Smiths Group leads FTSE lower as strong pound hits earnings

Wed Mar 19, 2014 5:14am EDT

* FTSE 100 down 0.2 percent

* Smiths Group falls; H1 profit hit by stronger pound

* Analysts see FTSE 100 trapped in range in medium term

By Tricia Wright

LONDON, March 19 (Reuters) - Britain's top shares edged lower on Wednesday, led down by Smiths Group after the engineer joined a list of companies reporting earnings hit by adverse exchange rates.

Smiths Group dropped 6.3 percent in brisk trade after it said first-half profit fell 3 percent due to a strong pound that reduced the U.S.-dominant manufacturer's margins and pricing pressure in its second largest unit.

Trading volume in the stock stood at more than half of its 90-day daily average after just an hour's trade, against only a tenth seen on the UK benchmark index.

Investors are waiting for British finance minister George Osborne's pre-election budget later in the day, with some analysts noting that any reaction in sterling would be felt most keenly by the market.

"Sterling strength has been quite a big factor in the downgrades that we've seen particularly from some of the FTSE 100 more globally exposed stocks ... if that could continue to reverse that would probably be quite helpful for sentiment," Peel Hunt equity strategist Ian Williams said.

The FTSE 100 was down 15.09 points, or 0.2 percent, at 6,590.19 points by 0900 GMT.

Investors were unlikely to place large bets before a policy update from the U.S. Federal Reserve, whose ultra-easy monetary stance has been a major driver behind a sharp equity rally over the past 1-1/2 years.

The Fed is set to further trim its bond-buying stimulus and could rewrite its guidance on when it might eventually raise interest rates, with some expecting chairman Janet Yellen to scrap a numerical target on unemployment and adopt a more flexible stance.

Investors have been relying on a pick-up in earnings to be the next driver of equity market gains.

However, the latest earnings season indicates that the recovery has not yet come about, with some 58 percent of European companies having missed revenue expectations, while 42 percent have missed profit expectations, according to StarMine.

"Have we got enough momentum to try for the top of the range? I'm not sure that we have... until earnings momentum starts to look better," Peel Hunt's Williams said.

Technical analysts also reckoned on the FTSE 100 levelling off, around 4 percent shy of a peak hit in late January. It has been trapped in a range between about 6,400 to 6,800 since late October.

"The fact that the FTSE has closed below the session highs over the last two days does raise questions about how committed traders are, even at these levels, and a failure to push above 6,640 or so (i.e. at the 38.2 percent retracement of the recent decline) would strongly suggest that it would be premature to move back into 'risk-on' mode," Bill McNamara, a technical analyst at Charles Stanley, said in a note. (Editing by Louise Ireland)