Market update - 12 August

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The FTSE 100 was up 1.1 points at 5,542.9 while the FTSE 250 was down 54.1 points at 9,330 at 11.35am this morning. The London market edged up following news that Russia had ordered a ceasefire in the conflict over the South Ossetia region in Georgia.

The development bought some cheer to the market, which was in the red after UK inflation came inhigher than expected for July – consumer prices advanced by 4.4 per cent compared with a year ago, well clear of the Bank of England’s 2 per cent target and above the Government’s 3 per cent upper limit for a third month.

Reacting to the news, Global Insight’s Howard Archer said the data “will not go down at all well at the Bank”. “The rise in consumer price inflation to a series high of 4.4 per cent in July was well above expectations. Furthermore, the rise cannot be attributed solely to sharply higher food and energy prices. Worryingly, core inflation spiked up to 1.9 per cent in July from 1.6 per cent in June, which raises concern that higher energy and food prices are increasingly having second round inflationary effects,” he said.

In the markets, Manoj Ladwa, senior trader at the City spread betters TradIndex, said: “The inflation figures are a further headache for the Bank of England, which is torn between the imperative to tame inflation and the need to provide a stimulus to the wider economy. But, so far, the market response to the inflation numbers has been pretty sanguine.”

“Just a few weeks ago, the FTSE 100 was flirting with 5,000, but now it is 500 or so points higher. If the FTSE 100 closes higher today, then it confirms the recent bullish run and suggests the market is happy to shrug off bad news. How long that mood will last remains to be seen.”

Moving up

ITV was the strongest on the FTSE 100, up more than 8 per cent or 4p at 51.6p thanks to continued bid speculation. The broadcaster drew strength from talk that it will be snapped up if the Competition Appeals Tribunals orders BSkyB to offload its stake in the company. Endemol, the Netherlands-based media group, was again mentioned as a possible bidder despite scepticism among some analysts, who doubt its ability to finance a major acquisition.

Intercontinental Hotels, at second place on the leader board, was up 27p at 777.5p after pleasing first-half results.

In response, Cazenove said: “H1 [first half] EPS [earnings per share] is 2 per cent ahead of forecast and the results demonstrate good growth due to a strong recovery in contribution from the owned and leased properties. Growth was slower in the managed and franchised hotels but their Ebit [earnings before interest and tax] still increased by 9 per cent. We believe IHG’s longer-term prospects are underpinned by a strong pipeline and the 28k rooms signed in the most recent quarter suggest that developer interest in IHG’s brands remains strong.”

Elsewhere, the Royal Bank of Scotland was up 6p at 255p following reports that, with Fortis, it had agreed to sell the majority of ABN Amro’s private equity business to a consortium led by Goldman Sachs.

Tesco was firm after unveiling a foray into the Indian wholesale retail market. The supermarket group, which was up 2.4p at 396.5p, plans to invest £60m over the next two years to set up a wholesale cash-and-carry business in the country. Tesco also announced an exclusive franchise agreement with Trent, Tata Group’s retail business.

Among analysts, Cazenove said that while the news is immaterial in the immediate financial context, it was a positive development.

“The background is that Indian law precludes foreign direct investment in multi-brand retail although international retailers have been striking franchise and partnership agreements with local retailers and industrial conglomerates to allow entry to what is expected to be a large and fast-growing market over the coming years,” the broker said.

Moving down

Standard Chartered was among the worst off on the FTSE 100, down 3.44 per cent or 55p at 1,544p, after Citigroup downgraded the stock to “sell” from “hold”.

“The continued dominance of Wholesale versus Consumer Banking profits is set to reduce overall returns for the group, with pressures on the group’s capital position likely to necessitate a sharp slowdown in asset growth or the need to raise equity at some stage. Although Standard Chartered operates in regions where economic growth has remained resilient, rising inflationary pressure in Asia represents a risk to this scenario. We believe this will act as a cap on the group’s rating with earnings potentially disappointing as asset growth slows next year,” said the broker, adding:

“Lacklustre performance in Korea and Taiwan and increased risk in Pakistan raises additional concern over the company’s recent M&A [mergers & acquisitions] track record.”