Lloyds Share News (LLOY)

LONDON (Alliance News) - The FTSE 100 closed modestly lower Friday, after news reports said European Union diplomats had reached a preliminary agreement on increased sanctions against Russia. However, strong gains from the index's banking constituents limited the losses.

The blue-chip index had spent much of the day trading within tight ranges, but fell shortly before the market close as investors sought to shed traditionally risky assets, such as equities, ahead of the weekend, following reports that the EU has come to an agreement over what sanctions to impose against Russia for its role in the Ukraine crisis and the downing of a Malaysian Airlines passenger jet.

Reuters said European diplomats spent Thursday and part of Friday discussing possible sanctions and key measures suggested by the EU Commission included closing EU capital markets to state-owned Russian banks, an embargo on arms sales to Moscow, and restrictions on the supply of energy and dual-use technologies.

The FTSE 100 closed down 0.4% at 6,791.55, while the FTSE 250 closed down 0.4% at 15,691.81, and the AIM All-Share index closed fractionally lower at 773.19. Still, this was not enough to prevent all three indices from posting gains for the week as a whole. The FTSE 100 ended the week up 0.6%, the FTSE 250 ended it up 0.9%, and the AIM All-Share index up 0.6%.

In Europe, sentiment was much worse Friday. The CAC 40 in Paris closed down 1.8%, while the DAX 30 closed down 1.5%.

European investors were dismayed by a poor set of German economic data. German business confidence slipped to its lowest level since October last year in July, according to the IFO survey that came in at 108.0, down from 109.7 in June, and missing expectations for a print of 109.4. The expectations survey, which tracks business leaders confidence of the coming six months, fell to 103.4, its lowest level since August last year.

Meanwhile, it has been a similarly negative session on Wall Street so far Friday. At the UK equity market close, the DJIA is down 0.8%, the S&P 500 is down 0.5%, and the NASDAQ Composite is down 0.7%.

While New York digested ever-wider losses from tech bellwether Amazon.com, London was supported throughout Friday's trading session by a surprise earnings statement from Royal Bank of Scotland. RBS ended the day as the biggest riser in the FTSE 100 after it said it expects to report a near doubling in first-half pretax profit, driven by a turnaround in impairments due to improving credit conditions in the UK and Ireland, and the performance of the part of the bank tasked with running down assets that require especially high levels of capital.

The state-backed bank surprised the market by publishing its results a week ahead of schedule - though they are still being finalised - because of the better-than-anticipated operating performance.

It said it expects to report GBP2.65 billion in pretax profit in the first six months of 2014, compared with GBP1.37 billion in the corresponding period last year. Total income, made up of net interest income and non-interest income, fell by 5.9% to GBP9.98 billion, but operating expenses fell to GBP7.11 billion from GBP7.75 billion, with overall headcount down by 8,000 over the past 12 months.

The bank also reported a significant improvement in impairment losses, which fell to GBP269.0 million from GBP2.15 billion, with all its core businesses showing reductions in impairment losses.

"The results we are posting today show the steady progress we are making as we take the steps to be a much simpler, smaller and fairer bank. These results show that underneath all the noise and huge restructuring of recent years, RBS is a fundamentally stronger bank that can deliver good results for customers and shareholders," Chief Executive Ross McEwan said.

Royal Bank of Scotland ended the day up 11%, dragging the other banks higher with it. Barclays closed up 2.3%, while Lloyds, which Friday confirmed it is close to agreeing a settlement with regulators over Libor rigging, closed up 1.2%.

Lloyds said it is in late-stage settlement discussions with government regulators with regards to their investigations into the setting of London interbank offered rates and other benchmarks, and that it expects to incur penalties as a result.

"Lloyds Banking Group confirms that it is in late-stage settlement discussions with a number of agencies. The settlements remain to be agreed, and LBG expects they will include the payment of penalties. Lloyds Banking Group will update the market on these issues as appropriate," the bank said.

Prior to the company's statement, the Financial Times reported that the bank is preparing to disclose that it will pay GBP200 million to GBP300 million to regulators in order to settle allegations that it manipulated Libor rates. Citing three people familiar with the situation, the FT said Lloyds' announcement is expected to come before its interim results, planned for release next Thursday.

As a whole, the FTSE 350 banking sector closed up 0.9%.

Away from the banks, Anglo American ended the day as another big blue-chip riser, closing up 3.4%. Shares in mining company jumped after it said its pretax profit rose in its first half, despite falls in profit at its Anglo American Platinum and Kumba Iron Ore subsidiaries, as improved performance, particularly at its copper operations, helped the company.

It said its pretax profit increased by 48% to USD2.95 billion for the six months to end-June from USD1.99 billion the previous year with production volumes up across its portfolio except platinum, with particular development at its copper division due to lower unit costs and increased sales volumes.

Pearson, closing up 4.1%, was similarly a big riser after it retained its outlook for the full-year. In an interim management statement for the first-half, the company posted a widened pretax loss of GBP36 million, more than doubling the GBP16 million loss recorded in the comparable half last year. Revenue came in 7% lower at GBP2.05 billion from GBP2.19 billion in 2013; the company said it was hit by the costs of merging its Penguin books unit with Random House Inc, as well as the appreciation of sterling. Pearson makes around 60% of its sales in the US.

However, the Financial Times owner proposed an increased interim dividend of 17 pence, up 6% on the 16 pence per share paid last year, which it said reflects its confidence in its prospects.

