Market update - 17 June

The FTSE 100 was up 90.2 points at 5884.8 at 11.41am on Tuesday, powered by the banks and mining companies. News that UK consumer price inflation ticked up to 3.3 per cent in May bore on the house builders and Persimmon was parked at second place on the loser board, down 1.54 per cent or 6.5p at 414.75p.

Reacting to the news, Mark Priest, senior trader at TradIndex, said the data represented “yet further bad news for the housing industry and borrowers”.

“Inflation at 3.3% is well above the government’s target of 2%, with the surging price of oil and basic foods to blame. This puts pressure on interest rates, and sterling hit a week high today on speculation that interest rates will have to rise later in the year,” he added.

In the wider sector, Barratt Developments was down 7.18 per cent or 7p at 90.5p, Redrow lost 1.45 per cent or 2.5p to 169.75p and Berkeley was weaker by 2.27 per cent or 17.5p at 753p.

Moving up

HBOS, up 6.17 per cent or 19.5p at 335.5p, claimed first place on the FTSE 100 leader board after some positive comment from Cazenove supplemented the already buoyant mood in the banking sector.

“Fundamentally the valuation [for HBOS] appears to have reached a level which discounts a markedly worse impairment performance versus UK peers, which in our view is unlikely to be the case,” the broker said, adding:

“We therefore see relative value in the stock at this price, with the catalyst being the completion of the rights issue (during the RBS rights issue, the shares reached a low a week before the fully paids started trading) and near term the shares may be supported by a pre-close update (due this week) that is devoid of significant surprises.”

Barclays was up 6.08 per cent or 20p at 349p, Alliance & Leicester gained 10.25p to 348p, Lloyds TSB was up 13p at 361p and the Royal Bank of Scotland climbed by 9.5p to 244.5p.

Positive results powered Whitbread, the hospitality group which climbed by more than 4 per cent or 51p to 1273p. Double digit growth at the company’s Premier Inn division helped drive sales up by 7.1 per cent in the 13 weeks to the end of May.

“Whitbread is achieving price increases in all three businesses. Their brands have traction on the High Street. All three divisions continue to grow strongly in terms of like-for-like sales and in new unit roll-outs in Premier Inn and Costa. Add to this low financial leverage, an undemanding rating and it's a good story,” said Evolution Securities, whose analysts responded to the results by reiterating their “buy” rating on the stock.

Cazenove was also pleased. “We are encouraged that the core business is showing no signs of slowdown,” the broker said, adding:

“This confirms our view that budget hotels should be resilient in a consumer downturn. Overall it provides evidence that Whitbread is a relatively defensive investment with strong growth prospects via the roll out of new rooms towards its 55,000 room target by 2013.”

Firmer metals prices helped the miners, and the Eurasian Natural Resources Corporation was up 71p at 1475p. The sector was also helped by market speculation – early rumours suggested that Chinalco, the Chinese state-back aluminium giant which picked up a chunk of Rio Tinto in a dawn raid earlier this year, may return to increase its stake. The talk helped Rio, which was up 181p at 6066p, and rival BHP Billiton, which gained 65p to 1930p.

Moving down

A bearish sector note from Morgan Stanley weighed on media stocks, and WPP was down 4p at 555.5p.

“Faced with a sharply deteriorating environment for the consumer and a more difficult environment for corporate spending, we review forecasts for all media stocks. We have made substantial cuts in 2009 and 2010 to consumer related names with earnings forecasts for advertising inventory companies cut on average by 17% in 2010, for marketing services by 12%...Our 2010 forecasts are now on average 14% below consensus,” the broker said, adding:

“Although multiples are frequently very low, the cyclical end of the sector remains unattractive due to a combination of structural deterioration, heavy downgrades and, in some cases, leverage fears. Valuation is unlikely to return as a driver of this sector in the coming months.”

The assessment sent BSkyB down by 6p to 526p. Yell was down 6.25p at 96.75p and Trinity Mirror lost 4.25p to 195p.