Britain's FTSE 100 index eked out modest gains on Wednesday, dominated by record oil prices that set energy shares afire but cast the shadow of inflation over the wider market. The FTSE 100 closed up 6.5 points, or 0.1 percent, at 6,198.1 after a volatile trading session as stocks fell elsewhere in Europe and in the United States.
The UK benchmark index shed 2.9 percent in the previous session, its biggest one-day fall in two months, and is down 4 percent year-to-date. Oil shares stormed ahead to account for 57 positive index points after data showing a larger-than-expected drop in crude inventories in the latest week sent oil prices soaring above $132 a barrel.
"There are inflationary concerns abounding," said Jeremy Batstone-Carr, head of private client research at Charles Stanley. BP advanced 3.5 percent, Royal Dutch Shell added 4.7 percent, BG Group climbed 5.5 percent and Cairn Energy tacked on 4.6 percent. Banks languished in the red, however, hurt by inflationary concerns and further depressed by market talk that Swiss bank UBS may have to increase the size of its planned rights issue. UBS was not immediately available for comment.
Royal Bank of Scotland dropped 4.9 percent, Alliance & Leicester shed 4.4 percent and HBOS lost 4.3 percent. Waning hopes of interest rate cuts also hurt the sector after minutes from the Bank of England's May rate-setting meeting showed policy makers voted 8-1 to hold borrowing costs at 5 percent this month.
The minutes indicated policy makers were keener to tackle inflation than cut rates to bolster growth, after a shock spike in consumer price inflation to 3 percent in April. "The Bank (of England) made it quite clear that inflation was the target for the foreseeable future," said David Jones, chief market strategist at IG Index.
British house prices are expected to drop 7 percent this year and there is likely to be a 35 percent slump in property market transactions, according to revised forecasts from the Council of Mortgage Lenders. Miners added support to the index, dusting themselves off after taking a whipping from profit-taking the day before. Rio Tinto, Anglo American, BHP Billiton and Vedanta Resources each added between and 0.7 and 2.8 percent.
Investors in Vedanta also gained confidence after UBS raised its price target on the stock to 3,100 pence from 2,600 pence with a "buy" rating. HSBC, Unilever, International Power, Home Retail Group, Carnival, Amec and Sainsbury all fell after going ex-dividend. British energy services provider John Wood Group rose 4.5 percent after Goldman Sachs raised its price target to 440 pence from 410 pence with a "sell" rating.
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