MARKET COMMENT: FTSE 100 Hits 3-Week High Before Closing Lower

LONDON (Alliance News) - The FTSE 100 reversed early gains to close slightly lower Thursday, as investors digested comments made by European Central Bank President Mario Draghi in the wake of the ECB's decision to keep its key interest rate unchanged.

Meanwhile, some worse-than-expected US data resulted in a soft open on Wall Street.

The UK's blue-chip index got off to a strong start Thursday, hitting a three-week high of 6,680.78 in early trading, before turning lower late in the session to end the day in negative territory.

The FTSE 100 closed down 0.2% at 6,649.14 and the FTSE 250 down 0.4% at 16,349.06, while the AIM All-Share index outperformed its larger peers to end the day up 0.1% at 852.34.

"All eyes and ears were trained on Mario Draghi at his European Central Bank press conference," said Jasper Lawler, market analyst at CMC Markets.

Speaking after the central bank left its benchmark rate unchanged at a record low of 0.25%, Draghi said that the bank had considered adopting unconventional measures such as quantitative easing and negative deposit rate in an attempt to combat the threat of deflation.

"We will monitor developments very closely and will consider all instruments available to us," Draghi said in his introductory statement in the customary post-meeting press conference in Frankfurt. "We are resolute in our determination to maintain a high degree of monetary accommodation and to act swiftly if required," he said.

Although he said that there is no risk of deflation in the euro area at the moment, he warned about his fear of a protracted period of stagnation taking hold in the eurozone.

"Although an indication of stimulus, which the markets like, the fact that the economy is not performing as well as some would hope could be a negative factor," said Lee Mumford, senior sales trader at Spreadex.

A soft start to trading on Wall Street further damped investor sentiment in the UK.

US stocks were pushed lower after a report released by the Institute for Supply Management revealed that, while US service sector activity expanded at a faster rate in March, the index of activity in the sector missed economists' expectations. The ISM said its non-manufacturing index climbed to 53.1 in March from 51.6 in February, but economists had been expecting the index to reach a reading of 53.5.

At the close of the UK equity market, the DJIA and S&P 500 are both down 0.1%, while the NASDAQ Composite is down 0.4%.

In the forex market, it was a volatile day for the euro Thursday, as traders reacted to the ECB rate decision and subsequent comments by Draghi.

Initially, "the market took the ECB's decision as a hawkish sign that the bank is likely to be on hold for some time; however, a deeper look at Draghi’s statement suggested that the bank has started to up the rhetoric about the potential for further easing," said Kathleen Brooks, research director at Forex.com.

Having spent the much of the trading session in a tight range, the euro jumped against most major currencies in the aftermath of the ECB's decision.

However, "although the euro saw strength amid Draghi's initial statements, comments on quantitative easing and the euro exchange rate helped to add downward pressure," said Christopher Vecchio, currency analyst at DailyFX.

At the close of the UK equity market Thursday, the single currency trades at USD1.3705, CHF1.2230, and JPY142.415, while the pound trades at EUR1.2095.

Sterling came under pressure against the dollar early in the day following a weaker-than-expected reading of the UK service industry.

The UK service purchasing managers' index from Markit dropped to 57.6 in March from 58.2 in February. Economists had expected expansion to slow only marginally to 58.1.

At the close of the UK stock market, the pound trades at USD1.6578.

Within UK equity sectors, the banking sector took a knock in late morning after the Financial Conduct Authority confirmed that it intends to undertake a competition review into the UK's GBP150 billion credit card market at the end of the year.

The FTSE 350 banking sector reversed early gains in the immediate aftermath of the news, slipping into the red, closing down 0.3%.

The general retail sector closed up 1.2%, lifted by strong performances by constituents Dunelm Group and Kingfisher.

Dunelm group closed up 3.6% after it reported strong sales growth for the third quarter, albeit at a slower pace than in the prior year, as it continues to invest in its in-store offer, store expansion, and improving its multi-channel offering. It said total sales in the 13 week period ended March 29 rose 9.9% to GBP195.4 million, up from GBP177.8 million the prior year, with like-for-like sales growth of 5%.

Kingfisher closed up 3%. The home improvement retailer's shares jumped after it said it is in exclusive negotiations to acquire French home improvement retail chain Mr Bricolage for an overall enterprise value of approximately EUR275 million.

Tullow Oil was the biggest winner in the blue-chip index, closing up 6.2%, after UBS upgraded it to Buy from Neutral. Following a sharp fall in the oil and gas company's share price over the past two years, UBS believes that the group's investment opportunity is skewed to the upside.

British Sky Broadcasting Group was the biggest loser, closing down 2.9%. Shares in the company fell after HSBC warned that, with a bidding auction looming, investor focus is set to return to the risks of a further step up in competitive intensity for Premier League football rights.

Vodafone Group also ended the day in the red. The telecommunications giant closed down 0.8% after it confirmed plans to invest GBP100 million in the UK to open 150 new retail shops and create 1,400 jobs, as it ramps up its investment programme in the country. Vodafone plans to invest GBP1 billion during 2014 in its UK networks and services. It said work was already "well under way" on its commitment to providing indoor and outdoor coverage of 2G, 3G and 4G services to 98% of the UK's population by 2015.

In the data calendar Friday, German factory orders data are released at 1000 GMT.

In the afternoon, there is a raft of US jobs data released at 1230 GMT. The highly anticipated non-farm payrolls print is expected to reveal an addition of 196,000 jobs in all non-agricultural businesses in March, up from the 175,000 increase in February. The headline rate of US unemployment is expected to edge lower, coming in at 6.6% in March from February's 6.7%.

In a quiet day in the corporate calendar, easyJet is scheduled to release traffic statistics for March.

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

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