London close: FTSE falls as ECB's Draghi strikes dovish tone on inflation

The FTSE 100 closed in the red as the pound strengthened and as European Central Bank President Mario Draghi struck a dovish tone on inflation.

The index fell 0.54% to 7,208.44 points while the pound rose 0.49% versus the dollar at $1.2321 and increased 0.47% against the euro to €1.1589.

Sterling unexpectedly shot up on Tuesday after Prime Minister Theresa May confirmed in a speech in London that Britain was leaving Europe’s single market. However, the news was softened by May saying parliament would get a vote on the final Brexit deal and that the government would be seeking a free trade deal with the EU.

May spoke again on Thursday, this time at the World Economic Forum in Davos, saying the UK will be a “world leader” on trade. She said that after Brexit, Britain would take on a "leadership role as the strongest and most forceful advocate for free markets and free trade anywhere in the world".

“If Tuesday’s speech was aimed at EU leaders, today’s appearance at Davos was aimed squarely at the business community, championing the idea that the UK is ‘open for business’,” said Joshua Mahony, market analyst at IG.

“After months of worry, there is a feeling the people are finally starting to look past the short term fears and instead focusing on the benefits that could eventually emerge from a Brexit.”

The euro weakened after the ECB played down the recent jump in consumer prices, saying there were no signs yet of a convincing upward trend in underlying inflation.

Headline inflation is likely to pick up further in the near term, largely reflecting movements in the annual rate of change of energy prices,” he said.

“However, measures of underlying inflation are expected to rise more gradually over the medium term."

Data from Eurostat on Wednesday showed Eurozone inflation jumped to 1.1% year-on-year in December from 0.6% in November, boosted by an increase in energy prices.

Draghi’s remarks came after the ECB announced it was keeping interest rates on main refinancing operations, the marginal lending facility and the deposit facility at 0.0%, 0.25% and -0.40%, respectively. Asset purchases will continue at a monthly pace of €80bn until the end of March before tapering to €60bn a month until the end of December.

The decision to stand pat on policy came as no surprise to analysts who believed the ECB was unlikely to make any changes after last month’s decision to extend the quantitative easing programme by nine months.

Neil Wilson, senior market analyst at ETX Capital, said: "We haven’t learned anything new today really – the ECB was always expected to stand pat. However, Draghi did sound a fair bit more dovish than we thought possible given the recent data, which has pointed to a positive uplift in Eurozone growth and inflation.

"We got the usual low rates now so we can have higher rates later trick. Some might have expected him to sound a bit more bullish, but he’s obviously worried about the political risks steaming his way – Trump, Brexit, German & French elections etc."

Meanwhile, traders were also digesting the latest figures from the Royal Institution of Chartered Surveyors, which showed the housing market in the UK cooled in December, experiencing its weakest month since June.

RICS’ headline house price balance declined to +24 from +29 in November, missing analysts’ expectations for a nudge up to +30.

In the US, initial jobless claims unexpectedly fell to 234,000 in the week to 14 January from 249,000 the previous week, the Labor Department said. Economists had predicted a rise to 251,000 claims.

US housing starts rose 11.3% month-on-month to 1.226m units, beating expectations for a smaller 8.6% increase to 1.184m units, the Commerce Department revealed.

Building permits slipped 0.2% in December from a month ago, surprising analysts who had expected a 1.1% rise.

The Philadelphia Federal Reserve's manufacturing survey index rose to 23.6 from a downwardly-revised 19.7 in December, comfortably beating expectations for a drop to 16.0 from December’s initial estimate of 21.5.

Meanwhile, oil prices rose, even as the Energy Information Administration reported an unexpected increase in US weekly crude inventories. US commercial crude inventories rose by 2.3m barrels in the week through 13 January to 485.5m barrels.

American Petroleum Institute data released on Wednesday showed US crude stocks fell 5.04m barrels last week, exceeding expectations for a 342,000-barrel drop.

Among corporate stocks, Royal Mail slumped after its third-quarter update revealed revenues for the nine months to 25 December were as flat as a second-class stamp, with increased "business uncertainty" hitting volumes particularly in flyers and business mailings.

