LONDON (Alliance News) - UK stocks are called to open firmly lower Friday, following on from a sell-off on Wall Street overnight, as investors look to shed risk assets, including equities, amid escalating violence in Iraq.
The crisis in Iraq escalated on Thursday as Iraqi Kurdish forces took advantage of the disarray of the government in Baghdad to seize key military installations in the major oil city of Kirkuk and vowed to march on to Baghdad.
"For a while now we?ve been waiting for that next major catalyst that can either provide a boost for the next leg higher in indices or bring about a long-overdue correction, and it looks like the latter may have won the race," says Craig Erlam, a market analyst at Alpari.
US President Barack Obama said he is weighing a range of short-term military options, including airstrikes, to support Iraq's government against advancing Sunni militants. However, he ruled out sending troops into Iraq.
Describing the situation as "alarming" and saying there has been a "clear structural breakdown" in Iraq, spokeswoman Jen Psaki said the US and Iraq "share a commitment to addressing threats from groups such as ISIL."
"The only question now is whether the situation in Iraq will deteriorate further and, if it does, how high oil prices will go before the expected fall in oil exports is offset with increased production elsewhere," Alpari's Erlam says. However, "a sustained spike in oil prices could have a very negative impact on the global economy, just at a time when many countries are just finding their feet again," he says.
Ahead of the UK equity market open, Brent oil trades at USD113.05 per barrel, slightly up, while West Texas Intermediate oil trades down at USD107.10.
Stocks on Wall Street fell sharply overnight, with the DJIA, NASDAQ Composite and S&P 500 all closing down between 0.7% and 0.8%.
Negative sentiment is set to roll into the UK session Friday, with the FTSE 100 called to open materially lower. IG and Alpari indicate that the blue-chip index will open down at around 6,822 points, having closed at 6,843.11 on Thursday, while CMC Markets expects it to open even lower at 6,816.
Stocks in Asia have fared better. Ahead of the UK equity market open, the Shanghai Composite index is up 0.8%, the Hang Seng is up 0.7%, and the Nikkei in Tokyo has closed up 0.8%.
In the forex market, the pound moved higher against its major rivals overnight after Bank of England Governor Mark Carney signalled that, due to strong economic growth, an interest rate hike "could happen sooner than markets currently expect."
In a speech at a Mansion House dinner, Carney said that "there's already great speculation about the exact timing of the first rate hike, and this decision is becoming more balanced." However, "the decision would be dependent on data and is not a pre-set course," he added.
There remains more spare capacity in the economy that would need to be used up first, Carney said.
"If that?s his way of reassuring UK households, he?s got a funny way of showing it, after saying last year a rate hike wasn?t coming any time soon," says Michael Hewson, chief market analyst at CMC Markets, before asking: "Is this flexible forward guidance a la make it up as I go along?"
Meanwhile, the yen fell against its key rivals overnight after the Bank of Japan kept its monetary policy steady. The policy board of the BoJ unanimously decided to maintain its target of increasing the monetary base at an annual pace of about JPY60 trillion to JPY70 trillion as widely expected by economists.
The currency moved even lower shortly after, as Japanese industrial production was revised to show a steeper decline in April. Industrial output declined 2.8% on month in April, a faster rate of decline than the preliminary estimate of a 2.5% fall. In March, production rose 0.7%. On a year-on-year basis, industrial output rose by a revised 3.8%, down from the preliminary estimate of a 4.1% rise. This follows the 6.4% increase in March.
In data just released, Chinese retail sales rose 12.5% year-on-year in May, following an increase of 11.9% in April, and beating economists' expectations of a more modest rise to 12.1%. China's urban investment rose 17.2% in the year to the end of May, slightly below the 17.3% posted in the year to end April, but ahead of the 17.1% that had been forecast by economists.
The country's industrial production figure rose to 8.8% year-on-year in May, from 8.7% in the previous month, as expected.
This is "hopefully a good sign that the economy is turning around and can have a much better second half of the year," says Erlam. "There's been plenty of concern that the country is slowing at a faster rate than intended and could face a hard landing. The latest data would suggest otherwise," he adds.
Also just released, German consumer price inflation came in as expected at 0.9% year-on-year in May, down from the 1.3% posted in April. It fell 0.1% month-on-month, following a 0.2% fall in April.
Ahead of the UK equity market open, sterling trades at USD1.6970, EUR1.2504, JPY173.185, and CHF1.5227.
Still to come in the data calendar Friday, Spanish and Italian consumer price inflation figures are released at 0800 BST and 0900 BST, respectively. Employment change and trade balance data for the eurozone is scheduled for 1000 BST.
In the US, producer price inflation is published at 1330 BST, with the preliminary Reuters/Michigan consumer sentiment index released at 1455 BST.
In corporate news, AIM All-Share index- listed Bonmarche Holdings has released full-year results Friday. For the year to March 29, the company said revenue rose to GBP164.3 million, up from GBP146.8 million in 2013. Its pretax profit rose to GBP8.0 million from GBP4.8 million.
By James Kemp; jameskemp@alliancenews.com; @jamespkemp
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