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LONDON MARKETS : FTSE 100 Turns Lower As Inflation Updates Drive Pound To Two-week High

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03/13/2018 | 04:07pm CEST

By Carla Mozee, MarketWatch

Antofagasta shares higher after earnings report

U.K. stocks dropped Tuesday, swinging lower as the pound jumped to a two-week high against the U.S. dollar on easing concerns the Federal Reserve will raise borrowings rates at a faster-than-anticipated pace.

The moves followed the release of the U.S. inflation report for February, as well as a modest upgrade to the U.K.'s economic growth forecast for this year.

How markets are moving

The FTSE 100 index fell 0.4% to 7,184.56 after wavering ahead of the Spring Statement and the report on U.S. inflation, which has been a major driver of moves across global markets this year. The oil and gas and basic materials groups moved higher while telecom and consumer-related stocks fell the most.

On Monday, the benchmark shed 0.1% , breaking a five-session win streak.

The pound bought $1.3955, up from $1.3848 late Friday in New York.

What's driving markets

Blue-chip shares moved decisively lower in afternoon trade, keying off a climb in the pound to an intraday high of $1.3971, the strongest level since Feb. 27, according to FactSet data.

Sterling strength can hurt shares of London-listed multinational companies, which make the bulk of their earnings overseas. Among such companies, British American Tobacco PLC fell 1.6% and Unilever PLC, whose products include Lipton tea and Sure deodorant, lost 1.6%. More than half of revenue made by companies listed on the FTSE 100 is generated outside of the U.K.

The dollar broadly fell after the U.S. consumer prices index in February matched expectations, and that tamped down concerns that the Fed will raise interest rates four times this year instead of three as previously expected. The consumer-price index rose 0.2% and the rate of annual inflation is running at 1.7%. Some questions about the rate of inflation and the pace of rate hikes were raised by Friday's U.S. jobs report, which showed a subdued rate of wage growth.

As that report was released, Chancellor of the Exchequer Philip Hammond delivered the British government's Spring Statement, which included the Office for Budget Responsibility's economic growth forecasts. The economy is expected to expand by 1.5% in 2018, compared with a 1.4% estimate released in November. Growth forecasts of 1.3% for 2019 and 2020 were unchanged.

Hammond also said U.K. inflation will move toward the 2% target over the next 12 months. U.K. inflation currently stands at 3%.

What strategists are saying

"The pound rose on currency markets in reaction to the improved economic forecasts, in particular the expectation that real wage growth will return to the U.K. this year, raising the prospects for higher interest rates," said Laith Khalaf, senior analyst at Hargreaves Lansdown, in a note.

"Despite the upbeat tone from the Chancellor, the U.K. is clearly out of favor as an investment destination for both domestic and overseas investors," he said. "While there are clearly risks to the U.K. economy, the current bout of extreme pessimism towards the U.K. stock market looks overcooked. The U.K. is home to a diverse range of companies, many of whom pay a decent dividend, and it shouldn't be ignored by investors looking for a home for their money."

Stock movers

Antofagasta PLC shares rose 2.3%, topping the FTSE 100, after the copper producer posted a more than fourfold rise in 2017 net profit .

Direct Line Insurance Group PLC shares fell 2.2% after Deutsche Bank downgraded the car and property insurer's rating to hold from buy.

"We believe Direct Line is now entering a transitory phase where the capital management story is well understood by investors (hence reflected in the current share price), whereas the benefits of positive strategic initiatives may still be a couple of years away from showing tangible benefit," wrote Deutsche Bank analysts.

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