News Column

MARKET COMMENT: UK Shares Firm As Inflation Falls To Multi-Year Low

June 17, 2014

Jon Darby



LONDON (Alliance News) - UK stocks trade modestly higher Tuesday, with a number of stand-out gainers supporting indices, while the pound has slipped against other major currencies after the headline rate in UK inflation fell to its lowest level for more than four-and-a-half years.


The slim stock market gains come despite ongoing concerns over the situation in Iraq, where the US has announced it is sending 275 troops to secure its embassy as clashes between jihadists militants and government security forces continue.


By mid-morning Tuesday, the FTSE 100 is up 0.2% at 6,768.50 and the FTSE 250 up 0.1% at 15,720.17, while the AIM All-Share is fractionally lower at 786.03.


Major European markets also are higher, with the French CAC 40 up 0.5%, and the German DAX up 0.7%.


Headline UK consumer price inflation slipped to 1.5% year-on-year in May from the 1.8% growth recorded in April, missing economists forecasts for 1.7% and showing the lowest level of price growth since October 2009. On a monthly basis, prices contracted by 0.1% in May, compared to the 0.4% growth seen in April. Core CPI, which excludes volatile items such as food and energy, also slipped to 1.6% in May after having reached the Bank of England's 2.0% target in April. Economists had expected core CPI to moderate to 1.7%.


The pound slipped against the dollar to a low for the week of USD1.6934, after having peaked above USD1.70 on Monday. Against the euro, the pound slipped to a low for the week so far of EUR1.2483.


The moves in the pound may be restricted by the upcoming release of the latest Monetary Policy Committee meeting minutes, due for publication on Wednesday at 0930 BST. The minutes will be closely scrutinised for indications of the timing of the first UK interest rate rise, with some economists even anticipating that notable hawk Martin Weale may already have voted for a hike at the June meeting.


As Governor Mark Carney and others at the BoE sit Tuesday for the quarterly Financial Policy Committee meeting, they will pay interest to the inflation numbers as a key determinant of the first interest rate rise.


While inflation levels remain more of an issue for the MPC, they will also be watched by the Financial Policy Committee, which is holding its regular quarterly meeting Tuesday. The FPC will likely be discussing the housing market, given that the FPC's mandate is to identify and take action to remove risks to the UK financial system and that many commentators see the recent rate of house price inflation as just that sort of risk.


Along with the inflation data just released, the Office for National statistics also said house prices rose by 9.9% year-on-year in May, the fastest level of growth recorded by the ONS since October 2010.


Crest Nicholson has added further evidence to the strong UK house price growth Tuesday. The housebuilder reported strong sales growth of 26% in the six months to April 30, while pretax profit growth outstripped that at 37%, reflecting an increase in the sales prices. Crest Nicholson is a top riser in the FTSE 250, up 3.8% at 335.50p.


While no announcement is expected from the BoE Tuesday, the key date for the diary is June 26, when the bank published its Financial Stability Report, which some economists expect to include new macro-prudential rules aimed at cooling the housing market.


Whitbread leads the FTSE 100 gainers, up 3.0% after reporting strong sales growth in its first quarter. The hotel, restaurant and coffee chain operator, which owns brands including Costa Coffee, said sales were up 13% in the 13 weeks to May 29, driven by a 6.9% increase in like-for-like sales.


Shire is a big gainer as merger and acquisition speculation moves back to the pharmaceutical sector. The shares are up by 2.8% Tuesday after Reuters reported late on Monday that the company has hired Citigroup as an advisor in anticipation of receiving a takeover offer following a wave of deals in the sector. Shire shares are up 2.7%.


JD Sports is trading well, up 2.8% in the FTSE 250 after saying that that it has seen a pleasing start to the year, with its core sportswear business performing well in the build up to the FIFAWorld Cup. The sports retailer declined to give any actual numbers, however, saying that it would be "potentially misleading" given the boost it has seen ahead of the World Cup.


At the other end of the FTSE 250, Xaar shares have plunged more than 23% after the digital print technology company released an unscheduled trading update that analysts say is likely to drive a significant downgrade to consensus earnings forecast for the current year. The group guided Tuesday that its 2014 full-year sales will be about GBP130 million, well below the previous Bloomberg-collated analyst consensus of GBP144.6 million.


Chinese Premier Li Keqiang was moving the UK markets this week before even landing in London. The mining stocks were big gainers on Monday after Li indicated that China was prepared to use further stimulus measures to help China reach its 7.5% growth target.


The Chinese premier is scheduled to meet with both UK Prime Minister David Cameron and the Queen on Tuesday, with various reports indicating that a raft of trade deals between the two countries will be announced with a cumulative value of about GBP18 billion. Markets are particularly alert for news of deals between China and the UK's two biggest oil companies, Royal Dutch Shell and BP, amid speculation that deals have been made for them to supply liquefied natural gas to China.


In Germany, the ZEW survey of business leaders current assessment of the economic situation rose faster than expected in June after reaching a multi-year low in May. The index came in at 67.7 this month, up from the recent low of 62.1 and exceeding economists expectations for a rise to just 62.6. The eurozone ZEW economic sentiment index also rose, to 58.4 in June from 55.2 in May.


Still to come Tuesday, US CPI and housing starts data is due at 1330 BST, followed by the US redbook of retail sales at 1355 BST.


Ahead of the data, futures trading indicates that US markets will follow Europe higher, with the S&P 500 and the DJIA both pointing up between 0.2% and 0.3%.







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Source: Alliance News


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