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LONDON (Alliance News) - London shares ended higher Wednesday, with insurers and banks recovering some of the heavy losses incurred so far in 2016, while US Federal Reserve Chair Janet Yellen told Congress that current financial conditions are "less supportive to growth" and that exposure to China could hurt the US economy.
The FTSE 100 index ended up 0.7% at 5,672.30 points, the FTSE 250 up 1.3% at 15,512.54 and the AIM All-Share up 0.4% at 673.74. In Europe, the CAC 40 in Paris and the DAX 30 in Frankfurt both ended up 1.6%.
At the London equity close, US stocks were mostly higher, with the Down Jones Industrials flat, the S&P 500 up 0.4% and the Nasdaq Composite up 1.1%.
"The equity market rally is in part because of short-side profit-taking following the recent acceleration in the downward trend," FOREX.com analyst Fawad Razaqzada said. "The lack of any major economic news so far this week means even the sellers are making a more sober assessment of the global economy."
Razaqzada said that another reason behind the positive close was the 10% increase in Frankfurt-listed Deutsche Bank shares, which helped to lift financial stocks across the board in Europe. Deutsche Co-CEO John Cryan on Tuesday said the bank was "rock-solid" in a move to allay market concerns.
"The stock has been among the worst hit in the sector this year as concerns have mounted about the bank's ability to pay coupons on its debts. But the company has reassured investors that the bank is in a strong financial position, while reports that the bank is considering buying back billions of euros in debt has also calmed investors' anxiety," Razaqzada added.
Royal Bank of Scotland ended up 3.7%, HSBC Holdings up 2.1% and Barclays up 2.0%, while FTSE 100 payments processor Worldpay Group closed up 5.8%.
Alongside banks, insurers also led the rebound, recovering from the losses seen Tuesday when talk of global economic slowdown and the possibility of another banking crisis weighed on investor confidence.
Prudential, up 4.4%, Legal & General Group, up 3.6%, St James's Place, up 4.0% and Old Mutual, up 2.9%, ended among the best blue-chip performers on Wednesday.
However, the FTSE 350 Life Insurance sector is still down 20% so far in 2016, while the FTSE 350 Banks sector is down 21% over the same period.
Fed Chair Yellen warned that financial conditions "have become less supportive to growth", and said this could weigh on the outlook for economic activity if it persists. Yellen said that given the recent further declines commodity prices, as well as the further appreciation of the dollar, the Fed expects US inflation to remain low in the near term.
In testimony to the House Financial Services Committee, Yellen admitted that "downside risks" from exposure to the slowing Chinese economy could hurt the US.
"Although recent economic indicators do not suggest a sharp slowdown in Chinese growth, declines in the foreign exchange value of the renminbi have intensified uncertainty about China's exchange rate policy and the prospects for its economy," said Yellen. "Should any of these downside risks materialize, foreign activity and demand for US exports could weaken and financial market conditions could tighten further".
However, Yellen's comments were not all negative, as she said that "ongoing employment gains and faster wage growth should support the growth of real incomes and therefore consumer spending, and global economic growth should pick up over time".
Yellen reiterated that the actual path of interest rates "will depend on what incoming data tell us about the economic outlook". However, she warned that "if the economy were to disappoint, a lower path of the federal funds rate would be appropriate".
Lloyds Bank said the overall message is that the Fed "is not certain" what to make of recent developments and so for now the central bank is simply monitoring the situation.
"The majority on the policy-making board remain hopeful that economic conditions will continue to improve but are wary that markets may be sending them a very different message," said Lloyds Bank.
Although Yellen didn't give any timeframe for any further interest rates moves, Lloyds believes that a March interest rate hike now looks highly unlikely. Nevertheless, increase from the June meeting onwards remain possible, Lloyds said.
"We continue to think that two interest rate rises remain likely in 2016, but this is in part dependent on markets settling down," Lloyds added.
Yellen's comments didn't produce a major reaction in the dollar, with the pound trading the greenback at USD1.4480 at the London equity close and the euro at USD1.1211.
