MARKET COMMENT: FTSE 100 Closes Up, But New Russia Sanctions Weigh

LONDON (Alliance News) - The FTSE 100 closed modestly higher Tuesday, even after taking a late hit as the EU slapped new economic sanctions on Russia, with automotive and aerospace parts engineer GKN ending the day as the blue-chip index's biggest gainer.

While details of the new sanctions are still to be confirmed, one EU diplomat, speaking on the condition of anonymity, said the "very substantial" sanctions would restrict both banks' access to financial markets and the imports of weapons, dual-use goods and energy technologies.

London's blue-chip index had been trading at a three-week high of 6,833.67, but the news weighed heavy on investor sentiment.

The FTSE 100 eventually closed up 0.3% at 6,807.75, while the FTSE 250 closed up 0.5% at 15,687.02, and the AIM All-Share index closed down 0.1% at 771.33.

In Europe, both the CAC 40 in Paris and the DAX 30 in Frankfurt closed higher, although both were well off their respective intra-day highs. The former closed up 0.5%, while the latter closed up 0.6%.

It was a similar story on Wall Street, where, at the UK equity market close, the NASDAQ Composite trades up 0.1%, the S&P 500 is down 0.2%, and the DJIA is flat.

At the individual UK equity level, automotive and aircraft parts engineer GKN ended the day as the biggest gainer in the blue-chip index, closing up 6.7%. The company's shares jumped after it said its pretax profit rose 6% to GBP296 million in the half year to end-June, up from the GBP278 million a year earlier, as automakers used more GKN parts in their cars.

The company's recent restructuring paid off, as margins rose, helping offset a marginal decline in revenue for the period, down 1% to GBP3.83 billion from GBP3.87 billion, due to a GBP247 million currency hit that was mainly due to the strength of sterling. On an organic basis, revenue was up 6%, driven by its driveline unit.

Next, closing up 2.6%, was the second biggest riser in the blue-chip index. The clothing and homeware retailer, which has already grown to become the UK's second-biggest retailer by market capitalisation behind Tesco, saw its shares rise solidly after it raised its profit guidance for the current financial year for a second time thanks to strong sales growth across its business in the first half.

The company raised its pretax profit guidance for the year ending in January 2015 by GBP25 million, and said it now expects to deliver a profit in the region of GBP775 million and GBP815 million, growth of between 11% and 17%. It also raised its guidance for earnings per share to growth of between 12% and 18%, up from the 8% to 14% guidance it gave in April.

In the first half, it opened new stores, and increased sales from existing stores, its buoyant online business and its international operations. Total brand sales were up 11% in the second quarter and for the first half of the year to July 26, with 2.4% growth coming from new stores. Retail sales from Next stores were up 7.5% in the first half of the year, while Next Directory sales rose 16%, boosted by a particularly strong second quarter.

The retailer had already raised its profit and sales guidance forecasts for the current financial year once this year, after reporting strong sales growth in the first quarter from both its retail stores and online business.

Mondi was another stand out gainer in the FTSE 100, ending the day up 1.3%. The international packaging company said it expects underlying operating profit for its first-half to come in higher than the comparative period last year due to lower special charges.

It said it expects its underlying operating profit to be above that of the EUR367 million recorded in the first-half of 2013. The company has also advised that basic earnings per share for the half-year are now expected to be between 46 to 51 euro cents, up on the EUR35.3 cents reported last year.

At the other end of the spectrum, St. James's Place, closing down 2.4%, was among the heaviest blue-chip fallers. The wealth management company posted a pretax profit of GBP110.4 million in the half year to end-June, down from GBP249.5 million in the previous year, as revenue declined to GBP1.76 billion from GBP3.87 billion, hampered by a reduction in investment return.

Nevertheless, it still posted an interim dividend of 8.93 pence, up 40% from 6.38 pence, pledging further dividend growth for the full year, as it saw strong growth in its net inflow of funds under management.

BP was another big loser, closing down 1.8%. The company's shares moved sharply lower after it warned that further sanctions against Russian partner Rosneft OAO could 'adversely impact' the company, and the oil and gas major reported higher profit in its second quarter but a decline in profit for all of the first half.

It said its pretax profit more than halved to USD11.14 billion for the six months to end-June, from USD24.62 billion in the previous year, as revenue and other income fell 7.0% to USD188,82 billion from USD202.92 billion. It said revenue fell as production dropped 7.3% to 2,118 million barrels of oil equivalent per day, leading to a downstream drop in revenues to USD171.17 billion from USD175.13 billion.

