(Update) The FTSE 100 shed its early gains to follow the pound south after a shock fall in the rate of inflation while tech stock Xaar (XAR) crashed 24% after a profits warning.
Shares in Cambridge-based Xaar, one of the best performing stocks last year, appeared to end its love affair with the City after its shares plunged 181p to 561p, valuing the maker of commercial ink-jet printer at £427 million.
The company, previously a top holding in many leading funds, such as Nigel Thomas' AXA Framlington UK Select Opportunities and Harry Nimmo's Standard Life Investments UK Smaller Companies, warned sales and profits from its ceramic tile market had slowed following exceptional 55% growth last year. It expects revenues for this year to fall to around £130 million compared to £134 million last year.
Numis analyst Scott Cagehin downgraded Xaar from ‘buy’ to ‘hold’ but maintained a target share price of 800p saying the company's long-term potential remained good, 'driven by new product introductions and the potential for markets to convert to digital printing’.
Wall Street falls as US inflation rises ...
After initially rising 15 points the FTSE 100 edged back as Wall Street opened lower following stronger-than-expected inflation and a drop in the number of new homes being built.
US consumer prices rose 0.4% last month, which while still low, was the biggest increase since August 2011. The data comes as Fed officials start a two-day meeting and investors focus on when the US central bank may start to rise interest rates once the emergency programme of bond-buying stops in the autumn.
In early trading the S&P 500 traded a point lower at 1,936. Approaching the close in London, the FTSE 100 traded seven points up at 6,762.
..as UK inflation drops
The sense of uncertainty over monetary policy and interest rates was heightened when the Office for National Statistics earlier revealed UK inflation had fallen to a four-and-a-half year low of 1.5% in May.
This tempered expectations of an early rise in interest rates and pushed the pound 0.15% lower to $1.6957, well below the $1.7 rate it breached on Monday in response to Bank of England governor Mar Carney's warning last week that interest rates could rise ‘sooner than markets expect’.
Economists had expected the consumer price index to fall to 1.7% after hitting 1.8% in April. Lower food and clothing prices were the main factors in the decline, said the ONS.
Interest rate uncertainty
The sharp fall in the cost of living shocked markets as it appeared to relieve some of the pressure on the Bank of England to increase its base rate of interest for the first time in five years.
Minutes of this month's monetary policy committee meeting are published tomorrow and could reveal one or two MPC members voting for an immediate rate rise in response to the UK's strong economic recovery.
Kathleen Brooks of Forex.com wondered if Carney had taken his eye off the ball with his Mansion House speech. 'How can the Bank prep the market for a rate rise if inflation is falling well below the target rate [of 2%]? Luckily for Carney the Office for National Statistics has his back. It noted that the timing of Easter in April is "likely" to have had an impact on the index, most notably in air and sea fares.'
Nevertheless, Alex Edwards of UKForex, believed: 'The Bank of England governor may have been prepping the market for such a scenario, but this inflation data will put a small dent in expectations for a rate hike this year.'
Pressure remains on the MPC to act, however, as ONS data also showed the annual rate of house price rises hit 9.9% in April, a two-year high, with prices in London soaring over 18%. 'The Bank of England's financial policy committee meets today and house prices will surely be top of the agenda. It remains to be seen whether it can successfully introduce measures to cool the housing markets which allow the MPC to keep interest rates on hold,' said Ben Brettell, senior economist at Hargreaves Lansdown.
Shire soars, Ashtead tumbles
Renewed bid speculation for Shire (SHP) helped prop the FTSE 100. Shares in the healthcare company shot 135p or 3.9% higher to £36.74 after Reuters reported it had hired investment bank Citi to advise it on takeover approaches it expects to receive. Shares in Shire have risen more than 30% since April as the M&A wave has hit the pharmaceutical and healthcare sectors. Shire’s attractions are enhanced by a tax base in Ireland, where corporate tax rates are low.
Whitbread (WTB), Britain’s biggest hotel and coffee shop operator, advanced 91p or 2.2% to £42.59 after first quarter results showed another strong performance from its Premier Inns division, with like-for-like sales up 9.5% compared to the group increase of 6.9%.
Sheridan Admans of The Share Centre stuck to his 'hold' rating saying Whitbread's growth prospects were priced into the shares. 'We suspect overseas expansion is likely to be a squeeze on capital, keeping the income yield low for some time.'
Equipment rental company Ashtead (AHT) was the biggest FTSE 100 faller, sliding 47.5p or 5.4% to 840p, despite beating full-year forecasts with a 50% rise in pre-tax profits to £362.1 million. The shares have fallen in recent weeks over concern about the impact of the strong pound on its dollar earnings.