22nd Jul 2014 09:59
LONDON (Alliance News) - UK stocks are trading higher Tuesday as investors tentatively move back into riskier assets, betting that the geopolitical issues which have weighed on sentiment in recent sessions won't derail the global economic recovery.
"Yet again this market is proving that geopolitical concerns have only a short-term impact on broader investor sentiment," says IG market analyst Alastair McCaig.
By mid-morning Tuesday, the FTSE 100 is up 0.9% at 6,787.18, the FTSE 250 is up 0.6% at 15,584.57, and the AIM All-Share is up 0.2% at 770.51.
European majors are also higher, with the French CAC 40 and the German DAX both up 0.8%.
Although European leaders are meeting Tuesday to discuss imposing further economic sanctions on Russia, pro-Russian separatists in eastern Ukraine have now handed over flight data and voice recorders of the downed passenger plane to Malaysian officials and let the train carrying the bodies of those that died in the crash leave the rebel-controlled area.
European leaders, particularly in Germany where trade links with Russia are strong, have been reluctant to impose harsh economic sanctions on Russia, given that they also would hurt their own economies. Although it has taken many days for the Ukrainian rebels to comply with international pleas, the fact that they are no longer obstructing investigations may mean that further sanctions are less harsh than they could have been, driving market risk sentiment higher.
"The handing back of the two black boxes, and the start of the repatriation of the victims bodies has certainly helped in ratcheting down tensions in the short term," says CMC Markets chief market analyst Michael Hewson.
Indeed, commentary from EU leaders in Brussels Tuesday suggests that further economic sanctions may get put on the back-burner, and that an arms embargo on Russia may be favoured instead.
"I think the fact that EU leaders remain divided over whether to impose tougher sanctions on Russia is creating an expectation that today?s meeting will be another example of what the EU does best, namely deferring any decision due to a lack of consensus," says Hewson.
Within UK stocks, ARM Holdings is leading the FTSE 100 higher, up 5.1% after reporting a year-on-year rise in its second-quarter revenue and pretax profit. ARM's average royalty revenue per chip was 4.6 cents, down from 5.0 cents in the second quarter, as lower-cost ARM-based microcontrollers and smartcards grew faster than the high-value chips used in smartphones and tablets. Even so, the chipmaker proposed an interim dividend of 2.25 pence, up 7.1% from 2.1 pence in the previous year.
Fellow chipmaker and supplier to US technology giant Apple, Imagination Technologies also is higher, up 1.4%. The stocks will likely remain in focus Tuesday, with Apple due to report its second quarter later in the day.
The supermarkets are providing a drag at the other end of the market Tuesday, with Tesco, Morrison, and Sainsbury's the top three FTSE 100 fallers, down 3.3%, 1.5%, and 1.3%, respectively. The supermarkets have suffered a raft of broker price target cuts Tuesday, following Monday's surprise profit warning. Tesco bucked the sector trend to close higher on Monday on the back of positivity surrounding the appointment of Dave Lewis from Unilever as its new chief executive officer, but all those gains have now been reversed.
Royal Mail shares are lower after it warned that its UK parcel business is experiencing tougher competition than expected. The shares dropped below their first-day closing price in early trade but have recovered a little from the early low and continue 0.5% lower. As a group, Royal Mail is performing broadly in line with expectations, as cost cutting in the letter business offset the parcel weakness.
UK public sector borrowing rose to GBP11.4 billion in June, a little higher than the consensus forecast and putting UK public sector debt as percentage of GDP at a record high of 77.3%.
The government had forecast government borrowing to fall by around GBP10 billion in the current fiscal year, explains Berenberg chief UK economist Rob Wood. "There is still a long way to go for the government to hit that forecast, with the numbers for this year looking off course so far," the economist says.
The pound moved a little lower against the dollar following the disappointing debt data, but volatility within the foreign exchange majors remains extremely low. Currently, the pound trades at USD1.7065, and EUR1.2655.
US consumer price inflation is the major data event of the afternoon, released at 1330 BST. Economists are expecting prices to have risen by 0.3% in the month of June, slowing slightly from 0.4% in May. On an annual basis, CPI is expected to remain unchanged at 2.1%.
"Inflation data have not really moved markets much for some time now as their attention has been on economic and labour market weakness rather than potential price pressures," says Rabobank analyst Michael Every. "With the FOMC?s gradual shift towards tightening monetary policy ahead, that attitude may begin to change gradually in tandem, and CPI start to move back towards being the key data release that it once was."
By Jon Darby; [email protected]; @jondarby100
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