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LONDON (Alliance News) - Share prices in London closed lower Wednesday, with investors still pricing in a September interest rate hike by the US Federal Reserve, even though US inflation came in a touch below expectations.

The Labor Department released a report showing the US consumer price index edged up by 0.1% in July from the month before, after climbing by 0.3% month-on-month in June. Economists had expected prices to rise by 0.2%. Excluding food and energy prices, the core consumer price index also ticked up by 0.1% in July from June following a 0.2% increase in June from May. Core prices also were expected to rise by 0.2%.

Paul Ashworth, chief US economist at Capital Economics, said: "The very muted 0.1% month-on-month gains in both headline and core CPI in July will certainly give the Fed pause for thought in whether to raise interest rates or not at the next [Federal Open Market Committee] meeting in mid-September."

He added: "On balance, we still think the Fed will go ahead and raise rates in response to the further improvement in labour market conditions. But the decision is finely balanced. With price inflation and wage growth still muted, a case can also be made for waiting."

On a year-on-year basis, US consumer prices rose by 0.2% in July, reflecting a slight acceleration from the 0.1% growth seen in June. Meanwhile, the annual rate of growth in core consumer prices came in at 1.8%, unchanged from the previous month. Both annual inflation readings matched estimates.

Dennis de Jong, managing director at UFX.com believes the Fed could hold off in September amid the low inflation and the decision by China to devalue the yuan against the dollar last week.

"Everything looked on track for Fed Chair Janet Yellen to press the button but, just as she could see the light at the end of the tunnel, China shocked the world by deciding to depreciate its currency," de Jong said.

"It seems as though growth in China isn't as strong as we thought, which is a very real concern for the health of the global economy. This, combined with continuing disinflationary forces around the world, could be enough to plant a big enough seed of doubt in the minds of Yellen and her Fed colleagues," he added.

Investors will now focus on the release of the minutes of the July 28-29 FOMC meeting at 1900 BST, which could offer more clues as to when the Fed will make its first interest-rate hike in nearly a decade.

Some analysts believe the minutes will not give much away in terms of the likelihood of a September rate hike, particularly because the minutes will not give any opinion on the recent currency intervention by China, thought by some to count against a September US rate hike, as this started to happen on August 11, well after the FOMC meeting.

In London, the FTSE 100 index ended down 1.9% at 6,403.45 points, its lowest level since mid-January. The blue-chip index has now failed to post a daily gain in seven sessions. The FTSE 250 closed down 1.2% at 17,398.55, and the AIM All-Share closed down 0.4% at 747.88.

In Europe, the CAC 40 in Paris closed down 1.8%, and the DAX 30 in Frankfurt ended down 2.1%.

On Wall Street at the London close, the DJIA, S&P 500 and Nasdaq Composite indices all were down 1.2%.

Oil prices wiped out any gains they made in the day and closed heavily lower, after data from the US Energy Information Administration showed crude oil stocks rose by 2.62 million barrels in the week ending August 15. Stocks were forecast to fall by 777,000 barrels. West Texas Intermediate fell back to a new six-and-a-half year low of USD41.14 a barrel. Brent oil was at USD47.14 a barrel at the London close.

Also weighing on stocks was more volatility in the Chinese stock market Wednesday. China's Shanghai Composite index fell as much as 5% to touch its lowest level since the beginning of August on renewed worries about the Chinese economic outlook and continuing uncertainty about the direction of the yuan, following last week's unexpected devaluation.

However, the Shanghai index staged a comeback near the close of trade to end up 1.2%, following another round of cash injections by People's Bank of China. The Hang Seng in Hong Kong, however, ended down 1.3%.

"According to the microblog of the People’s Bank of China, the bank has injected liquidity of RMB110 billion via the medium-term lending facility (MLF, with a 6-month tenor and 3.35% interest rate) to 14 financial institutions," said analysts at Nomura. "We believe the injection is to sterilise the tightened liquidity pressure arising from the intervention of the PBoC in the FX market (selling US dollars to defend the RMB) upon the capital outflows after the recent RMB devaluation."

In Europe, Greece's third bailout in five years cleared its final hurdles, after the German and Dutch parliaments both backed the EUR86 billion rescue plan for the cash-strapped nation. Following the parliamentary votes, eurozone finance ministers are expected to approve the first bailout tranche totalling EUR26 billion in a conference call late Wednesday.

Greece is set to receive the first EUR13 billion in time to meet Thursday's deadline for repaying a loan to the European Central Bank worth about EUR3.4 billion.

On the UK corporate front, Glencore ended as the biggest faller in the FTSE 100, down 6.4%. The multi-commodity miner reported a substantial fall in earnings, as expected, in the first half of the year, due to weaker commodities and oil prices and following the company's mixed production results earlier this month.

Glencore, like its peers, is suffering from steep declines in commodity prices such as iron ore and copper, whilst also battling the decline in oil prices, compounded by a slowdown in economic growth in China, the world's largest importer of metals.

Admiral Group ended as the best blue-chip performer, up 4.1%. The motor insurer beat analyst forecasts to declare an 'up' first half and lifted its interim dividend by more than expected after reserve releases for prior year claims in its UK car insurance business helped drive its overall profit performance.

Admiral increased its interim dividend per share to 51.0 pence from 49.4p, while earnings per shares increased by 4% to 54.8 pence. Thirteen analysts polled by the company had expected a dividend of 45.6p and earnings per share of 47.0p.

Hikma Pharmaceuticals was another of the few FTSE 100 gainers, rising 3.5%. The company reiterated its revenue guidance for 2015, although it reported a fall in pretax profit for its first half as revenue was hit by the strength of the dollar and a good performance in Hikma's Branded and Injectibles segments was offset by a decline in its Generics segment.

Additionally, Hikma said it has inked a licensing and distribution deal with UK nutraceutical and vitamin company Vitabiotics, giving it the exclusive rights to register, market, distribute and sell five of Vitabiotics' products in 15 of its Middle East and North Africa markets. It also has the rights to market, distribute and sell the full Vitabiotics product range in five of these markets.

Shares in Persimmon recovered losses from Tuesday after its interim results, closing up 1.6%. UBS and Liberum lifted their price targets on the housebuilder, but they both note that the company's shares are running out of upside, having reached an all-time high on Tuesday before closing lower.

In the economic calendar Thursday, the Bank of Japan will make its monetary policy decision and hold a press conference. There are UK retail sales at 0930 BST and the Confederation of British Industry Industrial Trends survey at 1100 BST. From the US, there are initial and continuing jobless claims at 1330 BST, before Conference Board leading indicators, Philadelphia Fed manufacturing survey and existing home sales, all at 1500 BST.

In the UK corporate calendar, there are half-year results from FTSE 250-listed companies Premier Oil, Rank Group, UK Commercial Property Trust, KAZ Minerals, Phoenix Group Holdings, and Bank of Georgia. Also reporting interim results are Stock Spirits Group, Polypipe Group and others.

By Neil Thakrar; neilthakrar@alliancenews.com; @NeilThakrar1

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