Pearson rebounded despite reiterated 'sell' ratings from analysts including those at Goldman Sachs, which cut its price target to 512p, and Liberum, which slashed its PT to 360p.

Ahead of its results, new FTSE 100 addition Smurfit Kappa was on the front foot, with Goldman initiating coverage on the London ticker with a 'buy' rating earlier in the week, highlighting the stock´s estimated 9% free cash flow yield for 2017 and assigning a 2,460p target price.

Moneysupermarket.com surged after saying it expects to deliver strong full-year results, with revenue ahead by around 12% on the year.

Retailer Halfords was also sharply higher as it maintained its profit expectations for the full year following better-than-expected trading over the Christmas period.

N Brown shares rallied as it reported 4.1% growth in group revenue for the 18 weeks to the end of December, underpinned by a strong performance in the run-up to and during Black Friday.

Tullow Oil tanked after HSBC downgraded the stock to ‘hold’ from ‘buy’ but lifted the target price to 320p from 270p, saying the shares offer “limited upside”.

Pets at Home sank after it posted a 4.4% rise in group revenue for the third quarter and said the profit outlook for the year remains in line with expectations, while Acacia Mining was on the back foot after its fourth-quarter production results.

Market Movers

FTSE 100 (UKX) 7,208.44 -0.54%
FTSE 250 (MCX) 18,223.72 -0.49%
techMARK (TASX) 3,359.92 -0.56%

FTSE 100 - Risers

Pearson (PSON) 588.50p 2.71%
British American Tobacco (BATS) 4,734.00p 2.16%
London Stock Exchange Group (LSE) 3,010.00p 1.93%
Smurfit Kappa Group (SKG) 2,089.00p 1.41%
Rolls-Royce Holdings (RR.) 702.50p 1.30%
Morrison (Wm) Supermarkets (MRW) 241.10p 0.92%
Burberry Group (BRBY) 1,665.00p 0.91%
Sainsbury (J) (SBRY) 268.00p 0.90%
Kingfisher (KGF) 350.00p 0.86%
Worldpay Group (WPG) 287.40p 0.84%

FTSE 100 - Fallers

Royal Mail (RMG) 422.50p -5.99%
British Land Company (BLND) 595.50p -3.64%
Fresnillo (FRES) 1,398.00p -3.39%
Anglo American (AAL) 1,302.00p -3.05%
Hammerson (HMSO) 546.50p -2.93%
SSE (SSE) 1,515.00p -2.70%
Land Securities Group (LAND) 988.00p -2.66%
AstraZeneca (AZN) 4,468.50p -2.45%
Intu Properties (INTU) 275.20p -2.41%
Compass Group (CPG) 1,416.00p -2.28%

FTSE 250 - Risers

Halfords Group (HFD) 385.00p 9.00%
Moneysupermarket.com Group (MONY) 327.10p 7.95%
Brown (N.) Group (BWNG) 217.00p 6.79%
Mitie Group (MTO) 203.70p 4.03%
IP Group (IPO) 189.40p 3.44%
Spire Healthcare Group (SPI) 322.70p 3.43%
CLS Holdings (CLI) 1,640.00p 3.02%
Hastings Group Holdings (HSTG) 236.70p 2.54%
Beazley (BEZ) 402.20p 2.39%
Jardine Lloyd Thompson Group (JLT) 1,021.00p 2.00%

FTSE 250 - Fallers

Pets at Home Group (PETS) 212.90p -10.58%
Hochschild Mining (HOC) 222.50p -7.83%
Acacia Mining (ACA) 407.10p -5.79%
Card Factory (CARD) 236.50p -4.91%
Tullow Oil (TLW) 300.60p -3.68%
Rightmove (RMV) 3,980.00p -3.42%
Derwent London (DLN) 2,497.00p -3.33%
Balfour Beatty (BBY) 265.00p -2.89%
Unite Group (UTG) 577.00p -2.62%
Virgin Money Holdings (UK) (VM.) 300.80p -2.56%