FTSE stronger despite inflation to stay higher for longer

UK stocks started the session trading lower, following AstraZeneca, BP, Royal Dutch Shell and Sage all going ex-dividend. The FTSE continued to head south during the first half of the trading session before turning positive prior to the US open.

Early on Bank of England Governor Mervyn King restated that the economic road ahead will not be smooth, with a slow but sustained recovery expected for the UK with risks to the downside. In his inflation report, King also stated that the bank expected inflation to remain above the target 2% until 2016 and forecast inflation peaking at 3.2% later on this year. However despite the gloomy news King also affirmed that the Bank is prepared to add extra stimulus measures should the economic recovery fail to take off.

Looking to Europe, stronger than expected eurozone industrial production data came in at 0.7% month on month and reinforced hopes that economic activity for the area has turned a corner. Additionally in Italy a successful bond auction saw the country sell its first 30-year bonds in almost two years despite the uncertainty of the looming political elections and Vatican elections.  Markets in mainland Europe were up on the back of the news, with the German DAX trading up 0.7% and the CAC up 0.2% by early afternoon.

Corporate earnings continued to direct the markets with mixed news across the continent. Here in the UK Tullow Oil gained over 6% after providing better-than-expected test results from some of their Kenyan wells. They also reported a drop in net profits of 4% but have kept their dividend unchanged as they still see a strong platform for growth.

Also moving up was Reckitt Benckiser Group, which gained over 1.6% after reporting that it will grow its health and hygiene business faster than expected and proposed to lift its dividend by 11%. Miners also supported the FTSE, tracing metal prices higher.

On a negative front the banking sector was slightly off this morning, pausing after its strong rally yesterday and also after digesting news that French Investment Bank Société Générale reported a worse than expected net loss of €476 million, compared with a net profit of €100 million for the year ago.

This afternoon sees a shortage of economic data from the UK and Europe so investors will turn their attention to US advanced retail sales and Japanese growth data due this evening.