An improvement in the RICS house price balance and increase in retail sales in December initially helped the FTSE edge higher this morning, but gains were limited after the banks were slapped with an increase in the Treasury’s banking levy, and miners were hurt by a surprise interest rate hike by China.

UK house prices and retail sales

The UK housing sector showed some sign of improvement, according to the Royal Institute of Chartered Surveyors (RICS). The RICS house price balance, which measures the number of surveyors saying price rose against those that fell, increased to -31% in January, compared to -39% the prior month. While the negative number still suggests there are more surveyors overall saying prices fell, it is still an improvement on the month and may be an indication that prices are beginning to stabilise. The report said that fewer houses were put on the market, which helped constrain supply and support prices. Halifax last week reported a similar shortage of supply and said that house prices rose in January, according to their gauge.

While it may be too early to suggest that house prices have bottomed out, considering mortgage financing remains constricted, and uncertainty over the health of the economy may keep buyers at bay, it does add to a series of data, which have pointed to improving economic fundamentals in the UK in January. Also out this morning was the British Retail Consortium retail sales monitor, which recorded a 2.3% increase like-for-like sales compared to a year earlier. That compares to a 0.8% drop in December, which was largely attributed to poor weather conditions during the month.

In all, it’s been a promising start to the year for the UK, with manufacturing, construction and the services industries all rebounding, while this morning’s data suggests consumers are still spending. The question is whether this can continue as the year progresses, with the government’s austerity measures looming and a potential interest rate rise being pencilled in as early as the first half of this year.

UK equities and China rate hike

By 10.30am (London time) the FTSE 100 was trading 3.3 points higher (+0.05%) at 6054.33 while the FTSE 250 climbed 20.16 points (+0.17%).

Retailers were buoyed by the BRC report and were among the best performers this morning. Marks & Spencer rose 2.08% to 367.30p, while Next added 0.75% and Burberry gained 0.6%.

The banking sector was broadly lower this morning after the Treasury increased the levy on banks by £800 million to £2.5 billion. Chancellor George Osborne said ‘It’s economics and the need to make sure the banks make a fair contribution to closing the budget deficit.’ [1] Barclays fell 0.74%, Standard Chartered declined 1.15% and Royal Bank of Scotland lost 0.36%.

Gas giant BG Group rose 1.18% to 1457p after reporting full-year results today. Earnings for the year were $4.01 billion, beating the $3.4 billion median estimate from analysts surveyed by Bloomberg. The company did miss on the revenue side, which rose 11% to $17.4 billion, against estimates of $17.8 billion. The company is continuing to invest heavily in projects in Australia, Brazil and the USA, while total reserves and resources increased by 1.7 billion barrels of oil equivalent.

Xstrata initially gained 0.44% to 1474p after full-year profit topped analyst estimates. Profit before exceptional items increased 86% to $5.15 billion, surpassing the $5.02 billion forecast from analysts polled by Bloomberg. The company plans to increase output by 50% over the next three years on the back of Asian demand. However, CEO Mick Davis expects growth in China will not be as fast as 2010 as the government tries to combat inflation and manage domestic growth. As a matter of fact, China raised interest rates today by 25bp in an attempt to cool inflationary pressures.

US pre-market

It is another quiet day on the economic front in the US this afternoon. At 3pm, the IBD/TIPP economic optimism survey is released. Meanwhile, March S&P futures were trading marginally lower and March Dow futures were 0.2% higher. Companies to report today include McAfee, Motricity and Sara Lee.