MARKET COMMENT: Oil Stocks Buoy FTSE, BoE Rattles Pound, FOMC In Focus

LONDON (Alliance News) - The major UK stock indices closed higher Wednesday, led by oil stocks as the worsening crisis in Iraq drove up oil prices, while trade on Thursday is set to be driven by the result of the US Federal Reserve's latest policy meeting later.

The FTSE 100 closed up 0.2% at 6,778.56, and the FTSE 250 up 0.3% at 15,624.20. The AIM All-Share closed down 0.3% at 783.34.

In Europe, the French CAC 40 close down 0.1%, while the German DAX closed up 0.1%, while US stocks are a little lower ahead of the Fed's policy announcement. When the European markets closed, the DJIA was down 0.2%, and the S&P 500 was fractionally lower.

Security sources and witnesses reported that militants of the Islamic State in Iraq and the Levant Wednesday invaded the country's biggest crude oil refinery, Baiji, about 130 miles north of the capital Baghdad.

That drove up the price of oil, which peaked at USD114.00 per barrel, close to the recent high it made last week when the conflict in Iraq began to deteriorate rapidly.

"If Iraq's oil output is disrupted in a meaningful way, crude prices could easily rise further, for the country is the second largest OPEC oil producer behind Saudi," said Forex.com analyst Fawad Razaqzada.

Oil prices moderated a little in Europe's afternoon after weekly EIA crude oil stocks data from the US showed a slightly smaller drop than expected. However, reports of international oil companies evacuating staff from Iraq served to keep prices elevated and at the time of the equity market close Brent Oil was again near to USD114.00 per barrel.

Royal Dutch Shell, the biggest UK listed company by market capitalisation, provided a boost to the FTSE 100. The oil major saw its A-shares rise 1.5% after it signed a new strategic agreement with the state-owned China National Offshore Oil Corporation Wednesday. The deal largely reaffirms a previous alliance the companies had, but also commits them to exploring cooperation opportunities in areas from oil exploration to refining.

Elsewhere in the sector, BP closed up 1.4%, BG Group closed up 0.6%, and FTSE 250-listed Ophir Energy closed up 0.9%.

Shire ended as the top FTSE 100 gainer for a third day in a row, up 3.0%, amid continued takeover speculation. After gaining 3.5% on Tuesday, the pharmaceutical group is up again after several media reported that analysts at US bank SunTrust Robinson Humphrey had issued a note to clients saying that it could be a target for US peer Allergen Inc.

At the other end of the FTSE 100, United Utilities and Severn Trent provided a drag, closing down 2.7% and 2.2%, respectively, after both going ex-dividend.

All nine members of the Bank of England's Monetary Policy Committee voted to keep the bank rate on hold at 0.5%, and to maintain the central bank's GBP375 billion stock of asset purchases, the minutes from the MPC's June 4 and 5 meeting showed.

The pound jumped against the dollar to just above USD1.70 in the wake of the release, as the notes indicated surprise amongst the nine members that the markets have only been pricing in a 15% chance of a rate rise before the end of 2014.

"The relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising," the committee's minutes read.

This most recent hawkish message from the BoE minutes comes after Governor Mark Carney said last week that the decision to raise interest rates "is becoming more balanced".

However there was something for both the hawks and doves in the BoE minutes, and the pound quickly gave up all of its gains. At the close of the equities markets, it was trading a little lower against the dollar at 1.6940.

"The precise timing of the rise would depend on the outlook for inflation," the notes say. Given that annual UK CPI, the BoE's target inflation measure, Tuesday slipped to a four-and-a-half year low of 1.5%, this suggests that rates may stay low for longer.

"Markets had been expecting some dissent given Carney’s comments last week, and then we get a copy and paste of last month’s minutes," said CMC Markets market analyst Michael Hewson. "For me it's all about the inflation and average earnings data. Until these two cross over, I think a hike remains unlikely."

"Cable is in the eye of the storm today due to the publication of the minutes of the BoE’s June MPC meeting and the FOMC meeting later this evening," said Rabobank analyst Jane Foley.

US interest rates are widely expected to be maintained at 0.25%, while the Fed is also expected to announce a further USD10 billion taper to its monthly asset purchase programme, which will likely mean a USD5 billion cut to mortgage backed securities, and a USD5 billion cut to Treasuries.

Assuming that goes according to forecasts, the focus will be on Yellen's press conference and any clues she gives as to the timing of the first potential US interest rate increase.

In the UK corporate calendar Thursday, full year results are scheduled from Charles Stanley and Infinis Energy, along with a trading statement from Go-Ahead Group. Full year numbers are also due from Norcros, Darty, Liontrust Asset Management, and Micro Focus International.

Later in the morning, UK retails sales numbers are due at 0930 BST, with analysts expecting a 0.5% fall month-on-month in May following the strong 1.3% gain recorded in April. From the US Thursday, initial jobless claims data is due at 1330 BST, followed by the Philadelphia Fed manufacturing survey at 1300 BST.

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

Copyright 2014 Alliance News Limited. All Rights Reserved.