Stocks Down As Carney Adds To UK's Brexit Worries

Stocks in London ended lower on Tuesday, while the pound gave up early gains following warnings by Bank of England Governor Mark Carney over Brexit, as UK inflation reached its highest level in over five years.

The FTSE 100 index closed down 0.1%, or 10.80 points at 7,516.17. The large-cap index had touched a intraday high of 7,550.44 in early trade.

The FTSE 250 ended down 0.4%, or 86.18 points, at 20,130.95, and the AIM All-Share closed up 0.2%, or 2.50 points, at 1,032.45.

The BATS UK 100 ended down 0.1% at 12,796.71, the BATS 250 closed down 0.4% at 18,371.41, and the BATS Small Companies ended 0.2% higher at 12,502.01.

Having risen after inflation data was released, the pound fell against the dollar to more than erase its early gains after Bank of England Governor Mark Carney attributed the surge in inflation to the depreciation of sterling since the Brexit vote, while warning that a failure to reach a Brexit deal with the EU would pose risks to the Europe and not the UK alone.

UK inflation increased in September to the highest since April 2012, data from the Office for National Statistics showed. Inflation rose to 3.0% in September from 2.9% in August. The rate came in line with expectations.

"Inflation rising potentially above the 3.0% level in coming months is something that we have anticipated," Carney told the UK Treasury Select Committee.

Carney highlighted the risk of derivative contracts becoming null and void without a Brexit deal and cited concerns over cross-border insurance, saying that a hard Brexit would hurt Europe more than the UK on these issues.

"BoE chief Mark Carney arguably dealt the biggest blow to the pound. Though the central bank head honcho said the Monetary Policy Committee thinks a hike may be appropriate 'in the coming months', that comment potentially pushes the pulling of the interest rate trigger beyond the Bank of England's next meeting in early November," said Spreadex analyst Connor Campbell.

The BoE is due to meet twice more before the end of the year, on November 2 and December 14.

In addition, Deputy Governor Dave Ramsden and fellow MPC member Silvana Tenreyro also expressed doubts over the possibility of an increase in interest rates in November, but Carney said a hike "may be appropriate."

Meanwhile, a report from French think tank OECD fuelled further Brexit concerns for the UK, stating the UK economy has weakened in the aftermath of its decision to leave the European Union, and that a reversal of Brexit would have a "significant" positive impact on growth.

The UK's planned departure from the EU has raised uncertainty, the OECD said, and "dented" business investment, "compounding the productivity challenge".

Prime Minister Theresa May and European Commission President Jean-Claude Juncker have agreed to "accelerate" efforts to find a Brexit deal but offered little sign of tangible progress.

Following a working dinner in Brussels on Monday, the prime minister and Juncker said in a joint statement that their meeting had been "constructive and friendly". However there was no indication the commissioner's side was ready to revise its view that the talks still had not made sufficient progress for them to move forward to the second phase - including a free trade deal.

"One of the chief losers today has been the pound, which failed to rally on the back of a rise in CPI. Markets chose instead to focus on Theresa May's apparent failure to break the deadlock in Brexit negotiations," said IG Group market analyst Joshua Mahony.

Sterling was quoted at USD1.3166 at the London equities close, compared to USD1.3279 on Monday. It fell to a five-day low of USD1.3153 against the greenback.

In Paris the CAC 40 ended up 0.1%, while the DAX 30 in Frankfurt also ended up 0.1%.

The euro was lower at USD1.1748 at the European equities close, against USD1.1816 the prior day versus the greenback.

Stocks in New York were mixed at the London equities close. The DJIA was up 0.1%, the S&P 500 index was down 0.1% and the Nasdaq Composite was also down 0.1%. The Dow touched a fresh record all-time high of 23,002.20 points in early trade.

With earnings season in full swing, banking giants Goldman Sachs Group and Morgan Stanley headlined the US corporate calendar.

Goldman Sachs reported profit for the third-quarter declined 3% from last year, but quarterly net revenues increased 2%. In addition, both earnings per share and revenues topped analysts' expectations. Not to be outdone, Morgan Stanley also reported third quarter results that exceeded analyst estimates on both the top and bottom lines.

Furthermore, tech giant IBM Corp will release its third quarter results after the New York close.

On the London Stock Exchange, Pearson ended the session as the best blue-chip performer, up 7.7% after the education giant lifted its full-year earnings outlook following a string of profit warnings in recent periods.

The company, which has slashed dividend payments and sold off non-core operations to focus on education services over the last few years, said its 2017 operating profit is now anticipated to be in the upper half of its guidance range due to strong trading and its ongoing cost savings program.

