Concern over what Centrica's results on Thursday will show caused the rally in Britain’s FTSE 100 to falter despite good news of a further decline in UK inflation and a rise in house prices.
The blue chip index had started to trade down about 0.4%, in line with other European markets. In London, a pair of downgrades to politically-sensitive Centrica (CNA.L) shares soured the mood.
Later in the morning though a report showing UK inflation fell back to 1.9% in January both knocked the pound lower and did away with some of FTSE’s losses. The index was trading down just 0.1% at 6,725.
The decline in CPI to the lowest level since November 2009, coupled with improving economic growth, provides the Bank of England with more leeway to keep interest rates lower for longer.
‘This “Goldilocks” scenario adds to the scope for policymakers to keep their foot on the accelerator for longer via lower interest rates to help drive a strong and more sustainable recovery,’ said Chris Williams, an economist at data provider Markit.
There was further evidence of growth in the UK’s housing market too, with a report from the Office for National Statistics showing house price growth of 0.9% in December.
But despite the economic tailwinds, declines in big stocks kept the FTSE in the red.
Intercontinental Hotels (IHG.L) slid 4.2% to £19.60 after reporting a 10% rise in 2013 profits. This was offset by a potential delay to further cash returns to investors.
Centrica, the British Gas owner that faces political threats of a break-up, is due to provide 2013 full-year figures on Thursday. The focus will be on the company’s outlook and it faces a ‘triple whammy’ of headwinds, said Deutsche Bank’s Martin Brough.
‘We believe all three main legs of the group are facing adverse pressures at the moment: with political pressure on the UK retail business, rising costs in upstream gas production and downward pressure on retail margins in North America from competition and commodity costs,’ said the analyst, who rates the shares as ‘hold’.
Stephen Hunt of UBS was glum about Centrica’s prospects, downgrading the shares to ‘sell’ on those same political risks and an ‘unsustainable’ retail strategy.
The biggest hurdle for the company, says Brough, is a review of the energy sector by Ofgem, the Office of Fair Trading and the Competition and Markets Authority. Due to be published next month this could recommend a full market investigation by the Competition Commission which in turn could recommend remedies including ‘behavioural restraints or forced divestments by large companies’.
Shares fell 3.2% to 308p. Only five analysts now rate Centrica as a ‘buy’, 10 say ‘hold’ and 7 ‘sell,’ according to Thomson Reuters data.