August 29, 2014 / 8:42 AM / 5 years ago

Britain's FTSE creeps higher; Tesco slides on profit warning

* FTSE 100 up 0.1 percent

* Tesco slashes profit forecast and dividend

* Supermarket groups trade sharply lower

* Astra buoyed by speculation of new Pfizer bid

By Tricia Wright

LONDON, Aug 29 (Reuters) - British shares inched higher on Friday in cautious trade as investors awaited inflation figures for the euro zone which may shed light on the European Central Bank’s next move, though shares in Tesco dropped sharply on the back of a profit warning.

Tesco slumped 6.2 percent after it cut its profit forecast for the second time in two months and slashed its interim dividend by 75 percent as tough operating conditions continued to ravage its business.

Tesco, which had issued a profit warning in July as it announced the departure of its chief executive Phil Clarke, also said its new head Dave Lewis would start work on Monday, a month earlier than expected, and launch a full review of the company.

“They were pretty awful figures,” Joe Rundle, head of trading at ETX Capital, said.

“I think that probably the market will give them a little bit of a break because of the new CEO coming in, starting a month early, so at least they’re trying to be proactive, but I think the worrying sign is they’re cutting their dividend and a lot of people are in it for the dividend.”

Rundle saw scope for the shares, which have been languishing at 10-year lows, to trend towards 200 pence - some 13 percent below current levels.

The Tesco profit warning took its toll on sector peers, with Sainsbury and Morrisons both down 3.5 percent.

Despite these sharp falls, the FTSE 100 managed to make headway, up 7.49 points, or 0.1 percent, at 6,813.29 points by 0816 GMT, partly thanks to gains from AstraZeneca.

Shares in the drugmaker rose 2.2 percent, fuelled once again by talk of renewed takeover interest from Pfizer, following an abortive $118 billion takeover attempt in May.

The same speculation has triggered a more than 11 percent rise in the shares over the last two weeks.

“(There is) a plethora of business taking place this morning (in Astra’s shares), which I attribute to traders not wanting to be positioned short over the weekend should something be announced when the markets are closed,” ayondo markets’ senior trader Jordan Hiscott said.

Also proving supportive, hopes for AstraZeneca’s promising cancer drug pipeline were boosted on Friday by news the company had moved its immuno-oncology medicine MEDI-4736 into a mid-stage study in colorectal cancer.

Euro zone inflation, due at 0900 GMT, is seen dropping to 0.3 percent in August, following a surprise dip to 0.4 percent in July, according to a Reuters poll of analysts.

The data will be at the centre of the ECB’s policy meeting next week, driving the debate about whether the central bank should accelerate existing policy measures to fight the risk of deflation.

The FTSE has risen around 4 percent in the past 2-1/2 weeks, helped by expectations of ECB stimulus. The index had climbed to 6,894.88 points in mid-May, its highest level in more than 14 years. But it has not passed 6,900, considered a key hurdle before the FTSE can challenge record highs around 7,000.

“It (ECB stimulus) is priced in to a large degree, but because interest rates are so low equities remain the asset class of choice to achieve yield,” Lex van Dam, a hedge fund manager at Hampstead Capital, said. (Additional reporting by Ben Hirschler; Editing by Crispian Balmer)

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