UK banks weighed on the blue-chip index this morning, as anxiety ahead of this afternoon’s US quarterly reports led investors to take profits across the board.
US banking sector reports
A slew of quarterly results from high-profile US banks are due for release this afternoon and that’s weighing on sentiment at the moment, especially in view of Citigroup’s disappointing results yesterday. The UK banking sector is not immune to US developments, and what we’re seeing at this juncture is a slight readjustment in exposure to the sector.
Rising interest rate expectations
Rising domestic interest rate expectations have also weighed on equities following yesterday’s inflation figures. There has been increasing chatter this morning that the Bank of England may lift interest rates sooner than expected, following yesterday’s jump in UK inflation. The Office for National Statistics reported inflation rising to 3.7% in December, surpassing consensus estimates from economists. Considering that inflation has now exceeded the central bank’s target of 3% for ten months now, some are calling for the bank to act.
According to a poll conducted by Reuters after the inflation announcement, the majority of analysts predict interest rates to rise by 0.25% in the fourth quarter. However, a third now believe an increase could come in the third quarter. Ross Walker from RBS and George Buckley from Deutsche Bank say that a rate hike could come as early as May.
The BoE will hold off on raising rates for as long as possible in order to support the economic recovery, and to see whether inflation does begin to come down after the temporary effects such as the VAT rate rise subside. The effects that the government’s austerity drive will have on the economy are also unclear. Rising unemployment would give the BoE a reason not to lift interest rates, as the margin of spare capacity would be increasing, which should help bring down inflation in theory.
In a positive sign for the economy, unemployment in the UK remains stable. The ILO unemployment rate remained at 7.9% in November, while the number of Britons claiming unemployment benefits unexpectedly fell by 4100. Inflation hasn’t filtered through yet to wages, with average weekly earnings for the three months to November rising 2.1%, slightly less than what economists were forecasting.
While the BoE will not be compelled to act in the near term, if inflation continues to rise in the coming months, it will be likely that the BoE will be forced to act.
UK equities
By 10.30am (London time) the FTSE 100 was down 22.79 points (-0.38%) to 6033.64, while the FTSE 250 had lost 15.99 points (-0.14%) to 11814.33.
Resource stocks posted minor gains this morning, as an easing US dollar help support commodity prices. Vedanta Resources, Randgold Resources and BP gained 1%, 0.97% and 0.86% respectively.
Weighing on the index was a broad decline in banks ahead of earnings announcements from a number of US banks this afternoon. The banks suffered yesterday after Citigroup missed earnings estimates. Barclays was down 1.56%, Lloyds retreated 0.5%, and HSBC fell 0.89%.
Pearson, the media business and publishing company that owns the Financial Times, gained 5.17% to 1058p this morning after raising their 2010 forecast. Pearson said adjusted earnings will rise 16% to 76p per share for 2010, while continuing operating profit will rise 20% to £850 million. CEO Marjorie Scardino said ‘For the third successive year, our growth is vigorous even though market conditions have been anaemic. We are on the right road and set out on 2011 with confidence that we will have another good year.’
Shares in pub operator JD Wetherspoon rose by 5.39% to 465.5p following upbeat guidance for the second quarter. Like-for-like sales are expected to increase 3% for the twelve weeks to 16 January. Sales from recently opened pubs have increased 7.7%. The company remains confident on the outlook despite saying that ‘there are clear indications of increases in the cost of supplies across a wide range of goods, including food and bar purchases, as well as utilities and excise duties.’
Meanwhile, Kesa Electricals sank 6.17% to 141.5p, after warning that its full-year profit would be towards the lower end of expectations. Total revenue fell 4% on a like-for-like basis in the third quarter, with weather conditions blamed for the poor performance. The Comet store chain was particularly hard hit losing 7.3% in underlying third-quarter sales. The company also said that sales have softened since the introduction of the VAT on 4 January.
Music retailer HMV was another casualty this morning, dropping 10.5% to 23.5p after its credit insurers said they are reducing the amount of cover they will provide to the company. The stock has fallen 26.6% this year alone, and 72% compared to a year ago, after performance in the Christmas season disappointed. Difficult weather conditions were also blamed for the lacklustre sales.
US pre-market
Goldman Sachs, Wells Fargo and Bank of New York Mellon all report before the opening bell today, while eBay’s earnings conference call is scheduled for 10pm (London time).
Apple and IBM shares will be in focus after both companies reported solid earnings last night. Apple shares are up 1.54% to $345.89 in pre-market trading, while IBM has gained 2.38% to $154.24.
At 1.30pm, US housing starts and building permits will be announced. Economists are forecasting housing starts to increase to an annualised 550,000 in December, while building permits are expected to rise to 554,000.
March Dow and S&P futures were trading 0.09% and 0.18% lower respectively which suggests a soft start to US trading this afternoon.
