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LONDON MARKETS : FTSE 100 Ends At 1-week Low After Inflation Update Drives Pound Higher

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03/13/2018 | 06:33pm CEST

By Carla Mozee, MarketWatch

Antofagasta shares higher after earnings report

U.K. stocks dropped to their lowest level in a week Tuesday, as the pound jumped against the U.S. dollar on fading expectations the Federal Reserve will accelerate the pace of rate increases in 2018.

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. Market attention also swung to the firing of U.S. Secretary of State Rex Tillerson by President Donald Trump.

How markets moved

The FTSE 100 index fell 1.1% to 7,138.78, the lowest finish since March 3, according to FactSet data. Only the basic materials sector ended higher. On Monday, the benchmark shed 0.1% , breaking a five-session win streak.

The pound bought $1.3986, up from $1.3848 late Friday in New York.

What drove markets

Blue-chip shares moved decisively lower in afternoon trade, keying off a climb in the pound to an intraday high of $1.3994, the strongest level since Feb. 27, according to FactSet data. The dollar broadly fell after the U.S. consumer prices index in February rose 0.2%, matching expectations. That tamped down concerns that the Fed will raise interest rates four times this year instead of three as previously expected. U.S. inflation expectations have been a major driver in global markets this year.

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 2.1% and Unilever PLC, whose products include Lipton tea, lost 2%. More than half of revenue made by companies listed on the FTSE 100 is generated outside of the U.K.

The U.S. rate of annual inflation is running at 1.7%. Some questions about the pace of rate increases 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 his Spring Statement in parliament. The statement included the Office for Budget Responsibility's forecast for the economy 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. British 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," Khalaf added.

Stock movers

Antofagasta PLC shares rose 3% after the copper producer posted a more than fourfold rise in 2017 net profit .

Direct Line Insurance Group PLC shares fell 2.5% 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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