Inflation rises toward 3%; RBS may be near settlement
U.K. stocks clung to thin gains Tuesday, as a leap in British inflation to a four-year high sent the pound higher, while investors kept watch on the political drama continuing to unfold in the wake of last week's general election.
The FTSE 100 edged up 0.1% to 7,520.06, but came off higher levels as commodity, consumer goods and tech shares turned lower.
Equity investors watched the pound reclaim the $1.27 handle after U.K. inflation in May hit a four-year high at 2.9%, a faster-than-anticipated rate as food and energy prices rose. The pound was pushed up to $1.2717, up from $1.2260 late Monday in New York.
A stronger pound can clip shares of multinational companies listed on the FTSE. Higher sterling can pressure earnings and sales made overseas by such companies.
"If [inflation] hits 3%, [Bank of England Governor] Mark Carney will need to pen a letter to the Chancellor explaining why inflation is so high. But this will be cold comfort to households already feeling the squeeze," wrote Maike Currie, investment director for personal investing at Fidelity International.
"Once pricing pressures become entrenched, consumers feel the pain, businesses don't invest and the stock market gets worried," she added.
The Bank of England will hold a policy meeting Thursday.
Retail stocks did hold to higher ground after the inflation report, with supermarket chain operator J Sainsbury PLC (SBRY.LN) up 1.6% and department store chain Marks & Spencer Group PLC (MKS.LN) up 0.8%.
Government reboot: The FTSE 100 on Monday fell 0.2% (http://www.marketwatch.com/story/ftse-100-falls-as-tech-stocks-suffer-uk-political-uncertainty-persists-2017-06-12), hampered by ongoing questions about what's next for the British government. The Conservative Party is attempting to hold onto power after it lost its parliamentary majority in a general election last week.
"While Prime Minister Theresa May appears determined to move past the humiliation of election night and get on with forming a government and beginning Brexit negotiations ... I think there's some way to go before people believe the country has anything that resembles stable leadership," Craig Erlam, Oanda's chief market analyst, wrote Tuesday.
On Tuesday, Prime Minister May is scheduled to meet with Arlene Foster, head of the Democratic Unionist Party. May is looking for an alliance with the Northern Irish lawmakers that would allow the Conservatives to form a minority government.
But the DUP has indicated that talks will center on a confidence-and-supply arrangement (http://www.marketwatch.com/story/questions-grow-over-theresa-mays-future-as-uk-prime-minister-2017-06-12). That would result in a weaker, and potentially more unstable, partnership compared with a formal coalition.
May's scramble to form a new government comes before the start of negotiations with the European Union, slated for June 19, about terms of Britain's exit from the European Union.
Read: Brace for another U.K. election -- bookies give it a 50-50 chance (http://www.marketwatch.com/story/brace-for-another-uk-election-bookies-give-it-a-50-50-chance-2017-06-12)
Also read:Why Theresa May's U.K. election fiasco has traders talking about 1974 (http://www.marketwatch.com/story/why-theresa-mays-uk-election-fiasco-has-traders-talking-about-1974-2017-06-10)
Later Tuesday, May will travel to France to meet President Emmanuel Macron, with security matters among the issues on the agenda. Macron's upstart En Marche party on Sunday won the first round of France's parliamentary elections (http://www.marketwatch.com/story/macrons-party-on-pace-for-landslide-win-in-french-elections-2017-06-11).
Stock movers: Royal Bank of Scotland PLC shares (RBS.LN) gained 1.7% after Sky News reported (http://news.sky.com/story/rbs-in-advanced-talks-over-16335bn-plus-mortgage-mis-selling-fine-10913753) the lender is near at multibillion-pound settlement with the U.S. Federal Housing Finance Agency over how it sold toxic mortgage bonds.
Merlin Entertainments PLC (MERL.LN) shares fell 2.6% after the theme park and resort operator said recent terror attacks have reduced domestic demand (http://www.marketwatch.com/story/merlin-trading-in-line-demand-down-after-attacks-2017-06-13). However, trading since the beginning of the year is in line with expectations, it said.
London Stock Exchange Group PLC shares (LSE.LN) rose 4.5% on the back of the exchange operator's upbeat forecast for revenue growth and costs controls.
Ashtead Group PLC shares (AHT.LN) moved 1.7% higher after the equipment rental company said sterling devaluation helped pushed quarterly pre-tax profit up 5% (http://www.marketwatch.com/story/ashtead-profit-up-5-on-rental-revenue-weak-pound-2017-06-13).
(END) Dow Jones Newswires
June 13, 2017 06:26 ET (10:26 GMT)