LONDON MARKETS: FTSE 100 Edges Higher; Pound Rises On Rate-hike Prospects

By Carla Mozee, MarketWatch

Burberry, Shire shares gain

LONDON (MarketWatch) -- U.K. stocks rose Thursday, with mining giant Rio Tinto PLC gaining after it revealed plans for a share buyback. Meanwhile, the British pound leapt on anticipation the Bank of England's next policy move would be an interest-rate increase.

Sterling: The currency (GBPUSD) popped up nearly 1% to $1.5370 as the Bank of England signaled it remains on course to raise the country's key interest rate as policy makers upgraded both their inflation and growth forecasts. It now expects inflation to reach 1.96% in two years, compared with its forecast in November of 1.8%, although the bank noted the inflation rate could briefly turn negative, feeling the impact of the slide in oil prices.

The pound was trading at $1.5228 ahead of the report, and at $1.5239 late Wednesday.

The U.K.'s key interest rate stands at 0.5%, a record low. But the bank said it would be open to cutting the rate even further or to launching a new round of asset purchases if inflation and growth prospects worsen.

The bank now expects 2016 economic growth of 2.9%, and 2.7% in 2017, with Bank of England Governor Mark Carney at Thursday's press conference "talking a lot about the oil price [decline] being a major positive for the economy," said Richard Perry, market analyst at Hantec Markets. Carney "was generally bordering on being a little bit hawkish and the market seemed to gradually get a hold of it and pushed cable higher."

The BOE had previously expected 2016 growth of 2.6%, and 2.6% in 2017

If sterling "can hold on to this breakout, I think that would be a strong sign near-term," with $1.5485 the next level to watch "as there's not a great deal of resistance until you get to where we at in December," he added. "But in the coming months, you going to get a little bit more volatility, a little more concern about the general election," which will be held in May.

Ashraf Laidi, chief global strategist at City Index, in a note said they expect "further sterling appreciation ahead -- even against the U.S. dollar -- as the currency secures its status alongside the greenback among the major currencies whose central banks remain on easing mode."

Stocks: The FTSE 100 rose 0.2% to 6,828.11, and hit intraday highs along with the broader European equity market following an agreement of a cease-fire in Ukraine that will begin Sunday.

But overall, the blue-chip index had been "dragging its heels all day," said Perry. Market heavyweight Royal Dutch Shell PLC (RDSB) fell 0.5%, underperforming a 3% jump in oil prices after news of the Ukraine cease-fire deal. Shares of BT Group PLC slumped 2.2% as the telecom raised GBP1 billion pounds ($1.5 billion) in a share placement, in part to finance its planned purchase of mobile operator EE.

As Germany's DAX jumped more than 1.6% Thursday following the Ukraine news, "the fact that the FTSE is struggling to get any real traction up at these highs ... is just a little bit concerning...a little bit disappointing," said Perry.

On the upside, shares of Shire PLC rose 4.6% after better-than-expected financial results from the drug maker.

Miner Rio Tinto (RIO) climbed 2.3% after the company said Thursday it will repurchase $2 billion (GBP1.31 billion) of its shares. Rio Tinto's full-year net profit jumped to $6.5 billion, from $3.67 billion a year ago, although the earnings fell short of the $8.38 billion expected in a Wall Street Journal poll of analysts.

Shares of fellow miners Glencore PLC and Anglo American PLC were also higher, by 1.9% and 3.7%, respectively.

Burberry Group PLC shares rose 3.6% as RBC Capital Markets initiated coverage of the luxury-goods maker with an outperform rating, citing its "digital leadership," expansion of its beauty business, and high exposure to the U.S. market as reasons for the move.

Burberry "deserves a higher P/E valuation premium to luxury peers thanks to its stronger top- and bottom-line growth potential, superior [return on invested capital] and attractive cash-return outlook," said RBC analysts Claire Huff and Rogerio Fujimori in a note to clients.

But shares of EasyJet PLC shed 0.2% following a downgrade at Goodbody to sell from hold. Sky PLC shares fell 0.6% as the broadcaster's rating at Bernstein was cut to market-perform from outperform.

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