LONDON MARKET CLOSE: Smiths Group Leads UK Stocks Higher

LONDON (Alliance News) - UK stocks closed significantly higher Tuesday, with engineering company Smiths Group closing as the biggest winner in the FTSE 100, as investors continued to exude confidence in spite of the terrorist attacks in Paris on Friday and subsequent security response.

The pound, meanwhile, moved sharply higher after UK core consumer price inflation came in fractionally ahead of expectations.

"What can't go down must go up," said Jasper Lawler, market analyst at CMC Markets. "Investors felt confident enough to dip a toe back in the water after markets held steady in spite of the largest drop since August last week and the terrorist attack in Paris," he added.

As the world continues to recoil following Friday night's attacks in Paris, Russian President Vladimir Putin ordered his military Tuesday to cooperate with France as an ally in a joint anti-terrorism operation in Syria.

The news came as US Secretary of State John Kerry said that a "major effort" against the Islamic State extremist group is in motion and that the US, along with Turkey, will work to shut off the border in northern Syria, which the extremist group controls.

When asked if terrorist attacks such as the ones in Paris on Friday were the new normal, Kerry said: "Absolutely not, no. This is not normal, it will not be normal and will not become normal. This is an aberration."

Meanwhile, France President Francois Hollande's decision to push for a three month extension to the state of emergency, and effectively suspending the Schengen Agreement, has the potential to impact on sentiment, particularly at a time when there is some concern about the resilience of the European economy let alone the French economy, said Michael Hewson, chief market analyst at CMC Markets.

The Schengen Agreement allows for open borders within many countries in the EU.

However, "for now it appears that markets are parking those concerns," Hewson said. "These concerns about sentiment are likely to be front of mind for the European Central Bank in the coming weeks as it weighs up the prospects for further stimulus at its next meeting in December, and as such could help explain the fairly sanguine market reaction yesterday, as well as today's positive European open," he added.

The FTSE 100, having opened firmly, ended the day significantly higher, closing up 2.0% at 6,268.76, while the FTSE 250 closed up 1.4% at 17,084.79 and the AIM All-Share index closed up 0.1% at 728.88.

In Europe, the CAC 40 in Paris closed up 2.8%, while the DAX 30 in Germany ended the day up 2.4%.

On Wall Street, at the UK equity market close, the DJIA, S&P 500 and NASDAQ Composite are all up between 0.5% and 0.7%.

"In the very short term, it will be interesting to see if the markets will be able to maintain the gains made over the past couple of days," said Fawad Razaqzada, technical analyst at FOREX.com. "Indeed, with commodity prices falling – copper, for example, has hit a fresh six-year low today – growth worries could re-ignite and cause sentiment to turn sour once more," he added.

In data released from the UK Tuesday, the Office for National Statistics showed that UK consumer price inflation remained in the negative territory for the second straight month in October largely due to lower food and energy prices. Consumer prices decreased 0.1% from a year ago, the same rate of decline as seen in September, coming in in line with economists' expectations.

Month-on-month, consumer prices gained 0.1%, offsetting a 0.1% fall in September.

"This morning's inflation data from the UK continued to show deflationary pressures persisting but these are likely to abate in the coming months as last year's decline in energy prices begin to fall out of the data," said Craig Erlam, senior market economist at OANDA.

Investec economist Chris Hare, meanwhile, said that while this was the second consecutive negative inflation reading, it does not necessarily indicate a persistent deflationary episode for the UK.

"That is because low inflation largely reflects transitory factors, namely, falls in oil prices at the turn of this year, and falling import prices caused by strength in trade-weighted sterling (up more than 10% over the past two years)," the analyst said. "Crucially, falls in energy prices really began to intensify in October 2014, so base effects should allow the annual inflation rate to start rising materially above zero very soon," he added.

Still, core inflation, which excludes energy, food, alcoholic beverages and tobacco, accelerated to 1.1% year-on-year in October, having been expected to match September's reading of a 1.0% rise.

In the forex market, the pound jumped higher in the immediate aftermath of the data. At the UK equity market close, sterling traded at USD1.5218, having stood at USD1.5192 at the same time Monday. The euro traded at USD1.0640 at the close of the UK stock market Tuesday, having traded at USD1.0708 at the same time on Monday.

In the US, data showed that consumer price inflation improved in October, supporting bets for a Fed rate hike next month. Data from the Labor Department revealed that the US consumer price index climbed by 0.2% year-on-year in October, having remained flat in September, coming in marginally above the 0.1% economists had been expecting.

On a monthly basis, US CPI rose 0.2% in October after falling by 0.2% in September. The modest increase matched economists estimates.

Still, the US Federal Reserve's industrial production report revealed that industrial production dipped by 0.2% in October, matching the decrease seen in September. The drop surprised economists, who had expected production to inch up by 0.1%.

