MARKET COMMENT: FTSE 100 Ends Higher As Wall Street Steadies

LONDON (Alliance News) - The FTSE 100 closed marginally higher Monday, rallying back into positive territory after the release of better-than-expected first quarter earnings from US bank Citigroup Inc helped Wall Street make a steady start after the heavy losses of last week.

The UK's main stock indices opened lower and spent most of the day in the red, but the steady start to US trading and a strong performance by traditionally defensive stocks supported the UK's blue chip index.

The FTSE 100 closed up 0.3% at 6,583.76. However, the FTSE 250 posted further heavy losses, closing down 1.2% at 15,702.42, and the AIM All-Share closed down 1.2% at 824.85.

Early trading was dominated by tensions in Ukraine, which escalated after pro-Russian activists in eastern Ukraine ignored an ultimatum from Kiev authorities to surrender, opting instead to storm more government buildings, ratcheting up worries that the country's east might seek to split from the west. Ukrainian interim President Oleksandr Turchynov suggested United Nations peacekeepers be deployed in eastern Ukraine to assist with regaining control.

"Geopolitical worries have resumed around the globe this week as violence increased between Pro-Russian activists and Ukraine, prompting commodities to rise as tensions flare," said Spreadex Financial Sales Trader Sam Fox.

The price of gold rose to a three-week high Monday, touching USD1,329.87 per ounce, while Brent oil rose to a two-week high of USD108.35 per barrel.

The commodity stocks therefore performed well, with Randgold Resources closing up 3.6%, Fresnillo up 2.6%, Rio Tinto up 1.0% and Glencore Xstrata up 2.0%.

Glencore received a particular boost Monday following the announcement that it has agreed to sell its interest in the Las Bambas copper project in Peru to a Chinese consortium. "While we had expected this transaction to happen, the cash price of USD5.85 billion is a positive surprise," said Jefferies analyst Christopher LaFemina, who had been expecting USD5 billion. The sale is part of an agreement to win Chinese regulatory approval for its USD29 billion takeover of Anglo-Swiss miner Xstrata in May last year.

Glencore also reached an agreed deal to acquire Caracal Energy Inc for 550 pence a share, or about GBP808.5 million in cash, ending Caracal's proposed merger with Transglobe Energy Corp and giving it new oil and gas assets in Africa.

The defensive tobacco and beverage sectors also performed well, with British American Tobacco gaining 1.7%, Imperial Tobacco gaining 1.1%, Diageo gaining 2.4%, and SAB Miller gaining 0.4%.

The housebuilder stocks performed less well, with FTSE 100-listed Persimmon and Barratt Developments among the index's biggest fallers, down 2.7% and 3.8%, respectively. In the FTSE 250, Redrow dropped 2.0%, Taylor Wimpey dropped 2.6%, and Crest Nicholson dropped 2.9%.

"The sharp falls in house building shares appears to be driven by the same concerns surrounding over valuations in the technology sector. These companies have also been at the forefront of the current rally higher in the past few months," said CMC Markets Chief Market Analyst Michael Hewson.

The poor performance by the housebuilders came despite the latest Rightmove house price index showing UK house prices hit another record high in April. Asking prices increased at a pace of 7.3% year-on-year in April, the highest since October 2007 and back to pre-credit crunch levels. This follows a 6.8% rise reported for March.

The afternoon lift came when US bank Citigroup published first quarter results that were ahead of anlysts' expectations, in contrast to Friday's disappointing results from JP Morgan. Citi reported net income of USD3.9 billion, up from USD3.8 billion in the previous year. Excluding credit/debt value adjustment and tax items, earnings were USD1.30 per share in the recent quarter, up 1% from last year's USD1.29 per share, and ahead of the USD1.14 per share that had been expected.

US retail sales data, released at a similar time, showed sales growth of 1.1% in March, up from 0.7% in February, exceeding economists expectations for growth of 0.8%, and the biggest rise since September 2012.

The positive news sent US stocks higher, with Citigroup shares amongst the biggest gainers, currently trading up 4.3%.

Major European equity indices also staged an afternoon turnaround on the back of the Wall Street gains to close marginally higher, with the French CAC 40 closing up 0.4% and the German DAX closing up 0.1%.

Markets remain concerned that many stocks, particularly in sectors like technology, are overvalued, and the current first-quarter earnings season is therefore being closely watched for signs that earnings are keeping pace with the recent surge in valuations. About 10% of the S&P 500 reports first quarter earnings within the next few days.

"The next twenty-four to forty-eight hours are crucial," said Kathleen Brooks, research director at Forex.com. "The short term direction of stocks may be dependent on the strength of earnings season. The market will look for better than expected sales growth, since profit growth on the back of cost-cutting isn’t the type of growth markets are willing to tolerate in this environment."

The euro has fallen from the highs it was making towards the end of last week, as the dollar strengthened due to the uncertain situation in Ukraine. At the close of the equity markets the euro trades at USD1.3815. However, that will frustrate European Central Bank officials worried about its current strength.

ECB President Mario Draghi Saturday said "a further strengthening of the exchange rate would require further stimulus". Earlier Monday, fellow ECB member Christian Noyer said "the stronger the euro is, the more accommodative policy is needed."

On Tuesday, the return of UK economic data brings consumer and producer price inflation numbers at 0830 GMT. The German and eurozone ZEW economic survey results are due at 0900 GMT, with US CPI numbers due later in the afternoon. Fed Chair Janet Yellen is also due to speak Tuesday at the Reserve Bank of Atlanta 2014 financial markets conference.

In the UK corporate calendar Tuesday, results are due from Amara Mining, Punch Taverns, and Debenhams. Interim management statements are also due from Aggreko, Michael Page International, and GKN, with a production report due from Rio Tinto.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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