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* FTSE 100 down 0.4 pct
* Assessment of U.S. economy by Fed's Yellen subdues markets
* Imperial Tobacco down, to buy assets from Reynolds/Lorillard
* Housebuilders fall, UK inflation takes surprise jump
* Weak German investor morale hurts broader sentiment
By Tricia Wright
LONDON, July 15 (Reuters) - Britain's top shares fell on Tuesday, held back by housebuilders on concern UK interest rates will soon rise, and big falls from Imperial Tobacco.
Imperial Tobacco sank 3 percent, making it the top FTSE 100 decliner, following news that Reynolds American would buy rival Lorillard, and sell brands to the British cigarette maker to address antitrust issues.
Reynolds said it would sell its Kool, Salem and Winston and Lorillard's Maverick and blu eCigs brands and other assets to Imperial Tobacco for $7.1 billion in cash.
Following the announcement concerning the asset disposals, credit rating agency Fitch revised its outlook on Imperial Tobacco to negative from stable.
"Fitch views positively the enlargement of Imperial's U.S. operations but at the same time notes that failure to enhance the cash flow generation and profit growth capability of its core European business would seriously impair credit metrics," Fitch said.
Markets were also hit by comments from U.S. Federal Reserve Chair Janet Yellen to a Senate committee to the effect that the U.S. economic recovery is incomplete, justifying a loose monetary policy for the foreseeable future.
Investors had been expecting a more upbeat assessment on the economy, strategists said.
"While in the short term it will be seen as a positive that the Federal Reserve don't have to raise interest rates, we do know that underlying strength in the U.S. economy is important for companies and for profitability growth, and investors are reacting," said Henk Potts, equity strategist at Barclays.
The FTSE 100 index was down by 0.4 percent at 6,720.43 points before the end of the trading day. It was also hampered by German investor morale data, which dropped to its lowest in 1 1/2 years in July.
Shares in housebuilders, volatile in recent weeks, came under pressure as a report on Tuesday showed British inflation unexpectedly rose to a five-month high in June.
Barratt Developments fell 2.1 percent. Mid-caps Redrow and Taylor Wimpey fell by 3.4 percent and 2.9 percent respectively.
"The feeling seems to be that interest rates could potentially go up sooner than the market expects, given the way that the inflation data was reported," Manoj Ladwa, head of trading at TJM Partners, said.
Housebuilders sold off in mid-June when Bank of England Governor Mark Carney said rates may rise sooner than markets were predicting. They recovered towards the end of the month when the BoE imposed measures aimed at curbing house prices that turned out to be more lenient than the builders had feared.
Carney said on Tuesday the central bank's forward guidance was intended to signal how interest rates might change over the medium term, not pinpoint the timing of a first hike. (Reporting by Tricia Wright; Editing by Larry King)