MARKET COMMENT: Pound Drops On UK Inflation Data, Global Equities Struggle To Push Any Higher

LONDON (Alliance News) - The UK economy was in focus Tuesday, with inflation data showing a monthly slowdown while two separate data sources have shown the UK housing market is continuing to heat up. Meanwhile global equity markets struggle to push any higher than the all-time highs recently made.

The FTSE 100 has ended the day just marginally lower, down 0.02% at 6,726.79. The FTSE 250 has closed down 0.3% at 15,369.08 and the AIM All-Share has closed down 0.3% at 808.70.

UK inflation slowed more than expected, to a level last seen in September 2012, easing the squeeze on purchasing power of consumers, official data showed. Driven by falling petrol prices, consumer price inflation dropped to 2.2% from 2.7% in September, the Office for National Statistics said. The figure came in below the 2.5% market consensus and was the weakest since November 2009. It also matched the September 2012 level.

"Britain?s hard work is paying off and the country is on the path to prosperity. Thanks to the government?s long term economic plan, all parts of the economy are growing, the deficit is falling and jobs are being created," a spokesperson for HM Treasury said.

The monthly House Price Balance Index from the Royal Institution of Chartered Surveyors rose to Plus-57 from the September reading of Plus-54. The index figure represents the proportion of surveyors reporting higher prices minus the proportion reporting lower prices and this reading is the highest since June 2002. Later in the day the Office for National Statistics said its house price index advanced 3.8% in September from the same month of last year, slightly faster than the 3.7% gain recorded in August. Prices have now increased for the eighteenth month in a row according to the Index.

"The rise in house prices reported by the ONS is obviously positive news for homeowners. However, our industry is unusual in the way that price rises appear to be consistently celebrated," says L&G Mortgage Club Director Ben Thompson. "In reality they need to rise steadily and broadly in line with inflation and wage increases. If prices do rise inexorably the market will become inaccessible for large swathes of the population," Thompson says.

"In our view the low inflation outlook removes the impetus that had appeared to be building for the Bank of England to tighten policy earlier than 2016, enabling the housing market based recovery to broaden to other sectors, hopefully", says Shore Capital analyst Gerard Lane. "A delay in tightening may remove some of the premium contained within sterling, in our view, which may aid the exporting sectors of the economy," Lane says.

The pound took an immediate dip against the dollar on release of the UK inflation numbers, causing a low of USD1.5850. Cable has clawed back some ground in the afternoon but the pound continues to trade lower on the day against the greenback, currently USD1.5925.

?Regardless of recent economic data, the miss in CPI today has provoked the UK Gilt yield curve to flatten on the long-end, suggesting that investors do indeed believe the Bank of England?s determination to keep interest rates lower for longer via forward guidance," says DailyFX Currency Analyst Christopher Vecchio.

Commodities continued to decline Tuesday. The price of gold was 0.6% lower, currently quoted at 1,274.50 per ounce, while silver fell more than 2%. At a UBS conference attended by Alliance News Tuesday, UBS Global Head of Macro Strategy and Asset Allocation Stephane Deo said that there will be, "nothing going on in commodities" over the next two to three years from the group's investment perspective. UBS are not recommending the asset class to customers as the tools of inflation hedging and safe haven investing are not needed in the current global economic environment.

Within UK equities, the Industrial Metals sector was the biggest faller, down 3.6%, dragged lower along with price of gold. The Electronic & Electrical Equipment sector was the biggest gainer, up 2.0% buoyed by a huge move rise in FTSE 250-listed Oxford Instruments.

The manufacturing and research company closed up 8.9% after saying it is in talks to acquire AIM-listed Andor Technology for 500 pence a share in cash, or GBP160 million, as it also reported a marked improvement in trading conditions in the second quarter that it expects to lift second-half results. The two sides have been in talks since early July and Oxford Instruments has already raised its offer from 420 pence and then 470 pence.

CRH was the biggest blue chip gainer Tuesday, closing up 3.7% after saying its third-quarter like-for-like sales had increased by 2%, rebounding from the 6% reduction reported in its half-year results due to bad weather conditions.

Vodafone revealed what it will do with a big chunk of the windfall it got from selling its stake in Verizon Wireless, spending GBP7 billion over the next two years with most going on an upgrade to its European 3G network and accelerating the rollout of the 4G network. The telecom giant also raised its interim dividend Tuesday, reporting a first-half profit compared with last year's loss, and confirmed its full year guidance. Vodafone shares closed up 1.0%.

TalkTalk Telecom shares also jumped after it raised its interim dividend and increased its full-year revenue growth guidance to 3%, from 2%, due to rising revenue in the half-year to the end of September. TalkTalk closed up 9.2%.

Major European markets have drifted to a lower close, the CAC40 down 0.6% and the DAX down 0.3%. The US markets are also struggling after the European close, with the DJIA, S&P500 and Nasdaq Composite all down about 0.1%.

With many global indices having posted all-time highs in recent days, markets seems to have stagnated as investor attention shifts once again away from earnings and on to Central Bank Policy. "Attention has already turned to Janet Yellen taking questions during her confirmation hearing to succeed Ben Bernanke on Thursday", says CMC Senior Trader Alex Young.

The UK will remain in focus Wednesday, with the release of unemployment numbers at 0930 GMT followed by the Bank of England's quarterly inflation report. With the pressure of having to defend his introduction of forward guidance significantly eased by the latest inflation figures, which show the headline rate moving back closer to the Bank of England's 2% target, Governor Mark Carney will deliver the inflation report at 1030 GMT.

"Any weakness (in the pound) could be short lived as on Wednesday we get the all-important inflation report from the Bank of England where we expect to see growth expectations revised higher, while expectations for the unemployment rate could be revised lower," says FOREX.com research director Kathleen Brooks.

Also Wednesday, EU industrial production numbers are due at 1000 GMT. In the afternoon the US will hold a round of bond auctions and release its monthly budget statement.

In the corporate calendar, interim results are due from ICAP, J Sainsbury, SSE Group and British Land, amongst others. Management statements are expected from Barratt Developments Tullow Oil and esure Group, amongst others.

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

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