BT Share News (BT.A)

LONDON (Alliance News) - UK stocks closed firmly lower Thursday, hit by a number of concerning pieces of news from across the world, including another drop in consumer prices in the eurozone, a lower growth target suggested for China by the International Monetary Fund, and the second Argentinian debt default in little over a decade.

Meanwhile, in the busiest day of the UK earnings season so far, blue-chip constituents Royal Dutch Shell, Lloyds Banking Group, Schroders, Intu Properties and Weir Group were among a long list of companies that released half-yearly results.

Another disappointing reading of eurozone consumer price inflation reignited fears of deflation in the single currency bloc. Eurozone inflation slowed to the lowest level in four-and-a-half years in July, even after the European Central Bank cut the interest rates to historic lows and introduced negative deposit rates for the single currency block in an effort to boost prices.

Eurozone CPI fell to 0.4% year-on-year in July, down from 0.5% in June and missing economists' expectations for a reading of 0.5%. Core price growth remained stable at 0.8%.

"A further drop is a big worry for the central bank and Mario Draghi has made it clear that they are ready to act swiftly with further monetary policy easing," said Dennis de Jong, managing director at UFX.com. "However, the increasing geopolitical tensions in Ukraine and the Middle-East remain a big threat to the stability of the eurozone and the ECB have plenty more tough decisions ahead."

These geopolitical issues weighed on sentiment, with Russia saying late on Wednesday that the latest sanctions imposed on it by the European Union and the US are "destructive and short-sighted" and will lead to higher energy prices. The Kremlin also announced a ban on fruit and vegetable imports from Poland and said it could extend the ban to the whole EU.

Meanwhile, the IMF said that China should give up its ambition of 7.5% GDP growth and instead target 6.5% to 7% in 2015, and only deploy stimulus if growth were to slow significantly below the target.

"Bond markets are starting to price in higher rates in the short- to medium-term and with the IMF calling for China to downgrade its growth target, you have to ask yourself whether stocks are good value at current valuations in an environment which is starting to put a slightly higher premium on risk," said Michael Hewson, chief market analyst at CMC Markets.

Further weighing on sentiment, Argentina has defaulted on a debt payment for the second time in thirteen years, as last minute talks failed, with officials failing to come to an agreement with holdout bond investors.

"While terrible news for the Argentine people, the default is likely a non-event in the long-run for markets due to the relative unimportance of the Argentine economy and minimal likelihood of bond market spill-over," said Jasper Lawler, a market analyst at CMC Markets. "The Argentina default is just another thorn in the side of market confidence today," he added.

The FTSE 100 closed down 0.6% at 6,730.11, while the FTSE 250 closed down 0.9% at 15,495.64, and the AIM All-Share index closed down 0.5% at 768.56. The losses ensured that the three indices ended the month of July in the red, down 0.2%, 1.5%, and 2.1%, respectively.

In Europe, the CAC 40 in Paris closed down 1.5%, while the DAX 30 in Frankfurt closed down 1.9%.

It is a similar story in the US, where, at the UK equity market close, the DJIA, NASDAQ Composite, and S&P 500 are all down between 1% and 1.6%.

Adidas AG weighed heavily on the German market and on sentiment in general, with its shares closing down over 15%. The sporting goods company saw its shares plummet after it issued a profit warning and said that it has decided to significantly reduce its store opening plan in Russia due to weakness in the rouble and increasing risks to consumer sentiment and consumer spending from current tensions in the region.

"When you see profit warnings like these from such a large company, it really makes you realise exactly what these countries are losing every time a fresh batch of sanctions are imposed on Russia," said Alpari market analyst Craig Erlam.

At the individual UK equity level, Schroders ended the day as the heaviest faller in the FTSE 100, closing down 3.8%. The company's shares were knocked as concerns over the outlook of its assets under management trumped a hike in its dividend payout.

Schroders first-half pretax profit increased to GBP233.9 million, from GBP221.7 million, and the asset manager hiked its dividend payout by 50% to 24.0 pence per share. However, while the dividend rise was a positive surprise, analysts are less impressed by the outlook on asset flows. Group net inflows were GBP4.8 billion in the first half, which looks light when compared to Liberum Capital's full year forecast for GBP14.4 billion.

