City struggles for direction on mixed economic data

Strong US retail figures, sticky UK inflation rates and weak European industrial production fluctuated the markets, which were still riding a wave of optimism triggered by Monday's data from China and Basel.

The FTSE 100 Index closed just 1.88 points up at 5567.41, after losses earlier in the session, while Wall Street's Dow Jones Industrial Average continued to progress, up 0.3 per cent.

In the US, the Commerce department said retail sales rose 0.4 per cent last month – the largest rise in five months.

"Expectations were that the economy and consumer were really running out of gas, so to see this type of data, given that expectations were beginning to come down, is significant," said Lawrence Glazer, a managing partner at Mayflower Advisers in Boston.

The increase in retail sales, which are a measure of consumer health, was the second monthly gain in a row and was a touch above market expectations for a 0.3 per cent rise. Sales rose 0.3 per cent in July.

In a second report, the department said business inventories increased 1.0 per cent in July, the largest since July 2008 and double market expectations for a 0.5 per cent rise as sales rebounded strongly.

But any optimism generated by this data was offset by news that

European industrial production unexpectedly stagnated in July.

In the UK, the Footsie bounced in and out of the red after the Office for National Statistics said the Consumer Prices Index held at 3.1 per cent in August, still well above the Bank of England's 2 per cent target.

The update gave an initial lift to the pound, which was up against the dollar at 1.55, amid expectations that it could advance the date when interest rates have to rise.

But all markets were still feeling the positive impact of Monday's upbeat industrial production reports from China and the Basel banking reforms.

The resources sector continued to show the benefit with Essar Energy soaring to the top of the FTSE 100 Index, up nearly 4 per cent or 16.7p to 464p, while silver miner Fresnillo added 30p to 1190p.

There was also a gain of 2 per cent for Cable & Wireless Worldwide after the telecoms firm signed a contract worth 82m with the Foreign and Commonwealth Office.

The deal, which prompted a rise of 17/8p to 74p for C&W, was viewed positively for other outsourcing firms as the government looks to spend money on cost-saving projects. Other risers included Capita, which lifted 211/2p to 7701/2p.

On the fallers' board, TUI Travel dropped nearly 2 per cent after Bank of America Merrill Lynch downgraded the tour operator to neutral from buy. Shares responded with a fall of 41/8p to 2213/4p.

Retailers suffered after the stubbornly high inflation figures were published, and following a warning from Debenhams over higher input costs.

Next, which is publishing half-year figures today, fell 43p to 2040p, Argos owner Home Retail Group dropped 31/4p to 2123/8p and Primark firm Associated British Foods fell 2p to 1070p.

Despite the cost uncertainty, department store chain Debenhams made it on to the FTSE 250 Index risers' board after forecasting a 20 per cent rise in full-year profits to about 150m.

It also reported a recovery in like-for-like sales during the last 10 weeks of the year, albeit against weaker comparatives. The news encouraged investors as shares lifted 21/4p to 671/4p.

Elsewhere in the retail sector, Superdry fashion firm SuperGroup

slipped after the release of first quarter figures showing a 60 per

cent jump in sales.

One analyst described the update as "outstanding" but shares still lost 42p to 1107p.

The biggest Footsie riser of the session was Essar Energy.