LONDON (Alliance News) - London's major stock indices all closed lower Tuesday, with the FTSE 100 hitting a three-month low, as global sentiment towards equities continued to be hit by the US political standoff.
On the eighth day of the partial US government shutdown, investors continued to shed risky assets, steering-clear of equities. The two US political parties appear to be no closer to finding the necessary common ground.
US President Barack Obama telephoned the leader of the House of Representatives to once again urge him to hold a vote on a budget bill with no conditions attached. Obama told John Boehner that he is willing to negotiate with Republicans on certain policies, including his signature health care reform act. But he said he wouldn't do that under threat of a continued government shutdown and default on US debt.
Obama will hold a news conference at 1900 BST, the White House said.
Alongside the budget impasse, the US government is now less than 10 days away from Secretary of the Treasury Jack Lew's widely-accepted October 17 debt limit deadline. The International Monetary Fund Tuesday warned that "a failure to promptly raise the debt ceiling, leading to a US selective default, could seriously damage the global economy". Oliver Blanchard, Chief Economist for the IMF, added that "conflicts around increasing the debt ceiling could lead to another bout of destabilising and lower growth".
The IMF has trimmed its global forecasts for this year and next, further weighing on investor sentiment. In its most recent World Economic Report, the crisis lender cut its growth forecast for 2013 to 2.9%, from the 3.1% it predicted in July. Similarly, the 2014 forecast has been lowered to 3.6% from 3.8%.
Despite these fears, there are commentators who believe that the US default is too unthinkable to price in, as it simply cannot be allowed happen. InterTrader Chief Strategist Steve Ruffey is adamant that "there will be an end to the shutdown by Friday; the US will not be responsible for its own undoing."
There was good news for George Osborne in the IMF report as the body raised its forecasts for the British economy. It is now seen expanding 1.4% versus the 0.9% forecast in July. In 2014, growth is seen accelerating to 1.9%, which is better than July's forecast of 1.5%.
The extension of the UK Government's Help to Buy scheme came into effect today. RBS, Natwest and Halifax announced that they will start taking applications this week, while HSBC was among those who said they would join later this year. Although house-building stocks were big gainers around midday, the FTSE 350 sector eventually closed down 1.5%.
Critics are still warning the scheme might cause a new housing bubble, just as the Royal Institute of Chartered Surveyors index measuring the average UK house price showed growth is at an 11-year high, with sales volumes at a four-year high. Every region of the country except the North East saw an increase. The headline figure of 54 in September blew past forecasts for 45, and RICS said that house prices are now expected to rise 2.6% in the next year.
Government ministers are still defending the scheme. "People who think that there's a housing bubble should get out more. They should get out of Kensington and Chelsea, and go to Manchester or Birmingham, and major towns across the country," Treasury Secretary Danny Alexander told the BBC.
The FTSE 250 closed down 0.7% at 14,667.64, the AIM All-Share index closed down 0.7% at 776.4, and the FTSE 100 was the biggest faller, down 1.1% at 6,365.83, having hit a three-month low of 6,364.97 just before the close of the markets.
Similarly, European stocks closed in the red. The French CAC 40 was down 0.8%, and the German DAX was down 0.4%.
At the individual stock level, Marks & Spencer Group, down 2.7% at 467.182 pence, was the biggest faller on the blue-chip index. The retail company was hit hard after Bernstein downgraded it to Underperform from Market-perform and lowered its price target to 420p from 445p, saying the market is overconfident about the company's new Autumn/Winter collection. Having conducted two focus groups, the brokerage reported that women from the retailer's core customer age bracket of 50-70 did not like the higher price of the new collection as they have got used to buying at discount. Likewise, a focus group of the 30-39 year-old women that the company hopes to attract had a lack of product awareness and a perception that M&S clothes are generally a bad fit. Bernstein expects investors to be disappointed over the next 12-18 months.
At the other end of the spectrum, AIM-listed All Asia Asset Capital Limited jumped 190%, closing at 21.011p, after buying a minority stake in Andaman Power and Utility Company Ltd for USD1.25 million in cash, its first investment. Andaman Power is a private electricity producer based in Thailand and Myanmar which plans to develop a power plant deploying combined cycle gas turbine technology to generate up to 500 megawatts of electricity, and will be helped by the Myanmar government which has agreed to commission a feasibility study, provide gas supply, arrange land acquisition, give it preferential treatment on duties and taxation, and finally buy the electricity generated by the utility plant and supply it to the regional and national grid.
US stocks, having opened relatively flat, followed UK shares firmly lower. At the close of the UK equities market, the DJIA is down 0.6% at 14,853.75, the S&P is down 0.8% at 1,663.07, and the Nasdaq is down 1.6% at 3,710.12
In Wednesday's data calendar, there is a slew of UK data due to be released at 0930 BST, including industrial and manufacturing production figures, as well as trade balance data. German industrial figures are expected to be announced at 1100 BST, while US MBA mortgage applications are scheduled for 1200 BST.
By James Kemp; jameskemp@alliancenews.com; @jamespkemp
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