Market Update

The Bank of England's quarterly inflation report almost managed to throw a wet blanket on the FTSE 100 today after it revealed that inflation could rise up to 4% this year, more than two percentage points above the bank's target of 2.0%.

Citing rising energy and import costs as the main reasons for inflation, governor Mervyn King said that 'the UK economy is in danger of grinding to a halt this year, and possibly sinking into recession as a result of the crisis in credit markets.' [1]

Surging mining stocks however, helped the blue-chip index pare its losses and by 2.30pm the FTSE 100 was up 6.50 points (0.10%) at 6218.40. The index had fallen below the 6180 level at its lowest point today. At 2.30pm Eurasian 1493p was up 8.42%, BHP Billiton 2094p was up 3.66%, Vedanta Resources 2511p was up 3.63% and Rio Tinto 6837p was up 2.89%. London Stock Exchange Group 1085p bucked the trend, gaining 4.93% on the day.

Britain's biggest train operator FirstGroup saw its shares plummet today after announcements that the company plans to sell some of its new shares to repay the debt it had taken to acquire US school bus operator Laidlaw International. At 2.30pm FirstGroup's 559p shares were down 6.68%.

Fears of rising inflation took their toll on banking stocks, which plummeted over reports that the BoE will become more tight-fisted about future interest rate cuts as it makes inflation its prime focus. Alliance and Leicester 440.25p fell 4.03%, while HBOS 468p was down 3.51%.

Supermarket giant Sainsbury's, which reported a 28% rise in annual profits today, also saw its share price tumble by 3.66% to 375.5p, while housebuilder Persimmon 559.5p stocks fell 3.62%.

It was the FTSE 250 however, which suffered the greatest fall: the broader mid-cap index was dragged down by poor reports from regional newspaper group Johnston Press and mortgage lender Bradford & Bingley (B&B). At 2.37pm the index was down 96.2 points or 0.93% at 10275.9.

Johnston Press 112.5p shares slipped 16.94% at 2.37pm today after the company announced plans to raise over £250 million to stave off falling advertising revenues. [2] B&B 144.75p was down 8.82% and continued to remain among the day's biggest losers. Other losers included Euromoney Institutional Investor, Provident Financial and Yell Group, all of which saw their share prices fall between 6.81% and 5.60%.

In the US, Freddie Mac has announced plans to raise $5.5 billion in an attempt to overcome rising credit costs. The second-largest mortgage finance company has reported a first-quarter net loss of $151 million, 66 cents a share. This beats predictions by a Bloomberg survey of analysts, which had estimated a loss of 84 cents per share.

According to CEO Richard Syron, 'Freddie Mac on the whole had a better first quarter than what we experienced in the third and fourth quarters of last year.' [3] Fannie Mae, Freddie Mac's bigger competitor, announced a $2.19 billion loss last week, and both companies are planning to raise capital to overcome losses from loan delinquencies.

Meanwhile, a Labor Department report said today that consumer prices in the US rose 0.2% on the month in April, less than the 0.3% gain predicted by a Reuters survey. [4] Core prices, excluding food and energy, were up 0.1%; Analysts had predicted double the increase. Energy prices meanwhile, remained unchanged after a 1.9% rise in March. At 2.45pm the Dow had climbed 71.16 points (0.55%) to 12903.34, while the broader S&P 500 Index was up 9.04 points (0.64%) at 1412.08.

Elsewhere, oil prices eased slightly, ahead of the OPEC's monthly report that's due later today. June brent crude oil was trading at $123.17 a barrel this morning, down $1.52 from yesterday's closing price of $124.56, while May light crude oil was at $125.10 a barrel, down 70 pence from yesterday's closing price of $125.97 a barrel. A Bloomberg report released today said that OPEC is assessing its oil output and might have to cut production this summer.

Looking forward, the May Empire State manufacturing survey and May Philadelphia Fed survey will throw might light on the state of the US economy tomorrow.

[1] Source: FX Street website
[2] Source: Guardian website
[3] Source: Bloomberg News
[4] Source: Reuters News

The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.