Inflation fears hit share prices

By Lucy Farndon
Updated: 02:44 EDT, 2 August 2006

THE only way is up, or so it seems, for interest rates.

Stronger than expected US manufacturing data has renewed fears of further tightening across the Atlantic, while bullish signals about consumer spending and house prices suggest any reprieve for us this week will be temporary.

The Footsie was flat as a pancake all morning, but knocked lower by Wall Street as factory numbers and income data stoked inflation fears.

US consumer prices continued the march upwards, climbing 0.2% in June. Core inflation - which excludes food and energy costs and is closely watched by the Fed which meets on August 8 - rose to 2.4%, the highest since September 2002.

Coming to terms with the fact that the $75 oil price 'spike' is looking more like a lasting phenomena, has made inflation a preoccupying concern for all industrial economies.

Eurozone rates are likely to be raised to 3% this week, the fourth hike by the European Central Bank in eight months. Business confidence in Europe is at its highest in more than five years, while unemployment is falling even in Germany.

The prevailing wisdom seems to be that the Bank of England will hold rates at 4.5% on Thursday, but investors feel a quarter-point rise will come soon enough.

Having drifted up 21.5 points to 5949.8 during early dealing, the FTSE 100 fell back 60 points after the Dow opened. It closed down 47.5 points at 5880.8.

This came as little surprise following last week's strong gains but spread better IG Index reckons a close below the key support of 5885 could prompt further selling down to 5820.

Middle East tensions kept oil stocks bubbling. Israel said it would resume full air attacks against Hezbollah positions in Lebanon when its 48-hour suspension comes to an end tomorrow.

Crude prices rose $1 to top $76 a barrel in London and $75 in New York. Cairn Energy topped the blue-chip risers, up 36p to 2147p, gas producer BG climbing 8½p to 728½p and Centrica rose 2¼p to 295¼p. Dana Petroleum (up 43½p to 1195½p), Burren Energy (up 26p to 914p) also received a lift.

But with most share prices remaining firmly in the red, upbeat earnings from builder's merchant Travis Perkins was a welcome relief. It climbed more than 5%, closing up 80p to 1605p on hopes that consumers are recharging their power-drills and gearing up for some DIY.

Chief executive Geoff Cooper forecasts a gradual-improvement in consumer spending and reckons even a 25 point interest rate hike won't spell disaster. Plumbers merchant Wolseley rose 8p to 1148p.

Life insurer Resolution closed down 7p at 560½p as 34m shares changed hands. Dealers said Resolution's broker Citigroup placed 13m shares, a 2% stake, at 557p. The insurer is gearing up for a £1.55bn rights issue at 480p per share to fund its purchase of Abbey's life insurance business which will propel the group into the FTSE 100 index.

Radio group GCap traded down to a fresh low of 188p on concerns about its finances, before closing up ¾p at 1889½p. Some fear it will have to cut the dividend unless trading improves.

Gambling stocks remained out of favour amid fears that the long arm of the US law could reach over here. PartyGaming fell 3¾p to 105¾p and 888 Holdings dropped 12p to 143p. Sportingbet closed down 10¾p to 235p even though its house broker Investec reiterated its 'strong buy'.

Investec believes that there will be a 'gradual re-rating' of the stock as investors take the view that the actions taken by America's Department of Justice against BetOnSports were company specific.

Whatever happens, William Hill (up 2½p to 593½p) must be thankful it stayed focused on bricks and mortar. Its first half profits beat expectations helped by favourable betting results from the World Cup, Cheltenham Festival and the Grand National.

Citigroup upped the gaming firm from hold to buy, raising its target price to 650p and upgrading 2006 earnings forecasts by 6%.

Alexon, owner of Dolcis shoes and Bay Trading fashion, fell 1½p to 135¼p after revealing a 6.9% drop in first half sales. It refused to comment on speculation that Dolcis will be sold, but warned that trade remains 'challenging'.

Severn Trent water fell 29p to 1269p as dealers took profits following the 6% rise on Monday fuelled by hopes of a private equity bid. EMI slipped another 1½p to 254p after admitting last week that there was little point trying to get rival Warner Music up the aisle.

Engineering minnow Hardide rose 1¼p to 9¾p. On Monday, it had warned that profits were below forecasts, but chief executive Jim Murray-Smith decided to show his faith yesterday by buying 150,000 shares at 9p each.

• INTEC Telecom Systems, which keeps track of mobile phone bills for Vodafone and Virgin Mobile, has rung up a different type of contract with Norwich Union. It will monitor billing for its new Pay As You Drive insurance, which enables drivers to link their premium to their mileage.

Intec shares rose 2¾p to 42¾p on hopes this could create a lucrative sideline, but are still well below the 70p seen in January.