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LONDON (Alliance News) - The main London stock indices fell on Thursday, hit by regulator intervention in the banking and energy sectors and continued concerns about Ukraine, while the pound rose to a weekly high against the dollar after UK retail sales grew much faster than expected last month.
European equity markets opened in the red Thursday after US President Barack Obama Wednesday warned that the situation in Ukraine could escalate further, and that harsher sanctions will be imposed on Russia if it does.
"Investors took this opportunity to take some risk of the table, sending markets lower," said Spreadex financial sales trader Lee Mumford.
The International Monetary Fund Thursday offered Ukraine between USD14 billion and USD18 billion in loans over two years to help the country avoid financial collapse after months of unrest that has seen Russia's annexation of the Crimean Peninsula.
The US Senate has passed the Ukrainian aid package Thursday, along with its sanctions against Russia. However, it isn't yet clear whether the Ukrainian parliament will accept the bailout.
The UK markets didn't recover from the early losses, and the FTSE 100 closed down 0.3% at 6,588.32, the FTSE 250 down 0.3% at 16,202.17, and the AIM All-Share closed down 0.2% at 848.62.
In Europe, the CAC 40 closed down 0.1%, and the DAX 30 ended flat, while after the close of European markets, stocks on Wall Street were also sliding, with the DJIA down 0.2%, the S&P 500 down 0.5%, and the Nazdaq Composite down 0.5%.
The banking sector underperformed Thursday after the Federal Reserve published results of its annual bank capital stress tests. The Fed rejected the plans of a number of banks, including the US units of Royal Bank of Scotland and HSBC, to raise dividend payments and increase stock buybacks. The report said that the banks internal practices and capital structures are not robust enough to withstand potential severe economic shocks in the future.
The stress test results "are a clear reminder of the mounting costs of a fragmenting global banking market. Foreign banks that are subject to the US CCAR process clearly need to invest more in process controls and governance," said Deutsche Bank analyst Jason Napier.
RBS closed down 1.4%, while HSBC closed down 0.7%, and Barclays, which analysts suggest will be subject to future testing under the so-called Comprehensive Capital Analysis and Review, closed down 1.0%.
The UK energy sector was also in focus after the regulator Ofgem recommended, as widely expected, that the Competition and Markets Authority investigates "once and for all" whether there are barriers to effective competition with the "Big Six" suppliers.
"Ofgem's competition assessment did not find any "smoking guns" showing that the energy market is actually uncompetitive. However, we are not surprised by Ofgem's move as it is under immense political pressure to be seen to be taking action, although the flimsy rationale for an enquiry does call into question Ofgem's claims to be politically independent," said Liberum Capital analyst Peter Atherton.
SSE, which earlier in the week saw its shares rise after it announced asset sales, job cuts, an energy price freeze and a legal separation of its retail and wholesale units, closed down 2.0% Thursday. Centrica shares, meanwhile, closed up 0.7%.
"We hope that a lengthy review process will not damage confidence in the market, when over GBP100 billion of investment in new infrastructure is needed. A prolonged period of uncertainty could damage investment at a time when Britain?s energy security is being seriously challenged," Centrica Chief Executive Sam Laidlaw said in a statement.
Outside of the energy and banking sectors, Babcock International Group was the biggest blue chip faller after announcing a huge rights issue to pay for the acquisition of Avincis, a provided of aerial emergency services. Babcock plans to raise GBP1.1 billion in a 5-for-13 rights issue at 790 pence, a 42% discount to Wednesday's closing price. The support services group will then spend GBP920 million on Avincis and also take on Avincis's debt of GBP705 million.
Babcock shares closed down 6.7% on the news at 1,275 pence. The rights issue implies an ex-rights share price of 1,206p due to dilution.
The pound received a boost, reaching a six-day high against the dollar of USD1.6647, after UK retail sales grew faster than expected last month, according to the latest data from the Office for National Statistics.
Sales grew by 1.7% in February, faster than the 0.5% growth expected by economists and reversing the 2.0% decline recorded in January, suggesting the impact of the winter flooding may not have been as bad as expected.
On an annual basis, sales grew by 3.7%, faster than the 2.5% expected. Excluding fuel, sales grew at an even faster rate of 1.8% in the month of February, strongly beating expectations of 0.3% growth.
"The UK consumer is powering on, helped by improving pay growth, subsiding inflation and very low interest rates. Even the rain during February did not appear to dampen spirits on the high street, with retail sales rising well ahead of consensus expectations," said Berenberg chief UK economist Rob Wood.
US data was more mixed, with the third and final reading of the country's fourth-quarter GDP missing expectations. Although the annualised number was revised up to 2.6%, from 2.4%, economists had expected a revision to 2.7%.
After the revision, Federal Reserve president Sandra Pianalto warned that, while the US economy has been gathering pace, inflation may remain stubbornly low for some time.
"Low inflation might sound like good news, but today it is also a sign of an economy that is not firing on all cylinders. The big risk is that persistently low inflation could tip into deflation, which is when the level of prices actually falls," said the president of the Cleveland Fed, a voting member of the Federal Open Market Committee this year.
On a more positive note, initial jobless claims grew by less than expected, rising by 311,000 in the week ended March 21, less than the 325,000 expected. US personal consumption also expanded slightly faster than expected, rising by 1.1% in the fourth-quarter, exceeding the 1.0% expectation, although slowing from 1.9% in the fourth-quarter.
Although sterling has eased from the peak of USD1.6647, it continues to trade at USD1.6620 after the equity market close. Against the euro, the pound is also higher, currently trading at EUR1.2090. Against the dollar the euro lost ground Thursday, to currently trade at USD1.3736.
In the corporate calendar Friday, Johnston Press is due to publish full-year results, along with Songbird Estates, Chesnara, and Optimal Payments, while QinetiQ Group is due to release a trading statement.
In the economic calendar Friday, UK growth will be the morning focus, with the third and final reading of fourth-quarter GDP released at 0930 GMT. Economists expect the annualised growth rate to be confirmed at 2.7%, unchanged from the second reading. If that happens, it would confirm that the UK grew slightly faster than the US last year.
The UK Gfk consumer confidence survey is also released overnight, while later in the morning the Eurozone consumer confidence survey is due at 1000 GMT. In the afternoon Friday, both German and US CPI data will be released.
By Jon Darby; jondarby@alliancenews.com; @jondarby100
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