Meanwhile, the company said it could be hit by ongoing sanctions against Russia as part of the Ukraine crisis, since among those hit by the sanctions already announced earlier this year is Igor Sechin, chief executive of Rosneft OAO. BP has a 19.75% holding in Rosneft.

Elementis, closing up 5.2%, was the biggest riser in the FTSE 250 after it said its pretax profit increased in its first half due to sales improvements in its specialty products division. The chemicals company said its pretax profit increased 7.2% to USD72.4 million for the six months ended June 30 from USD67.5 million in the previous year, as revenue increased 3% to USD400.0 million from USD388.2 million.

Jardine Lloyd Thompson Group was one of the mid-cap index's heaviest fallers, closing down 1.8%. The insurer hiked its dividend on the back of improved revenue and pretax profit in the first half, but also warned about the weak insurance and reinsurance rating environment, as well as adverse foreign exchange fluctuations.

It said it would increase its interim dividend to 10.6 pence per share, up from 10.1 pence per share. The company's revenue rose 15% to GBP559.6 million in the half year to end-June, while underlying pretax profit rose 15% to GBP107.4 million, from GBP93.1 million a year ago.

However, while Jardine said it was was confident of delivering year-on-year financial progress, it said it was cautious on the outlook for the remainder of the year owing to the "marked decline" seen in the insurance and reinsurance rating environment in the second quarter, along with the continued strength of sterling.

Petra Diamonds, closing down 8.8%, was the mid-cap index's biggest loser Tuesday. The diamond miner saw its shares rise almost 3% on Monday when it said its revenue rose by 17% to USD472.6 million in the year. However, with shares reaching an all-time high after the results, the moment has been chosen for a block sale of 21 million shares, sending the shares sharply lower Tuesday. The placing was handled by RBC Capital, who have been restricted from commenting.

In economic news, the latest lending data from the Bank of England revealed that UK mortgage approvals rose in June for the first time since January. Approvals rose to 67,196 in June from 61,707 in May, exceeding expectations for a riser to 62,600.

"Although the housing market has been cooling, mortgage approvals have bounced back in June which may be a sign that lenders are now becoming more comfortable with the Mortgage Market Review regulations," said Dennis de Jong, managing director at UFXMarkets.

Mortgage approvals have been on a downward trend so far this year amid the introduction of stricter lending criteria on banks by the Bank of England, aimed at cooling the UK housing market and stopping households from taking out unsustainable debt as the economy ultimately prepares for the first interest rate rise.

In the forex market, the pound rose to a session high against the dollar of USD1.6995 following the release, but failed to rise above key psychological barrier of USD1.70, giving up its small gains and then some throughout the day, as the major currency pairs remain in extremely tight ranges ahead of the major US data to come later in the week.

At the UK equity market close, the pound trades at USD1.6938, EUR1.2628, CHF1.5360, and JPY172.984.

Late on Monday, the International Monetary Fund warned that the currency is overvalued, posing challenges to rebalance the UK economy and widening the UK current account deficit.

"Staff estimates that the current account balance is 2.6% weaker than its equilibrium level, and that the real exchange rate is overvalued by about 5-10%." the IMF said. The Bank of England may need to consider raising interest rates in case macro-prudential measures prove insufficient to deal with financial stability risks from the housing market, it added.

In the data calendar Wednesday, preliminary Japanese industrial production data are released at 0050 BST. The eurozone economic sentiment indicator is due at 1000 BST, at the same time as business climate, industrial and consumer confidence and services sentiment readings for the single currency area. The preliminary release of German consumer price inflation is due at 1300 BST.

In the US, the latest ADP employment change report, which is widely regarded as a warm-up for the monthly non-farm payrolls on Friday, is released at 1315 BST, shortly before the initial estimate of US second quarter gross domestic product and personal consumption expenditures data at 1330 BST.

The US Federal Reserve releases its latest monetary policy and asset purchase decisions after the UK equity market close at 1900 BST.

In a busy day in the UK corporate calendar, FTSE 100-listed Compass Group, Travis Perkins, ITV, Barclays, British American Tobacco, and Tullow Oil are joined by FTSE 250-listed Taylor Wimpey, National Express Group, Segro, International Personal Finance, Dignity, MoneySupermarket.com Group, Rightmove, Jupiter Fund Management, and Riverstone Energy in releasing half-year results Wednesday.

Blue-chip Antogasta provides a second-quarter production update, while mid-cap Vedanta Resources releases first quarter results. 3i Group, Diploma, and WS Atkins are expected to publish trading updates.

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

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