MARKET COMMENT: Big Names Drag Dow FTSE, Pound Tests Multi-Year High

LONDON (Alliance News) - Main market UK stock indices are firmly lower Thursday, weighed on by disappointing results from some big corporate names. Meanwhile small-cap companies on the AIM All-Share are outperforming, with the market slightly higher.

The pound has continued its rise against the dollar that began after the Bank of England boosted its growth forecasts for the UK on Wednesday. Sterling is currently trading at USD1.6650, testing its recent high of USD1.6668. Beyond that level, the pound will be at its highest point since May 2011, potentially frustrating the Bank of England, which Wednesday warned about the strength of the pound hurting the UK's global competitiveness.

By mid-morning Thursday the FTSE 100 is down 0.6% at 6,636.30, the FTSE 250 is down 0.7% at 15,970.40, while the AIM All-Share is up 0.3% at 873.13.

Major European markets are also lower, with the CAC 40 down 0.3% and the DAX 40 down 0.2%.

"Global indices are currently trading down, with some major FTSE 100 constituents posting sharp drops in their share price", said SpreadEx financial sales trader Sam Fox.

With little in the data calendar markets are focused on earnings, and the Aerospace & Defence sector is leading UK stocks lower after Rolls Royce revised down its guidance for this year to flat revenue and profit growth. Analysts say this implies a 10% downgrade to 2014 earnings and the shares are down almost 12% as a result. The read-across sees BAE Systems down 3.3% and the sector as a whole down 7.0%.

The biggest faller on the FTSE 100, however, is Tate & Lyle, currently down almost 16% and providing a significant drag on the index. Shares in the food producer have plummeted after it also revised down its 2014 guidance on the back of increasing pressure on Sucralose pricing.

Lloyds Banking is providing another big drag on the leading index, with shares now down more than 4.0% despite the banking group saying it swung into profit last year. Analysts suggest that there is disappointment over the lack of improvement in cost-cutting targets, along with some profit taking as Lloyds nears the end of its recovery phase. The bank confirmed that CEO António Horta-Osório is in line for a GBP1.7 million bonus, although it will be deferred until the job is done.

Tobacco stocks are the stand out gainers after Imperial Tobacco kept its full-year expectations for modest earnings growth, despite seeing a decline in revenue in the first-quarter. The stock leads the FTSE 100 gainers, up 5.7%, while British American Tobacco is following, up 2.2%.

Following the morning release of German CPI data, which showed prices in Europe's biggest economy falling in line with expectations, the European Central Bank has revised down its inflation forecasts for the whole eurozone. As part of the ECB monthly report, the central bank said it now expects inflation of 1.1% this year and 1.4% in 2015, down from 1.5% and 1.6% respectively.

Despite this, the euro has gained against the dollar Thursday, following its heavy drop on Wednesday that followed comments from ECB board member Benoit Coeure that negative interest rates are being very seriously considered.

The euro has regained 0.5 cent against the dollar Thursday, currently trading at USD1.3670

ECB President Mario Draghi had said last week that he was going to wait for further information, such as the new inflation projections and growth data before making any policy changes. These latest forecasts are the first new figures released since then and suggest policy loosening may be on the cards.

"Due to the recently low inflation rates there is a high likelihood that they (the ECB) will take further expansionary measures", says analysts at Commerzbank. As a result the recovery of the euro since yesterday afternoon is build on sand", says Commerzbank.

Still to come Thursday, US initial jobless claims and retain sales data at 1330 GMT.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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