On top of this, according to a report released by the National Association of Home Builders, homebuilder confidence in the US unexpectedly deteriorated in November. The report said the NAHB/Wells Fargo Housing Market Index fell to 62 in November from an upwardly revised 65 in October, missing expectations for the index to come in unchanged compared to the 64 originally reported for the previous month.

In data released from Europe, Germany's economic confidence strengthened more-than-expected in November as investors expect economic conditions to improve in coming six months.

The Mannheim-based Centre for European Economic Research, or ZEW, revealed that investor sentiment index rose notably to 10.4 in November from 1.9 points in October It was well above the expected score of 6. The indicator has improved for the first time following seven consecutive declines.

At the same time, economic sentiment for the eurozone weakened in November. The corresponding index dropped by 1.8 points to 28.3 points, having been expected to rise to 35.2.

In the commodities market, at the UK equity market close, Brent oil was quoted at USD44.11 a barrel, having traded at USD43.30 a barrel at the same time Monday. The price of gold traded at USD1,074.32 an ounce, firmly beneath the USD1,085.41 an ounce seen at the same time on Monday.

At the individual UK equity level, Smiths Group was the biggest riser in the FTSE 100, closing up 9.7%, after the company affirmed its guidance for its current financial year and amid suggestions that its Smiths Detection business could benefit from the increased security levels likely to prevail following the terrorist attack in Paris over the weekend.

The potential business benefit the group may get from security being tightened in the wake of the Paris attacks would seem the only reason for such a sharp rise, said Augustin Eden at Accendo Markets, given the trading update from Smiths was "merely OK".

EasyJet, ending the day down 4.1%, was the biggest faller in the FTSE 100. The budget carrier reported growth in profit in its recently-ended financial year as revenue rose and it carried more passengers than the prior year, while it said the long-term outlook for the business is positive.

The company said pretax profit in the year ended September 30 grew 18% to GBP686 million from GBP581 million the year before, as revenue rose 4% to GBP4.68 billion from GBP4.52 billion. Profit was in line with the company's guidance of between GBP675 million and GBP700 million, though short of consensus around GBP695 million.

EasyJet said passengers increased 6% in the year to 68.6 million, with a record load factor in August of 94.4%. Annual load factor increased by 0.9 percentage point to 91.5%. easyJet will pay a total dividend of 55.2 pence per share for the year, a 22% increase on the 45.4p it paid the prior year.

In the FTSE 250, mining company Kaz Minerals, closing up 16%, was the stand-out winner after it said it has reached an agreement with its main construction contractor on the Atkogay project to defer a payment of USD300.0 million.

Under the revised terms of its agreement with Non Ferrous China, the USD300.0 million in construction costs that had been due to be paid in 2016 and 2017 will now be settled in 2018. There is no change to the overall budget of the project or the total amount payable to the contractor.

Speciality chemicals company Bodycote was another big mid-cap riser, closing up 8.0%. The company maintained its full-year profit guidance but said its markets remain challenging and are likely to stay that way in the near term.

Bodycote said group revenue was down 9.7% in the four months to the end of October, with revenue from its aerospace, defence and energy business declining 11% and automotive and general industrial revenue down 8.8%. The group added its restructuring programme is on track and said it will accelerate its greenfield investment programme, which will drive up start-up costs for the company in 2016.

B&M European Value Retail, closing down 3.5%, was among the FTSE 250 index's heaviest fallers even though the discount retailer said it swung to a profit in the first half of its financial year while growth in revenue was boosted by new store openings.

The company said it made a GBP66.7 million pretax profit in the 26 weeks ended September 26, having suffered a GBP16.5 million pretax loss in the same period the year before as it was hit by higher finance costs which did not repeat in the current year. Revenue rose by more than a quarter to GBP930.3 million from GBP739.8 million.

B&M will pay an interim dividend of 1.6 pence per share, a 78% increase on the 0.9p it paid the prior year.

Still ahead Tuesday, US Federal Reserve Governor Daniel Tarullo is scheduled to speak after the UK equity market close at 2030 GMT.

In the data calendar Wednesday, the European Central Bank's non-monetary policy meeting is scheduled for 0800 GMT, shortly ahead of some eurozone construction data for September at 1000 GMT.

In the afternoon, the Mortgage Bankers Association releases its weekly US MBA mortgage applications reading at 1200 GMT, with US building permits and housing starts data for October due at 1330 GMT. Investors will also be keeping a close eye on speeches by Federal Reserve Bank of Cleveland President Loretta Mester, Federal Reserve Bank of Atlanta President Dennis Lockhart and Federal Reserve Bank of New York President William Dudley at 1300 GMT.

After the close of the UK equity market, the latest Federal Open Market Committee minutes are released at 1900 GMT. Japanese trade data, meanwhile, is scheduled to be released at 2350 GMT.

In a relatively quiet day in the corporate calendar Wednesday, Avon Rubber is scheduled to release full-year results, while UK Mail Group, HICL Infrastructure Co and NewRiver Retail, amongst others, are due to release half-year results.

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

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