LONDON (Reuters) - Britain’s leading share index edged higher late on Friday as much stronger-than-expected U.S. jobs data suggested growth in the world’s largest economy was gaining momentum.
U.S. jobs growth unexpectedly accelerated in October as employers shrugged off a government shutdown. The readings for the previous two months were revised upwards in a sign of building momentum.
The stronger data was likely to bring forward the time when the Federal Reserve would cut its equity-friendly quantitative easing programme. But it also meant the U.S. recovery was on a more sustainable path, which investors subsequently latched on to.
After an initial dip after the data release, Britain’s FTSE bounced back to close 11.20 points higher, or 0.2 percent, at 6,708.42 points. The index has fallen roughly 1.7 percent since hitting a five-month high on Oct 30.
The yield on U.S. Treasuries rose steadily, a sign investors were positioning for a stronger U.S. economy and an early reduction to the Fed’s bond-buying programme.
“The market reaction was uncertain because we are in a transition period,” said Roberto Brasca, who manages a pan-European equity fund for Italian asset manager AcomeA.
“As interest rates turn around, we have to slowly get used - and these mental processes are very slow - to take strong economic data as good news. It won’t happen overnight but by successive approximations and confirmations.”
Positive updates from airline IAG and the world’s second-largest maker of aircraft engines, Rolls Royce, sent the two heavily traded stocks to the top of the FTSE 100.
IAG climbed 8 percent in volume nearly 2-1/2 times its average for the past three months after saying its third-quarter profit more than doubled, paving the way for a bumper full-year earnings forecast.
“We expect confident 2013 guidance to lead to mid-single digit upgrades to consensus operating profit,” Jefferies said in a note, reiterating its “buy” rating on the stock.
“We see a clear roadmap to higher return on capital, and therefore a higher valuation, which we expect to emerge as restructuring benefits develop.”
Both companies’ strong reports were a bright spot in a lacklustre earnings season, which has seen 44 percent of companies that have reported so far beat analysts’ earnings expectations - lower than the long-term average of 49 percent, Thomson Reuters StarMine data showed.
Falling earnings estimates and rising prices have left the FTSE trading at 12.5 times its expected earnings for the next 12 months, its highest valuation multiples since early 2010, Datastream data showed.
This means a recovery in profits was needed if the FTSE was to make new highs after an 18 percent rally since QE was announced in September 2012.
“If there is a recovery, the new phase of the cycle will be driven by earnings and not by (low) interest rates,” AcomeA’s Brasca said.
(The story corrects spelling of company acronym in paragraph 9)
Reporting By Francesco Canepa; Editing by John Stonestreet, Ron Askew