The February rally took a breather this morning after a widening of the UK trade balance dampened spirits, while disappointing results from Reckitt Benckiser and a broad decline in resource stocks weighed on the index.

UK trade balance

The UK trade balance widened to a record in December, further highlighting the difficulties the economy faced in the last month of 2010. The total trade deficit in goods and services reached £4.8 billion, up from £3.9 billion in November. Exports rose 1.5% to £24.2 billion, while imports increased 3.5% to £33.4 billion. The surge in imports has been partly attributed to a jump in aircraft purchases ahead of VAT changes in January which affected which aircraft qualified for zero tax.

Economists may not read into the figure too much, as short-term weather effects and the jump in aircraft imports may have distorted the figures. Still, the underlying trend is that the trade deficit is continuing to widen, despite sterling depreciating in value over the last three years. The weaker currency would be expected to boost exports, but it also means that imports have become more expensive, which may be part of the reason why inflation is such a problem for the UK economy.

With the price of raw commodities expected to rise further - at least in the near-term - due to heavy demand from emerging economies, it does not seem that the upward pressure on prices will abate any time soon. According to Bloomberg, the import of oil and basic materials jumped by almost one third; as a result, inflation in the UK may rise further this year, as the Bank of England expects.

The Bank of England meets tomorrow to announce their latest interest rate decision. Speculation that the central bank may be mulling over a rate increase has intensified in recent weeks, however it is unlikely that a move on interest rates will come tomorrow. With domestic inflationary pressure subdued and the government's austerity measures on the way, it would be too risky to raise rates in the current environment.

UK equities

By 10.45am (London time) the FTSE 100 was trading 17.83 points lower (-0.29%) at 6073.5, while the FTSE 250 gained 15.87 points (+0.13%) to 11,846.41.

Weighing on the FTSE 100 this morning was a 20.67% drop in International Power after the company went ex-dividend. International Power will be merging with GDF SUEZ to form one the world's largest gas and power producers; on 25 February shareholders will receive a special dividend of 92p as part of the deal, with today being the ex-dividend date in order to be an eligible recorded shareholder.

Shares in Reckitt Benckiser fell 4.76% to 3281p this morning after fourth-quarter earnings disappointed. Earnings for the quarter came in at 69p a share, missing the company's own forecast of 73.7p. Chief Executive Bart Becht summed up the situation by saying 'We are facing two worlds, Western Europe and North America are not showing much growth while Eastern Europe and other developing areas are growing well.' [1] The company expects sales to increase 4% in the coming year.

Resource stocks were also broadly lower as metal and energy prices eased this morning. Essar Energy was down 3.22%, Royal Dutch Shell fell 1.8% and Randgold Resources lost 1.46%.

Banks were generally higher after a deal was struck with the UK government on 'Project Merlin'. As part of the agreement banks will lend an extra £15 billion to businesses this year, while bank bonuses will lower in 2010 compared to 2009. Lloyds gained 1%, Barclays added 0.8% and HSBC rose 0.85%.

US pre-market

The economic data is sparse this afternoon, with only US MBA mortgage applications at midday (London time) to digest. However, Fed Chairman Ben Bernanke will be testifying before the House Budget Committee at 3pm, which could provide some volatility this afternoon. At this stage the Fed seems committed to completing the full quantitative easing program, as the speed of the economic recovery has not been satisfactory and job creation remains a concern.

Companies to report today include Agrium, Cisco, Coca-Cola, General Motors and Polo Ralph Lauren.

March Dow and S&P futures were trading 0.19% and 0.27% lower this morning, which may suggest a soft start to US trading this afternoon.