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LONDON (Alliance News) - UK stock indices are modestly higher Thursday, led by the banks as Lloyds says its underlying profitability is improving.
At the same time the pound has pushed to fresh multi-year highs against the US dollar as data shows the UK manufacturing industry expanding fast, while house prices continue to inflate.
By mid-morning Thursday the FTSE 100 is up 0.3% at 6,798.10, the FTSE 250 is up 0.3% at 15,871.21, and the AIM All-share is up 0.2% at 824.11.
While UK equity investors have starter May in a buoyant mood, European indices remain closed for the May Day bank holiday. Tens of thousands took to the streets of Japan Thursday for May Day demonstrations, urging corporations to improve their working environments and criticizing Prime Minister Shinzo Abe's economic policies.
While little effect is expected on the markets Thursday, similar, if smaller, demonstrations may well be witnessed in flash points across Europe, such as Athens and Berlin as the day goes on.
The pound has continued with its upward momentum, possibly helped by thinner-than-normal holiday trading. It rallied up to a fresh two-and-a-half year high against the dollar of USD1.6920 following the latest round of stronger-than-expected UK economic data.
The UK manufacturing sector expanded at its fastest rate for five months in April, according to the latest Markit manufacturing PMI, which recorded 57.3 for April, up from 55.8 in March and exceeding economists expectations for expansion to slow to 55.4.
The reading gave the pound its second boost of the day, after the Nationwide house price index earlier showed UK house prices rising at 10.9% year-on-year in March, faster than the 10.0% rise expected by economists. Over the month of March alone, prices rose by 1.2%, faster than the 0.7% expected.
"There is absolutely no sign that UK growth is slowing down as the Bank of England had banked on in its last quarterly forecast in February. To the contrary, it is probably accelerating," said Berenberg chief UK economist Rob Wood. "The strength of manufacturing shows that the UK recovery is not simply a housing driven credit bubble that will inevitably bust," the economist says.
Indeed, the latest lending data, also released Thursday have shown UK mortgage approvals slowing for the second consecutive month, to 67,135 in March from 69,592 in February. While new stricter ruler on mortgage lending only came into effect a few days ago, some analysts suggest that lenders may have tightened up their lending in anticipation of the rule change.
With the housing market having become such a key element of the UK economic recovery, and manufacturing PMI at one of its highest ever readings, the pound rallied to a level not seen against the dollar since August 2009.
Within UK equity sectors, the housebuilders are leading the gains on the back of the latest housing data, with the FTSE 350 household goods sector, which contains all the housebuilders, up 1.6%.
The banks are also providing a boost, with Lloyds leading the bank sector and the FTSE 100 higher after saying its net interest margin is improving faster than analysts expected. While the group's first quarter profit is down on the previous year, when results were boosted by gains on the sale of government securities, its underlying profit, margins, and capital ratio are improving. This "gives us confidence around the dividend prospects," says Shore Capital analyst Gary Greenwood. Lloyds shares are up 4.4%.
Royal Bank of Scotland shares are up 2.6% ahead of the fellow government-owned bank's interim management statement due on Friday, while Barclays is up 1.5%, and HSBC is up 0.6%.
BSkyB is a big blue-chip gainer, up 3.5% after saying it is on track to deliver on its expectations for the full-year, as it saw revenue rise in the nine months to end-March.
The supermarkets are doing less well after Morrison's brought the UK price war back to the forefront of investors attention by announcing 1,200 price cuts. Thursday's price cuts presumably fall within the GBP300 million of gross margin investment already announced, says Shore Capital. Amongst the headline price cuts - Jammie Dodgers have been cut to 49p from 109p.
The stock is down 0.5%, while peer Sainsbury's leads the FTSE 100 fallers, down 3.5%, and Tesco is down 2.1%.
Still to come Thursday, investors will be watching for any clues to Janet Yellen's current thinking following the latest USD10 billion cut to monthly asset purchases announced by the Federal Reserve last night, when the Fed Chair delivers a speech at 1230 GMT. "There have been a few slight missteps from her on the communications front in the very early part of her term, and the market will be keen to hear what she has to say," said Rabobank analyst Michael Every.
US initial jobless claims are also due at 1230 GMT, along with personal consumption data. The US Markit PMI is due at 1345, followed by construction spending at 1400 GMT and the ISM manufacturing PMI at 1400 GMT.
By Jon Darby; jondarby@alliancenews.com; @jondarby100
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