Vodafone Group ended the day up 2.1%. The company's share moved higher after it confirmed its outlook for the 2015 financial year, as it saw trading in line with expectations in the first quarter to end-June. Although revenue fell by 4.4% on an organic basis, it said that its GBP19 billion Project Spring investment programme had taken off quickly and its 4G coverage in Europe rose to 52% from 20% in the past nine months.

The company also said that it was beginning to see its performance stabilise quarter on quarter in several of its European markets as the take up of new 4G services grows.

At the other end of the spectrum, British Sky Broadcasting Group ended the day as the biggest loser in the FTSE 100. The broadcaster closed down 4.9% at 879.6405 pence after it said it will acquire 21st Century Fox Inc's holdings in Sky Italia and Sky Deutschland for a total of GBP4.9 billion in cash, plus BSkyB's 21% stake in the National Geographic Channel, to form a new enlarged business, as it also reported a fall in pretax profit in the year to the end of June.

To part-fund the acquisitions, BSkyB placed 156.1 million shares, representing around 9.99% of its existing share capital. The shares were placed at 870 pence each, BSkyB said, raising a total of GBP1.36 billion. Fox, which has a 39.14% interest in BSkyB, has subscribed for 61.1 million shares at GBP531.6 million to maintain its existing shareholding in the company.

The acquisition will lend more fuel to speculation that Rupert Murdoch, who is chief executive and co-chairman of Fox and also founded BSkyB, will pursue his bid for US media giant Time Warner Inc. Time Warner previously rejected a USD92 billion bid from Fox, and the funds from the sale of the European assets could be used to bolster a new bid.

Meanwhile, BSkyB also released its results for the recent financial year Friday, reporting that revenue, which was adjusted to exclude revenue from BSkyB's discontinued retailing of the ESPN channel, but included revenue from broadband customers acquired from Telefónica O2 UK rose to GBP7.63 billion from GBP7.24 billion. Pretax profit, however, fell to GBP1.08 billion for the financial year, down from GBP1.26 billion in the previous year, hampered by a step-up in Premier League costs and continued investment into BSkyB's connected services.

GlaxoSmithKline, closing down 3.2%, was the blue-chip index's second biggest loser, after it confirmed that it received an e-mail on July 18 making claims of misconduct against its former consumer operations and related distributors in Syria. Glaxo closed its consumer operations in the country in 2012 due to the "worsening domestic situation" in the country, and refocused its pharmaceuticals operations to supply medicines for humanitarian reasons.

Glaxo has been weathering investigations from Chinese authorities over allegations that it paid up to USD500 million to doctors and hospital executives over the past six years. A series of other smaller bribery claims have since surfaced, in Poland, Iraq, Jordan and Lebanon.

In the FTSE 250, construction companies Balfour Beatty and Carillion ended the day as the biggest risers in the mid-cap index, up 9.6% and 7.2%, respectively. The companies shares moved sharply higher after they confirmed that they were in preliminary talks for the creation of a construction services powerhouse through a GBP3 billion combination.

A deal between the two FTSE 250-listed British construction firms, which have flagship projects such as London's Olympics Aquatics Centre and the redevelopment of Liverpool's Anfield football stadium, would put them on track to enter into the FTSE 100 index as a joint entity.

Analysts were broadly positive about the potential deal and the cost savings that could arise from it. Liberum Capital estimates that GBP250 million of cash synergies could be achieved.

Separately, Balfour also said that it has been awarded a USD136 million contract to build an office block in Charlotte, North Carolina.

Spectris, closing down 6.9%, was the heaviest faller in the FTSE 250. Shares in the company fell sharply after it reported a drop in pretax profit and revenue in its first half after a weaker-than-expected performance by its divisions in its Material Analysis sector and lower shipments in the second quarter.

In its results for the six months to end-June, the instrumentation and controls company said revenue declined 5% to GBP539.8 million from GBP566.2 million, while pretax profit dropped 10% to GBP67.3 million from GBP75.0 million last year. Operating profit declined 12% to GBP70.1 million, down from GBP80.1 million in the comparable period.

In the forex market, the pound edged higher against its major rivals following the preliminary release of UK gross domestic product data Friday, before returning to pre-release levels shortly after.

The UK economy grew by 0.8% in the second quarter, according the initial estimate from the Office for National Statistics. That officially puts the UK's economic output at a higher level than its previous peak back in the first quarter of 2008. Year-on-year, GDP growth was estimated at 3.1%, in line with expectations.

"This is encouraging as there were plenty of headwinds to knock the economy off course, including geopolitical fears, rising expectations of a UK interest rate increase and a surge in the pound," said Kathleen Brooks, a research director at Forex.com.

The euro, meanwhile, fell against its rivals in the wake of the disappointing German IFO data Friday.

At the UK equity market close, sterling trades at USD1.6967, EUR1.2636, CHF1.5355, and JPY172.790. The euro trades at USD1.3426, CHF1.2149, and JPY136.717.

In a relatively quiet day in the data calendar Monday, Italian business confidence information is released at 0900 BST.

In the afternoon, the preliminary release of the US Markit services purchasing managers' index reading is due at 1445 BST, shortly before US home sales data at 1500 BST. The Federal Reserve bank of Dallas releases its manufacturing business index at 1530 BST.

In the corporate calendar, FTSE 100-listed Reckitt Benckiser Group and FTSE 250-listed Hiscox release half-year results Monday. Blue-chips National Grid and Aberdeen Asset Management are joined by mid-caps Cranswick and Great Portland Estates in providing trading update.

By James Kemp; jameskemp@alliancenews.com; @jamespkemp

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