FTSE edges up as Iran deal boosts travel firms

By Francesco Canepa

LONDON (Reuters) - Britain's main share index rose for the first time in a week in thin trade on Monday as travel stocks rallied on expectations that a nuclear deal between oil-rich Iran and six world powers would help cut fuel costs.

Airlines IAG and easyJet, and cruise operator Carnival rose between 2 percent and 2.8 percent as crude prices fell after the deal, which will give Iran some relief from crippling sanctions.

The sanctions have cut Iran's exports by more than half in recent years, helping keep Brent above $100 a barrel despite weak global demand.

While Monday's Brent price of $110 was well within its recent range, investors were speculating that future supply from Iran would help curb energy costs in coming years.

Fuel accounts for 30 to 45 percent of an airline's costs, according to Mark Irvine-Fortescue, an analyst at Jefferies, who estimates airlines largely hedge that source of costs six to 12 months ahead.

"A lower oil price is not going to affect earnings for the next couple of quarters but clearly if this is a new, lower level then (airlines) will be able to start locking in more attractive hedged prices and these will start to feed through to earnings a little bit further out," Irvine-Fortescue said.

Jefferies lifted its rating on easyJet to "buy" from "hold", and its target price to 1,620 pence from 1,470 pence, citing greater confidence in the group's competitive position. On IAG, the broker lifted its target to 410 pence, from 355 pence.

On the flipside, shares in oil companies came under pressure. BP was off 0.7 percent and Royal Dutch Shell off 0.4 percent after the deal.

Energy services group Petrofac bucked the trend, rising 1.8 percent after the firm said its joint venture with South Korea's Daelim Industrial Co had won a $2.1 billion contract for a refinery project in Oman.

The FTSE 100 rose 20.32 points, or 0.3 percent, at 6,694.62 points, rising for the first time in a week and leaving it roughly 2 percent below a five-month high of 6,819 hit on October 30.

Trading volume on the FTSE was 35 percent lower than the index's average for the past three months on the first day of what is expected to be a quiet week due to Thursday's Thanksgiving holiday in the United States.

Equities remain supported by central bank stimulus, which has dulled returns in alternative asset classes such as bonds and cash, and by signs of a recovery in the British economy.

Analysts were expecting the dividend yield on the FTSE 100, a key metric of investor returns, to rise in each of the next three years, hitting 4.7 percent in 2016 from 3.3 percent this year, StarMine data showed.

"I don't see too many clouds on the horizon. There's plenty of liquidity coming into the market globally and that should all lift equities," said Jeremy Le Sueur, managing director of 4-Shires Asset Management.

"We're running full weightings for all portfolio in the UK and we don't see any reason to take money out of that because dividend growth is strong and government bonds are deeply unattractive."

(Additional reporting by Tricia Wright; Editing by Catherine Evans)