News Column

MARKET COMMENT: Yellen Lifts UK Stocks As Rolls-Royce Returns Cash

June 19, 2014

James Kemp

LONDON (Alliance News) - UK stocks closed higher Thursday, with the FTSE 100 posting its biggest daily gain for almost two weeks, boosted by an well-received update after the London close on Wednesday from the US Federal Open Market Committee and Federal Reserve Chair Janet Yellen.

Rolls-Royce Holdings, closing up 8.1%, ended Thursday as the blue-chip index's biggest riser after saying it will return cash to shareholders through a GBP1 billion share buyback.

Meanwhile, the pound rose to its highest level for more than five and a half years against the dollar in the wake of Yellen's dovish remarks, hitting a high of USD1.7063.

The FTSE 100 closed up 0.4% at 6,808.11, to mark its biggest daily gain since June 6, the FTSE 250 closed up 0.4% at 15,683.88, and the AIM All-Share index up 0.2% at 784.6.

In Europe, the CAC 40 in Paris and the DAX 30 in Frankfurt both closed up 0.7%.

"Stock markets in Europe were trading with a positive bias today on the back of a perhaps more accommodative FOMC than some were expecting," said Jasper Lawler, a market analyst at CMC Markets. "The action, however, was in the US dollar, gold and silver which were all making huge moves as investors start to question the Fed's commitment to fighting inflation," he said.

The US central bank completed the two-day FOMC policy meeting with another taper of its quantitative easing programme and an indication that rates are staying low for longer.

As widely expected, the FOMC reduced its monthly asset purchase programme by another USD10 billion, bringing the total monthly amount of purchases down to USD35 billion from USD45 billion. If the Fed stays on this course, its asset purchasing programme will have finished by October this year.

Afterwards, Yellen held a balanced and calming press conference, suggesting that the relatively new Fed chair has quickly learned not to shock the markets with unexpected comments. At one of her first post-FOMC press conferences, Yellen indicated interest rates could start to rise as soon as six months after bond bond buying ends, a time-line that she was was careful to keep flexible on Wednesday.

Yellen said that the Fed would look at a "range of indicators" on jobs before deciding to raise rates, making it clear that the central bank intends to keep rates low "for a considerable time" after the bond-buying ends.

Indeed, only one of 16 Fed officials thought that rates should rise this year, while 12 thought 2015 would be appropriate.

"The comments were so well received that traders even overlooked suggestions that the rate of tapering could increase in the coming months," said Craig Erlam, a market analyst at Alpari. "Clearly, we've all moved past quantitative easing now and are far more concerned with interest rates, both the timing of the first hike and the path for future increases. When it comes to this, Yellen said all the right things," he said.

The Fed also released new quarterly forecasts for unemployment, inflation and economic growth.

The US central bank cut its 2014 gross domestic product forecast range to between 2.1% and 2.3%, from the 2.8% to 3% range released in March, following the unexpected contraction in the first quarter, but Yellen also said that the committee believes that US economic activity is expanding in the second quarter. Officials also lowered its 2014 unemployment rate expectations to between 6.0% and 6.1%, down from between 6.1% and 6.3%, while its inflation projection range remained relatively stable at between 1.5% and 1.7%, from 1.5% to 1.6%.

Whereas Yellen indicated that interest rates in the US could stay very low even after inflation has returned to its target, Wednesday's minutes from the Bank of England's latest policy meeting said committee members were surprised that markets were only pricing in a low possibility of a UK rate rise this year.

"The pound is boosted above all by a hawkish Bank of England, and a stronger UK economy, while the dollar continues to be shot down by a dovish Federal Reserve," said Fawad Razaqzada, a technical analyst at

Sterling edged lower in the immediate aftermath of some slightly weaker-than-expected UK retail sales, but any weakness was short-lived, and the currency moved higher quickly after.

UK retail sales contracted by 0.5% month-on-month in May, in line with expectations and down from a downwardly revised 1.0% rise in April. On a yearly basis, retail sales were up by 3.9% in May, less than the 4.3% that had been expected and down from 6.5% in April.

The Office for National statistics noted that, at 29%, growth in sporting goods over the month was the highest since January 2009. "Feedback from retailers in these stores has suggested that the increase in sales in May 2014 is due to the build-up of the FIFA World Cup," the ONS said. While a better picture of this trend may be available with next month's numbers, sales may also be directly linked to the performance of the England team in their upcoming game against Uruguay Thursday evening.

