MARKET COMMENT: Zero UK Inflation Sends London Shares Higher

LONDON (Alliance News) - UK equities have reversed an initial fall to move higher mid-morning Tuesday, as UK inflation came in below expectations.

The FTSE 100 is up 0.3% at 7,055.50, having hit a new intraday record high of 7,065.08. The FTSE 250 trades up 0.5% at 17,633.14 and the AIM All-Share is up 0.7% at 721.29.

UK inflation fell to zero for the first time on record in February, the Office for National Statistics showed Tuesday. Consumer prices remained flat in February from last year after rising 0.3% in January. Prices were expected to rise 0.1%. On a monthly basis, consumer prices gained 0.3%, in line with expectations. In January, prices had dropped 0.9%.

Bank of England Governor Mark Carney has previously said the central bank will not raise interest rates until inflation begins to move towards its 2.0% target. Carney said at the Treasury Select Committee at the end of February that inflation may drop below zero in the coming months, but will return to the 2.0% target on a two-year horizon.

However, Rob Wood, chief UK economist at Berenberg, says that inflation will continue to fall below consensus due to the strength of the pound and gas price cuts.

"Past experience suggests that the BoE and the market underestimates the impact of sterling on inflation, so there remains the potential for further downside surprises to come, especially after sterling's gains over the past few months. We look for inflation to run below consensus through 2016," Wood says.

"In the very short-term, gas price cuts from three companies (British Gas, Scottish Power and SSE) are yet to feed through to the inflation figures, and the volatile rise in air-fares in February will probably unwind in the coming months," he adds.

The pound initially fell against its major trading partners but has since recovered, and trades the dollar at USD1.4932.

European stocks are higher after largely positive Markit purchasing managers' index readings. The CAC 40 in Paris trades up 0.7%, and the DAX 30 in Frankfurt is up 0.5%.

Germany's composite PMI rose to 55.3 from 53.8 in February. The reading marked the 23rd month of growth, with the latest rate of expansion being the quickest since July last year.

The PMI for the service sector rose by more than expected to a six-month high of 55.3 in March from 54.7 in February. The expected score was 55. The manufacturing PMI came in at 52.4 versus 51.1 in February. The score was above the expected level of 51.5.

Data from Markit Economics also showed that Eurozone private sector grew at the fastest pace in almost four years in March. The flash composite PMI rose by more than expected to 54.1 in March from 53.3 in February. The index rose for the fourth consecutive month to reach the highest since May 2011. The reading stayed above the forecast of 53.6. The services PMI came in at 54.3 in March, a 46-month high. Economists had forecast the index to rise to 53.9 from 53.7 in February.

The euro rose on the back of the data, reaching a high of USD1.1008 before falling back below the USD1.10 mark. It currently trades at USD1.0989.

On the UK corporate front, Wolseley, down 3.0%, is the biggest faller in the FTSE 100. The building materials company said its pretax profit fell by two-thirds in the first half of the financial year, as it booked a large impairment due to challenging market conditions in the Nordic region, but its closely-watched trading profit rose on the back of a strong performance in the US, by far its biggest market.

The company reported a pretax profit of GBP103 million for the six months to end-January, down from GBP312 million a year earlier, as it booked a GBP245 million impairment for the DT Group business in the Nordics it bought back in 2006. It blamed challenging market conditions in the region and reduced expectations of future profitability at the business.

Centrica, down 1.3% is also one of worst blue-chip performers after it was downgraded to Sell from Hold by Deutsche Bank, which warned that UK power utilities face risks from the upcoming May election.

Also in the FTSE 100, home improvement company Kingfisher is down 1.4%. The company said it has noted the suspension of shares in Mr Bricolage and said it has been made aware of reservations held by the board and a major shareholder about its acquisition of the French DIY retail chain.

Kingfisher said both the board of Mr Bricolage and the ANPF, a major shareholder in Mr Bricolage, have reservations in relation to the acquisition of the company, though Kingfisher said it has not yet received any clarification of their position.

Spire Healthcare Group, down 4.4%, is the biggest faller in the FTSE 250. The independent hospital group proposed a maiden final dividend and guided mid-to-high single-digit revenue growth for 2015, as it posted a narrowed pretax loss for 2014 on strong revenue growth in its first results since listing on the London Stock Exchange last July. However, both Investec and Numis highlight the company's recent strong share price, which has risen 23% since the beginning of March, ahead of its results.

The rest of the economic calendar is focussed on the US, with CPI at 1230 GMT, Markit manufacturing PMI at 1345 GMT, and new home sales at 1400 GMT.

Futures indicate a higher open for Wall Street, with the DJIA, S&P 500 and Nasdaq 100 all expected to open up 0.3%.

By Neil Thakrar; neilthakrar@alliancenews.com; @NeilThakrar1

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