MARKET COMMENT: FTSE 100 Closes At 15-Year High Amid "Good" Deflation

LONDON (Alliance News) - UK blue-chip stocks edged up to their loftiest close in 15 years Tuesday, shrugging off the lack of progress seen in the Eurogroup meeting with Greece on Monday, as UK inflation fell to its lowest level on record.

The FTSE 100 closed up 0.6% at 6,898.13, its highest close since December 1999. The FTSE 250 ended up 0.2% at 16,887.70, a new record high close. The mid-cap index also touched a new intraday high Tuesday of 16,955.36 points. The AIM All-Share index closed up 0.5% at 706.71.

European stocks underperformed London, with the CAC 40 in Paris ending fractionally higher and the DAX 30 in Frankfurt closing down 0.3%.

At the London stock market close, Wall Street also was trading lower. The DJIA was down 0.2%, and the S&P 500 and Nasdaq Composite both down 0.1%.

The best way forward for the Greek authorities would be to seek an extension of the country's debt programme, Eurogroup President Jeroen Dijsselbloem said at a press conference after the meeting in Brussels on Monday. Athens has time to seek an extension of the programme until Friday. Otherwise, the EUR240 billion debt bailout programme will expire on February 28.

"The next step has to come from the Greek authorities. If the request for an extension would come in, we would of course look at it, ask the institutions to review it and advise us," Dijsselbloem said.

"The Eurogroup meeting certainly ended a bit sooner than most were expecting, but the result or lack thereof was largely anticipated and left markets pretty much where they started," said Jasper Lawler, a market analyst at CMC markets.

"The quiet in markets today is setting up for major event-risk tomorrow from the European Central Bank’s decision on the [emergency liquidity assistance]. There is an outside chance the ECB could attempt to apply some pressure on Greece by withdrawing Greek bank access to emergency funding. Greek banks need the ELA to stem the tide of deposit withdrawals; if the ECB were to pull the plug, there’d be insolvency across the Greek banking sector," Lawler added

Meanwhile, UK consumer inflation was reported Tuesday to have eased by more than expected to a record low in January on falling motor fuel and food prices, buttressing the Bank of England's recent assessment that inflation is moving into negative territory.

Annual inflation fell to 0.3% in January from 0.5% in December, according to the UK Office for National Statistics. It had been expected to slow to 0.4%. This was the lowest since records began in 1989. On a monthly basis, consumer prices declined 0.9%, the biggest monthly fall since January 2001, after staying flat in December. Economists had forecast a 0.8% drop.

However, core inflation, which excludes energy, food, alcoholic beverages and tobacco, edged up to 1.4% in January from 1.3% the month before.

Food and non-alcoholic beverage prices fell 2.5% and transport costs slid 2.8%. Meanwhile, clothing and footwear costs rose 1.4% after falling for three straight months.

The increase in core inflation reflected the fact that more retailer discounting than usual happened in December and November, with the result that many shops introduced full-priced new stock earlier than normal in January, said IHS Global Insight Chief UK Economist Howard Archer.

With few signs that low inflation is becoming ingrained, the period of deflation in the UK should be of the "good" sort, argued Paul Hollingsworth, a UK economist at Capital Economics.

Gold prices fell by more than 2% Tuesday, touching an intraday low of USD1,203.95 an ounce. According to Fawad Razaqzada, technical analyst at Forex.com, the commodity does not have safe haven demand as investors remain relatively calm to threats from Greece, Islamic State attacks, and the Ukrainian conflict.

"Clearly, demand for the safe haven asset is simply not there, for if there was, it would probably be trading much higher due to the growing concerns over Greece, the advances of the terrorist group IS (now in Libya) and the continued conflicts in Ukraine despite the ceasefire agreement there. If these sort of risks are unable to lend gold support, one would have to wonder what actually would?," Razaqzada said.

Intercontinental Hotels Group, down 2.3% was one of the worst FTSE 100 performers. The hotels group, which owns brands including Holiday Inn, Crowne Plaza and InterContinental Hotels, reported an operating profit of USD651 million for 2014, down 3% on 2013's USD668 million profit. The decline was caused by hotel disposals and by liquidated damage receipts in 2013 that weren't all repeated, as well as revenue dipping 2% to USD1.86 billion from USD1.90 billion. IHG said pretax profit for the year was flat at USD600 million.

In China, the group has experienced negative revenue per available room in recent months but its hotels have continued to outperform the industry for the last couple of years. IHG said again Tuesday that its 2014 performance was "significantly" ahead of the industry.

Brit, up 11%, was the second best performer in the FTSE 250, after Afren, up 14%. Canadian property and casualty insurer Fairfax Financial Holdings Ltd said it has reached a deal with Brit to buy the insurance company for around USD1.88 billion. Fairfax said Brit shareholders will get 305 pence per share, inclusive of any final dividend for the year to the end of December. Fairfax said the offer represents an 11% premium to Brit's closing price on Monday of 274.2 pence per share. Shares in the company closed at 304.541 pence.

John Wood Group, up 4.8%, also ended as one of the biggest mid-cap gainers. The oil-services company said it increased its dividend for the full year after the company reported a rise in earnings, profit and revenue in 2014, and said it intends to increase the dividend further from 2015 onwards. For the year ended December 31, John Wood reported a 3.1% rise in earnings before interest, tax and amortization of USD549.6 million, from USD533.0 million in 2013. The rise resulted from increased revenue and by the company's production services unit providing 30% year-on-year growth in EBITA in 2014.

Hargreaves Services closed as one of the worst AIM All-Share performers, down 10%. The supplier of solid fuel and bulk material logistics reported a significant fall in profit for the first half of the year as revenue declined, but the company increased its interim dividend in line with its previous guidance. For the six months ended November 30, the company reported a 49% fall in continuing profit before tax of GBP15.2 million from GBP29.7 million a year earlier, whilst underlying profit before tax fell by 29% to GBP20.3 million from GBP28.5 million.

In the economic calendar the Bank of England will release the minutes from its last policy meeting at 0930 GMT, alongside UK unemployment and wage data. There is US producer prices at 1330 GMT and industrial production at 1415 GMT as well. After the close of London equity markets, the US Federal Reserve will release its minutes from its previous policy meeting at 1900 GMT.

In the corporate calendar, full-year results are expected from Coca-Cola HBC, and half-year results from construction company Galliford Try and real estate investment trust A&J Mucklow Group.

By Neil Thakrar; neilthakrar@alliancenews.com; @NeilThakrar1

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