence in the wider UK economy."

Meanwhile, German retail sales fell 1.5% in July, their steepest monthly decline since August 2023, reversing a 1.0% rise in June and missing forecasts of a 0.4% drop.

Think-tank report weighs on banks, Rolls-Royce and JTC in the green

On London's equity markets, banking stocks slumped after the Institute for Public Policy Research (IPPR) urged the government to impose a windfall tax on the sector and halt bond sales to stem losses from quantitative easing.

Mould observed: "Shares in UK banks including Lloyds and NatWest have taken a hit as the idea of a tax raid on lenders was suggested by think-tank IPPR.

"It's hardly a surprise that every cushion is being upended in the hunt for extra cash to fill the much-discussed black hole in the Treasury's finances.

"The issue is whether taxing the banks more will end up stifling the very growth the government is keen to foster, by crimping lending to businesses and households alike."

NatWest Group fell 4.85%, Lloyds Banking Group dropped 3.38%, Barclays lost 2.24% and HSBC eased 0.95%.

Mould added that the timing of the debate was "unfortunate given it coincides with a new poll from Lloyds suggesting a rise in business confidence, despite cost pressures.

"This positive sentiment could be threatened if businesses take the view that a new tax on banks might force lenders to tighten their lending criteria."

On the FTSE 250, Paragon Banking Group slid 2.47%, Close Brothers Group declined 3.65% and OSB Group fell 3.74% as the IPPR report weighed on mid-cap lenders as well.

Outside the banking sector, Wood Group was in focus after selling its North America transmission and distribution division to Qualus for $110m as it streamlines operations ahead of a possible takeover by Sidara.

"Given the precarious financial position Wood Group is in, the $110m sale of its US transmission and distribution engineering business might have been expected to draw some enthusiasm," said Mould.

"However, this is a minor subplot to the much bigger story of its takeover by Dubai-based Sidara.

"Most shareholders will want the sorry saga to be over and will be impatient for the deal to go through."

Among the gainers, Rolls-Royce rose 1.09% after Citi raised its price target to 1,101p from 641p, citing stronger profit and cash flow forecasts through 2030.

JTC surged 17.76% after rejecting two takeover approaches from private equity firm Permira, which has until 26 September to decide whether to make a firm bid.

Reporting by Josh White for Sharecast.com.