Brent oil prices took back earlier losses after data from the US Energy Information Administration showed that crude stockpiles in the US decreased sharply in the week ended February 6. The report said US crude oil inventories eased by 754,000 barrels last week, with economists expecting an increase of 3.65 million barrels.
Brent was quoted at USD30.76 a barrel at the London equity close, having touched a low of USD30.33 before the data. However, US benchmark West Texas Intermediate didn't recover, standing at USD27.61 at the close, having set a new low at USD27.37 a barrel, its lowest level since September 2003.
Elsewhere on the London Stock Exchange, ARM Holdings finished at the bottom of the FTSE 100, down 5.0%. The chip designer fell as a soft outlook statement overshadowed an increase in pretax profit for 2015 and a 25% dividend hike, amid continued concerns about a slowdown in the smartphone market.
ARM acknowledged that "uncertainty may influence consumer and enterprise spending, potentially impacting semiconductor revenues and industry confidence". However, it said that based on current market conditions, it expects its 2016 dollar revenues to be "broadly in line" with market expectations.
Liberum analyst Eoin Lambe noted the wording of this outlook, saying the company "does not typically use the word broadly", and as a result Liberum expects the high end of consensus revenue forecasts to come down.
However, ARM also suggested its operational expenditure in 2016 is likely to amount to USD520 million to USD525 million, which is higher than current consensus forecasts of USD500 million, which also is likely to drag on profit forecasts.
The price of gold remained stable at USD1,191.26 an ounce at the close, having stood at USD1,193.31 at the close on Tuesday. However, gold miners Randgold Resources and Fresnillo ended down 3.5% and 2.7%, respectively, having previously followed the metal higher in its rally since the start of 2016.
In the FTSE 250, Dunelm Group ended at the top of the index, up 13%. The homewares retailer reported growth in profit in the first half of its financial year, as sales grew and it benefited from six extra days of winter price promotion. Dunelm said it made solid progress in like-for-like store sales, underpinned by a strong performance from curtains and bedding, particularly in its new 'kids' range.
Domino's Pizza finished up 9.7%, after the pizza delivery company was upgraded to Buy from Neutral by Credit Suisse. Meanwhile, Virgin Money Holdings rose 5.7% to 289.30p after Nomura initiated research coverage on the stock with a Buy rating and 445p price target, citing the retail bank's ability to grow its share of mortgage lending in the UK.
Tullow Oil ended down 8.5%, making it the worst mid-cap performer. The oil producer reported a narrower pretax loss in 2015 despite a steep drop in revenue due to the fall in oil prices, as the company said it remains focused on reducing costs and getting the TEN development in Ghana producing.
The company reported a USD1.29 billion pretax loss from continuing activities in 2015 compared to a USD2.04 billion loss in 2014. That result came despite a steep drop in revenue to USD1.60 billion from USD2.21 billion, yielding a gross profit of USD591.3 million compared to USD1.09 billion last year - in line with Tullow's guidance last month.
With Tullow already releasing a glimpse into its results last month, attention was on the company's spending in the near term and on the TEN development in Ghana which is expected to begin producing this year.
Tullow stuck to its guidance of a USD1.10 billion capital expenditure budget in 2016, but said this could fall to USD900.0 million. Importantly, with TEN almost finished, the company believes capital expenditure could be as low as USD300.0 million per year from 2017 onwards.
In the UK corporate calendar Thursday, Rio Tinto releases full-year results, Glencore publishes its fourth-quarter production results, and Imperial Brands issues a trading statement.
Emerging markets asset manager Ashmore Group releases half-year results, while Europe-focused Henderson Group publishes full-year results. Grainger issues a trading statement and Thomas Cook Group publishes its first-quarter results. Dairy Crest, Enterprise Inns, Tate & Lyle, and Cable & Wireless, and Halma issue trading statements. Informa releases full-year results and Pennon Group issue a trading statement.
Pharmaceutical giant Shire releases its full-year results at 1200 GMT.
In the economic calendar, US initial and continuing jobless claims are due at 1330 GMT, while EIA Natural Gas storage change data are due at 1530 GMT.
By Daniel Ruiz; danielruiz@alliancenews.com
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