At the close of the UK equity market, the pound traded at USD1.7040, EUR1.2504, JPY173.544, and CHF1.5215.

"GBPUSD is currently holding above the 1.70 mark where it had struggled before," said Razaqzada. "Now that this psychologically-important level has been eroded, further gains could be on the cards over the coming days and weeks," he added.

Gold and silver also have posted large gains Thursday. At the close of the UK equity market, the price of gold was USD1,298.49 per ounce, and the price of silver USD20.351 per ounce.

On Wall Street, the NASDAQ Composite, DJIA, and S&P 500 were all down between 0.1% and 0.2%, having posted strong gains on the back the FOMC's decisions and Yellen's speech on Wednesday.

At the individual UK stock level, Rolls-Royce Holdings moved to appease investors unhappy with the company's recent outlook downgrade, saying it will return cash to shareholders through a GBP1 billion share buyback once the planned sale of its energy gas turbine and compressor business to Siemens goes through. It said the cash return reflects its strong balance sheet and was possible because it isn't planning any material acquisitions.

In its statement, the company said it is still retaining its guidance for 2014 and 2015.

In a second piece of better news, Rolls-Royce also revealed that it has signed a memorandum of understanding with Chinese nuclear reactor vendor CNNC to cooperate more closely on civil nuclear power projects in China, and also elsewhere. The memorandum will explore possible collaboration in areas such as engineering support, provision of components and systems, emergency diesel generators, supply chain management and instrumentation and control technology, it said.

BT Group, closing up 2%, was another big riser after UK telecoms regulator OFCOM said that it had provisionally decided to drop FTSE 250-listed TalkTalk Telecom Group's complaint that BT had failed to maintain a sufficient margin between its wholesale and retail prices, as there is "no grounds for action".

At the same time, OFCOM proposed new rules for BT, restricting the way it charges operators for wholesale access to its superfast broadband network. Under the new proposals, BT is required to maintain a "sufficient" margin between the rate it charges for wholesale access to its network and the price at which it retails its own superfast broadband services, to allow competing operators to match its price and make a profit.

TalkTalk's shares ended the day down 0.1%.

Man Group was one of the FTSE 250's stand out gainers, closing up 5.8%. The company's shares rose to their highest level in over two months after it said it had agreed to acquire Numeric Holdings LLC, a Boston quantitative equity manager that had USD14.7 billion in funds under management as at the end of May, for up to USD494.0 million, as Man looks to diversify its flagship AHL fund and expand in North America.

News of the acquisition comes three weeks after Man Group confirmed it was in talks to buy Numeric from majority owners TA Associates and other shareholders, as well as from management and employees. Man Group has been seeking to diversify its AHL fund, which has suffered from investor outflows and weak performance in recent years.

Micro Focus International, ending the day up 3.9%, was another big winner. The FTSE 250 software company increased its total dividend for the year to end-April, as it saw pretax profit decline slightly despite revenue growth, hampered by higher operating costs. It proposed a total dividend per share of 44.0 cents, up 10% from 40.0 cents in the previous year. The company reiterated that its core objective is to deliver long-term consist returns to shareholders of at least 15% to 20% per year.

Investec Securities upgraded the company to Buy, from Hold, increasing its price target to 950 pence from 850p, following the release of the company's 2014 full-year results, saying that its outlook supports a higher target price.

Go-Ahead Group, closing up 3.9%, raised its guidance for its current financial year, after its rail unit performed better than expected in the fiscal fourth quarter, and said it is expecting strong growth rates to continue in its next year.

In the data calendar Friday, German produce price inflation figures are released at 0700 BST, ahead of eurozone current account data and Italian industrial data at 0900 BST. UK public sector net borrowing information is released shortly after at 0930 BST.

In the afternoon, the preliminary reading of eurozone consumer confidence is published at 1500 BST.

In the corporate calendar, FTSE 100-listed Debenhams releases a trading update, while AIM All-Share-constituent Polar Capital Holdings publishes full-year results.

Meanwhile, TSB Banking Group, the retail bank Lloyds Banking Group must divest to meet European conditions for its UK state bailout in 2009, is expected to float Friday. The Financial Times reported late Wednesday that Lloyds is set to value the new bank at GBP1.3 billion when it prices the offer Thursday, citing people familiar with the deal.

The FT said that the order book was "well covered" at the midpoint of a 250p-270p per share price range. Lloyds is planning an initial sale of between 25% and 27.5% of TSB.

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Source: Alliance News

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