Miners drag FTSE lower UK inflation at 2 year high

The FTSE 100 underperformed wider European indices to fall 0.5% in late trading on Tuesday. Mining companies weighed on the UK index whilst key pieces of economic data also missed market expectations, leaving traders at a point of indecision.

The story of the trading day has been one of a battle between the banks and miners.

We have also seen a general trend whereby UK investors are taking their lead from US market today, which have fallen by a similar amount to that of the FTSE.

Barclays’ strong results has been the trigger for a boost in demand for bank stocks today, with Barclays topping the FTSE 100 gainers list and shares rallying 5%. We have also seen gains for RBS and Lloyds on hopes of a similarly strong performance when they both report next week.

Protests that have sparked change in both Tunisia and Egypt appear to now be spreading across the Middle East region, with reports of protests in Iran as well. As a result this has created more tension amongst investors, who have bought into crude oil. Traders have historically reacted to instability in the Middle East region as a trigger to buy into the price of crude oil and this could become a common theme should Egypt-like protests continue to spread.

On the flip side however, it has been mining stocks that have lagged on the UK index. I get the feeling that traders in the UK have reached the point of indecision today. The inflation data out of China whilst initially being bullish for copper prices has now seen traders sell out of mining positions as the day has progressed. Whilst weaker than expected jump in Chinese inflation may raise hopes that China may cool its rate hike mandate somewhat, food price pressures were at their strongest in a decade and this in turn may force more monetary tightening. Align this sentiment with economic data today such as the US retail sales, which missed market expectations, and this has convinced some to downside their appetite for risky asset classes such as mining stocks.

Looking at the mining sector in London, it has found resistance in the past at current levels too and so this could certainly be another contributor to today’s sector weakness.

UK Inflation at a 2-year high
Data out today confirmed that UK inflation hit double the target set by the Bank of England. The inflation figure was met with little reaction by equity markets whilst it did trigger a 30-minute sell off in the pound sterling before the price of GBP/USD rallied higher.

I think the general reading from today’s inflationary data is a sense of relief that the 4% inflation was not higher.