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FTSE knocked off highs as tension grows in Ukraine

04/25/2014 | 12:46pm US/Eastern

Britain's top share index slipped on Friday from its seven-week closing high the day before, as growing tension in Ukraine offset encouraging updates from media group Pearson and betting agency William Hill.

Pearson rose 3.8 percent after saying it had made a "solid" start to the year. William Hill gained 2.1 percent after its first-quarter results. The two companies were the top gainers on the FTSE 100 index.

But the index ended 0.3 percent lower at 6,685.69 points, after its highest close since March 7 on Thursday, following an escalation in tensions in Ukraine and the prospect of more sanctions against Russia.

The Ukraine government opened further military operations against some of the pro-Russian separatists who have seized government buildings in eastern Ukraine. As many as five of the separatists were killed on Thursday.

"Clearly, the market remains sensitive to geopolitical tensions, and that's getting reflected in the weak performance today," HSBC equity strategist Robert Parkes said, although he remained positive on the market's longer-term outlook.

"Even though the market is facing a number of headwinds, including the Fed's stimulus-tapering programme and concerns regarding emerging-market growth, we think the stock market is well-supported."

Parkes said monetary policy could ease further in Europe and

the business cycle was heading up. Ultimately, earnings growth would accelerate.

Cyclical stocks were the worst hit on Friday, with HSBC falling 1.7 percent and Standard Chartered down 1.6 percent. The UK banking index dropped 1.3 percent, the biggest sectoral decliner on the FTSE 100 index.

Despite Friday's losses, the UK stock market outperformed the rest of the Europe, with the pan-European FTSEurofirst 300 index down 0.8 percent, Germany's DAX falling 1.5 percent and Italy's FTSE MIB down 1.7 percent.

UK blue chips get only 0.3 percent of their sales in eastern Europe, Thomson Reuters Datastream shows. But the prospect of more sanctions and strained ties between Russia and Western powers curbed appetites for shares across Europe.

"Fresh tensions in Ukraine have darkened investors' mood, and there are concerns about further sanctions against Russia. People are also worried about possible military conflict between Russia and Ukraine, which is not priced in at all," said Keith Bowman, equity analyst at Hargreaves Lansdown.

U.S. President Barack Obama will press European allies to impose more sanctions if Russia steps up action in Ukraine Meanwhile, a cut in Russia's credit rating reminded Moscow of the economic consequences of its involvement in the crisis.

LOSSES CAPPED

Losses in the broader market were capped by a rise in shares of individual companies.

Investors reacted positively to updates from William Hill and Pearson, while Berenberg's move to raise its price target for luxury goods company Burberry to 1,550 pence from 1,500 pence helped its shares to gain 0.8 percent.

Analysts at Citi said Pearson's underlying revenue growth of 1 percent beat its forecast of a 3-5 percent drop, while some other analysts highlighted William Hill's encouraging numbers in overseas and online markets despite weak results at its football business and regulatory headwinds in Britain.

"We retain our 'buy' recommendation given the strong position of William Hill in the online gambling space, with potential to see further significant revenue growth, whilst the valuation remains undemanding," analysts at Panmure Gordon said in a note.

(Additional reporting by Francesco Canepa; Editing by Larry King)

By Atul Prakash

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