The FTSE 100-listed company expects annual adjusted operating profit to be in the range of GBP576 million and GBP606 million. Previously, it estimated adjusted operating profit to be between GBP546 million and GBP606 million.

UK supermarkets were also among the large-cap gainers after well-received data from the UK grocery market released by Kantar Worldpanel, which revealed a 17th consecutive 12-week period of growth in the sector - equal to almost four years.

J Sainsbury closed up 2.5%, WM Morrison Supermarkets closed up 0.3% andTesco ended 0.3% higher.

Sales at Sainsbury's increased 1.9%, as its market share fell to 15.8%, down 0.2 percentage point. Morrisons was the fastest growing in the period with sales up 2.8%, but its overall market share fell by 0.1 percentage point to 10.3%. Tesco's sales grew by 2.1%, but its market share was down 0.3 percentage point to 27.9%.

"While Morrisons saw the fastest growth rate, it was Sainsbury's that had the bigger reaction in share price terms, as the firm succeeds in reducing its reliance on price-cut deals, down to 35% from almost 440% a year ago," said IG chief market analyst Chris Beauchamp.

Midcap online grocer Ocado saw sales up 8.7%, but Kantar also highlighted a slowdown in online sales growth, down to 6.7% from the high of 21.9% in October 2014. Ocado closed down 1.4%.

Merlin Entertainments closed down 16%, languishing at the bottom of the FTSE 100, after the theme park and attractions operator said summer trading had been poor, despite new business development driving revenue growth in the 40 weeks to October 7.

Merlin, which runs popular tourist attraction Madame Tussauds as well as theme parks Alton Towers, Thorpe Park and Legoland, noted it expects 2017 like-for-like revenue to be flat compared to 2016 and for earnings before interest, tax, depreciation and amortization to be in the range of GBP470.0 million to GBP480.0 million.

This reflects "difficult" summer trading due to UK terror attacks and poor weather conditions in Northern Europe, flash flooding in Italy and Hurricane Irma in the US.

Mediclinic International closed down 4.0% after the private hospital operator said half year underlying profit and revenue expanded, but saw a weak performance from its operations in the Middle East.

For the six months ended September 30, the company said underlying earnings before interest, tax, depreciation and amortisation was GBP231.0 million, up 5% from GBP220.0 million the year prior. Revenue was GBP1.40 billion, up 9.5% from GBP1.30 billion the year before.

However, in the Middle East revenue sank 4.7% to AED1.50 billion, around GBP310.0 million, with Ebitda margins compressing to 8.5% from 11.0% the year before.

In the FTSE 250, Virgin Money ended as the best performer up 5.0%, after the lender said profitability, earnings, and underlying equity returns remain in line with expectations as it reaffirmed its full year guidance.

Housebuilder Bellway closed up 1.1% after it upped its payout to shareholders after a jump in profit for its recently-ended financial year, delivering a year of "record" completions, while its outlook remained positive.

For the financial year that ended on July 31, Bellway posted a pretax profit of GBP560.7 million, up from GBP497.9 million the prior year, on revenue of GBP2.56 billion, up from GBP2.24 billion. The total dividend for the year was 122.0 pence, up from 108.0p the year before.

Meanwhile on AIM, ASOS closed up 1.8% after strong growth in the UK and an even better performance abroad saw the online fashion retailer more than double profit in its recently-ended financial year, prompting it to up its investment in capacity to help it meet its improved sales targets for the new year.

Brent oil was higher at USD58.17 a barrel at the equities close Tuesday from USD57.67 at the London equities close Monday.

"Brent crude oil prices have continued to edge back towards their highest levels this year as skirmishes between Iraqi and Kurdish forces prompt concerns about supply disruption in and around Kirkuk. With US President Trump ramping up his rhetoric over Iran and the prospect that the US might impose fresh sanctions, the downside for oil prices appears to be becoming much more limited," said CMC Markets analyst Michael Hewson.

Gold fell and was quoted at USD1,284.38 an ounce compared to USD1,303.86 an ounce at the London equities close Monday.

Headlining the economic events calendar for Wednesday are unemployment figures from the UK at 0930 BST, there is also eurozone construction data at 1000 BST. In the US mortgage applications and housing starts are at 1200 BST and 1330 BST respectively, along with EIA crude oil stocks change figures at 1530 BST.

In addition, European Central Bank President Mario Draghi will speak at the ECB regarding structural reforms in the euro area in Frankfurt, Germany at 0910 BST.

Highlights in the UK corporate calendar for Wednesday include third quarter results from FTSE 100-listed household goods giant Reckitt Benckiser Group, in the FTSE 250 there are third quarter production results from gold miner Hochschild Miningand a trading statement from investment manager Rathbone Brothers.