LONDON MARKET CLOSE: Investors Hold For ECB; UK Inflation Rises

LONDON (Alliance News) - Stocks in the UK ended slightly higher, taking back earlier losses, despite the IMF lowering its global growth outlook after the UK's vote to leave the European Union, while upbeat UK inflation figures failed to lift sterling.

"Today can be marked down as another day of hesitation, as the anticipation of Thursday's European Central Bank meeting, coupled with the overextended nature of the recent rally means we have seen markets trade largely sideways or lower," said IG analyst Joshua Mahony.

The FTSE 100 ended up 1.95 points, at 6,697.37. The FTSE 250 rose 0.2%, or 38.60 points, to 16,906.26, and the AIM All-Share added 0.5%, or 3.82 points, to 730.47.

Following the Bank of England's inaction last week, the ECB is expected to mimic its UK peer on Thursday, though analysts believe the central bank will make some changes to its monetary policy after the summer, with more easing measures likely in September.

The ECB will announce its policy decision at 1245 BST on Thursday, followed by a press conference with President Mario Draghi at 1330 BST.

UK inflation accelerated by more than expected in June, figures from the Office for National Statistics showed. Consumer prices climbed 0.5% year-on-year in June, faster than the 0.3% rise seen in May. Inflation was expected to edge up to 0.4%. On a monthly basis, consumer prices gained 0.2% in June as seen in May and in line with expectations. Core inflation, that excludes energy, food, alcoholic beverages and tobacco, rose to 1.4% year-on-year, versus 1.2% in May.

The ONS report showed that rises in air fares, prices for motor fuels and a variety of recreational and cultural goods and services were the main contributors to the increase in the annual rate. Air fares were driven higher due to the Euro 2016 football tournament. The data was obtained by the ONS prior to the EU referendum, so doesn't include the effect of the pound's dramatic fall since the vote.

"June's rise should be the start of an upward trend in UK inflation in the wake of sterling's referendum-related slide," said Ruth Miller, economist at Capital Economics.

"Looking ahead, the effect of low energy and food inflation – which accounts for about 80% of the difference between the headline inflation rate and the 2% target – should wane as last year's sharp falls drop out of the annual comparison. This will be compounded by sterling's slide of about 10% since the referendum, which looks set to boost the price level by a little less than 3% over the next three years," noted Capital Economics' Miller.

The pound rose slightly to USD1.3220 immediately after the inflation data, but it gave back those gains shortly thereafter, standing at USD1.3134 at the London equities close Tuesday. The currency had been quoted at USD1.3304 at the same time Monday.

The International Monetary Fund trimmed its outlook for global economic growth through 2017 due to economic uncertainty in the wake of last month's Brexit vote. The Washington-based crisis lender lowered its global 2016 growth forecast to 3.1%, down from its prior estimate of 3.2%. The revised projection for 2017 is 3.4%, likewise down 0.1 percentage points.

The expected exit of the UK from the EU constitutes "an important downside risk" for the world economy and caught global financial markets off guard, shaking up equity and currency markets, the IMF said in a quarterly update to its World Economic Outlook.

The IMF report noted that the economies of the UK and Europe will be hit the hardest by fallout from the June 23 referendum.

The eurozone growth projection for this year was trimmed to 1.6% and the forecast for next year was cut to 1.4%. For the UK, the economic growth was downgraded to 1.7% and 1.3%, for this year and next, respectively.

In Paris, the CAC 40 index fell 0.6%, while in Frankfurt the DAX 30 dropped 0.8%. The euro stood at USD1.1011 at the London equities close, against the USD1.1080 seen at the same time Monday.

German economic sentiment plunged in July to its lowest level in more than three years, hurt by the Brexit vote and the consequent uncertainty for the economy, results of a survey by the ZEW showed. The ZEW indicator of economic sentiment for Germany plummeted to minus 6.8 from positive 19.2 in June. It was the lowest level since November 2012, well below its long-term average of 24.3 points. Economists had forecast a score of positive 9.

US stocks were lower at the European equities close, with the Dow 30 down 0.1%, while the S&P 500 and the Nasdaq Composite were both down 0.2%. Still ahead in the US corporate calendar, tech giant Microsoft reports earnings after the close.

A report from the US Commerce Department said housing starts jumped 4.8% to an annual rate of 1.189 million in June from the revised May estimate of 1.135 million. Economists had expected housing starts to edge up by 0.5% to 1.170 million from the 1.164 million originally reported for the previous month.

Highlights in the economic calendar Wednesday are German producer prices at 0700 BST, eurozone current account data at 0900 BST, while the UK ILO unemployment rate is at 0930 BST. US mortgage applications are at 1200 BST, while the EIA crude oil stocks data are at 1530 BST.

Gold stood at USD1,330.87 an ounce at the equities close, compared to USD1,328.10 at the same time Monday. Brent oil was quoted at USD46.90 a barrel against USD46.71 on Monday.

On the London Stock Exchange, Rio Tinto ended down 3.3%, one of the biggest blue-chip decliners. The world's second-largest iron-ore producer said iron ore production for the second quarter at its Pilbara operation in Australia increased 8% to 80.9 million tons, while Pilbara iron ore shipments rose 6% to 82.2 million tonnes.

Rio will need to increase iron ore shipments in the second half of 2016 in order to meets its targets but the multi-commodity miner managed to deliver production results that broadly met expectations in the first half.

However, it wasn't enough for investors, dragging other mining stocks lower, with Glencore ending down 3.5% and Anglo American down 3.6%, the biggest decliner.

Coca-Cola HBC ended up 2.2%, after Societe Generale upgraded Coca-Cola European Partners to Buy from Hold. Coca-Cola European Partners is a holding company formed by the combination of the group's bottlers in the UK, central Europe, Iberia, and Germany.

Shares in postal service and logistics operator Royal Mail ended up 1.7%, after the company said trading in the first quarter of its financial year was in line with its expectations. In the three months to June 26, Royal Mail group revenue grew 1.0% year-on-year. Revenue in its UK parcels and letters business declined 1.0%, with parcel revenue rising 2.0% but letter revenue down 3.0%.

Sky rose 1.4% after RBC Capital upgraded the pay-television stock to Outperform from Underperform. RBC said it is excited about the potential upside from the rollout of Sky's mobile phone offering, following the signing of a multi-year deal with O2 in January 2015.

Highlights in the UK corporate calendar Wednesday are second-quarter production results from miners Anglo American and Fresnillo, while Severn Trent, Johnson Matthey, and TalkTalk Telecom Group release trading statements.

By Daniel Ruiz; danielruiz@alliancenews.com

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