MARKET COMMENT: FTSE Hits 14-Year High, Before Consolidating

LONDON (Alliance News) - The FTSE 100 reached a fourteen-year high Tuesday as a dearth of fresh headlines out of Ukraine allowed investors to contemplate the potential for further monetary easing by central banks in China and Europe.

Weak Chinese industrial production and retail sales data overnight raised hopes that the Peoples Bank of China would move again to stimulate the Chinese economy, and hence demand for commodities and products from the rest of the world.

"This morning’s Chinese data was very much on the weak side, and whether or not I believe Chinese authorities will add further stimulus, which I don’t, it is pretty clear markets think they will," said CMC Markets Chief Market Analyst Michael Hewson. "For that reason, combined with expectations of extended loose monetary policy from both the Fed and the ECB, the momentum continues to favour further gains for equity markets."

Chinese Industrial production grew 8.7% year-on-year in April, which was slightly slower than both the 8.8% rise seen in March and the 8.9% growth that economists had forecast. Chinese retail sales advanced 11.9% in April from a year ago, while the growth was forecast to remain unchanged from March's reading of 12.2%

The FTSE 100 rallied to its highest level since January 2000, peaking at 6,877.39 in morning trade, but subsequently lost some ground after a much weaker-than-expected reading of German economic confidence that brought the potential impact of an escalation of the Ukrainian crisis back to the fore.

The forward-looking ZEW economic sentiment survey fell faster than expected in May, recording 33.1, down from 43.2 in in April and missing economists' expectations for a reading of 41.0. The eurozone economic sentiment survey also missed expectations, coming in at 55.2 in May, down from 61.2 in April, well below the rise to 63.5 that had been expected.

"The crisis in Ukraine and potential for further sanctions on Russia has the potential to negatively impact the eurozone more so than the US, so this negative impact on sentiment is likely to continue until we either see evidence suggesting otherwise, or tensions ease. This looks unlikely at this stage though," said Alpari market analyst Craig Erlam.

Disappointing US retail sales data did little to lift markets any further in the afternoon. US retail sales grew at just 0.1% month-on-month in April, down from 1.5% growth in March, and lower than the 0.4% growth expected by economists.

Ultimately, the FTSE 100 closed up 0.3% at 6,873.08, its highest closing level since 2000. The FTSE 250 closed up 0.4% at 16,038.89, and the AIM All-Share closed up 0.1% at 808.81.

In Europe, the CAC 40 ended up 0.2% in Paris, while the DAX in Frankfurt ended up 0.6%.

In the US, the DJIA and the S&P 500 had closed at all-time highs Monday, but had made only modest further gains when the European markets closed Tuesday. The DJIA and S&P 500 were both up 0.1%, while the Nasdaq Composite was down 0.1%.

Housebuilder Taylor Wimpey led the gainers on the mid-cap FTSE 250 index in London, closing up 7.6% after the company told investors that they can expect higher returns than previously forecast due to the strong recovery in the UK housing market. At an analyst and investor day, Taylor Wimpey raised its key financial targets for the next three years, including targeting an average operating margin of 20% over the period.

"The UK housing market is performing much more strongly in 2014 than we believed possible back in 2011 and the medium-term guidance provided today would have seemed like a fairy tale in 2011," said Jefferies analyst Anthony Codling.

Taylor Wimpey's bullish outlook bouyed the whole sector, with Persimmon and Barratt Developments closing up 3.2%, the top FTSE 100 gainers.

AstraZeneca again rejected Pfizer's "opportunistic" GBP63 million takeover approach. Crucially, however, AstraZeneca Chief Executive Pascal Soriot left the door open for a higher Pfizer approach, saying "it's impossible to say we would not accept any offer".

Pfizer is planning to up its offer for the second time, raising it modestly from the current GBP50 per share approach, according to a report by Bloomberg. The possibility of a better offer saw AstraZeneca shares rise 0.7%.

Melrose industries closed up 2.2% after expressing confidence in meeting full-year expectations, as it saw order intake up 3% in the year to date. The industrial investment company said that its two largest businesses, Elster Gas and Brush, both had good visibility with their current order books supporting full year expectations.

EasyJet closed down 4.3%, the biggest fall on the FTSE 100, despite announcing what appeared to be a solid update. Its pretax loss narrowed in the six months to the end of March, as revenue rose and the mild winter reduced the need for costly de-icing of its planes and reduced disruption.

The airline also said that it expects a 2.9% rise in capacity from competitors across its routes in the second half of its financial year. Combined with easyJet's own expected capacity increase, overall capacity is guided to increase by 4.1% year-on-year. "This is enough to warrant some caution on yields," said Investec analyst James Hollins.

Travel & Leisure sector peer TUI Travel also lost ground, closing down 2.3%, even though its first-half loss also narrowed. Numis Securities analyst Wyn Ellis said that both easyJet and TUI Travel's numbers were "fine" and broadly in line with expectations. However, "there is nothing to say things are going to get better," Ellis added.

In the UK corporate calendar Wednesday, full-year results are due from British Land Co, ICAP, and 3i Group. Interim management statements are due from Admiral Group, ITV, John Wood Group, Premier Oil, and Partnership Assurance.

The UK housing market may be back in focus Wednesday when the Bank of England releases its quarterly inflation report at 0930 GMT. Governor Mark Carney is widely expected to bring forward the bank's initial interest rate increase timetable to before next years general election, from the previous prediction of the second half of 2015. While the move would help stem the UK's raging house price inflation, investors in the housebuilders will also have a close eye on whether Carney makes any mention of curtailing the Help to Buy scheme.

Ahead of that news Wednesday, the latest UK unemployment and average earnings numbers are due at 0830 GMT. A further tick down in the unemployment rate to 6.8% is expected and would give even more reason for the BoE to bring forward its rate rise timetable.

Also due Wednesday, German consumer price inflation data is due ahead of the equity market open at 0600 GMT. CPI in Europe's largest economy is expected to slip into contraction month-on-month in April, falling by 0.2%, and 0.3% on a harmonised basis.

Given ECB President Mario Draghi's recent comments, strongly hinting at policy easing next month if the latest inflation data and official inflation forecasts are disappointingly low, the numbers will be of particular focus. Eurozone industrial production numbers are also due at 0900 GMT.

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

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