Weir Group, also closing down 3.8%, was the second biggest faller in the blue-chip index. The engineering company said its pretax profit declined 6% to GBP182 million, from GBP193 million last year. While this was in line with analysts' expectations and meant the company retained its guidance for the full year, it wasn't enough to impress investors, given challenging end markets and an expected continued hit from a strong pound.

Moreover, net debt of GBP751 million was higher than analysts' expected. Weir shares had risen by 25% year-to-date up until Thursday's announcement, putting them on an estimated 2015 price-to-earnings ratio of 17 times, and Liberum Capital said its valuation looked full.

Lloyds Banking Group, closing down 2.8%, was another heavy faller. The part-government-owned bank reported a 60% decline in pretax profit to GBP863.0 million in the first half of the year as it was hit by yet more provisions for previous mis-selling and the costs of spinning off TSB Banking Group.

It has now booked over GBP10.4 billion in provisions for mis-selling payment protection insurance after setting aside another GBP600 million in the half.

Excluding these items, pretax profit rose 32% to GBP3.82 billion due partly to a 58% reduction in impairment charges for things like bad loans, and its shares have risen. Lloyds reiterated that it will apply the Bank of England's Prudential Regulation Authority in the second-half to restart dividend payments.

At the other end of the spectrum, oil major Royal Dutch Shell saw its shares jump after it said its current cost of supplies based second-quarter earnings more than doubled in the second quarter, buoyed by USD7.4 billion in asset sale proceeds as well as higher liquids production volumes and prices.

Shell A and B shares closed up 2.8% and 2.7%, respectively, placing them at the top of the FTSE 100, as the figures beat market expectations.

Intu Properties, closing up 2.7%, was another big blue-chip riser. The shopping centre owner's shares jumped after it revealed that strong investment demand for prime shopping centres drove up property valuations, and it said the UK's economic recovery was encouraging retailers to let more space.

The company's net asset value per share rose to 372 pence on June 30, from 346 pence a year earlier, buoyed by a GBP573 million, or 44 pence a share, property valuation gain. That represented a 7.6% like-for-like valuation gain, ahead of the benchmark IPD monthly index, retail, which was up 3.5% on the year.

Telecommunications company BT Group ended the day up 0.2%. The group maintained its outlook for the full-year, as it saw pretax profit rise in its first quarter to the end of June on lower costs, despite seeing a decline in revenue. It posted a pretax profit of GBP546 million, up from GBP449 million, despite seeing revenue decline to GBP4.35 billion from GBP4.45 billion, as operating costs fell and it posted fewer exceptional charges. Revenue was hit by GBP71 million from the strength of sterling, and a GBP46 million reduction in transit revenue.

In the FTSE 250, Laird closed up 8%, making it the biggest riser in the mid-cap index. The electronics and technology company said it was on track to meet expectations for the full-year after posting upticks in revenue and profit in the first half, though its results were impacted by currency movements.

It said that pretax profit rose to GBP16.0 million from GBP10.2 million a year earlier, as revenue rose 4% to GBP252.6 million, from GBP243.5 million a year earlier, though this was offset by negative forex movements. Laird also said it would pay a dividend of 4.27 pence per share, up 4% from the 4.10 pence per share paid last year.

Afren, closing down 26%, was by far the heaviest faller in the FTSE 250. The oil and gas explorer and producer said that its board has suspended the chief executive and chief operating officer pending an investigation into alleged evidence of unauthorised payments that were potentially for the benefit of the executives.

It said that in the course of an independent review on the board's behalf by Willkie Farr & Gallagher (UK) LLP of the potential need for disclosure of certain previous transactions to the market, evidence had been identified of the receipt of unauthorised payments potentially for the benefit of CEO Osman Shahenshah and COO Shahid Ullah.

The company said Non-Executive Chairman Egbert Imomoh has agreed to become executive chairman, and the board has appointed Senior Independent Director Toby Hayward as interim CEO while the investigation continues.

Balfour Beatty and Carillion, closing down 5.9% and 5.4%, respectively, were two more mid-cap fallers. The two infrastructure and construction companies saw their shares fall after Balfour ended its merger talks with peer Carillion because Carillion suddenly demanded that Balfour halted its planned sale of US project management business Parsons Brinckerhoff.

In a tersely worded statement just a week after news of the potential GBP3.05 billion merger of the companies broke, Balfour accused Carillion of misleading it, saying the new demand was both unexpected and contrary to earlier agreements. It said it would continue with the sale of Parsons Brinckerhoff.

Carillion said it was surprised by Balfour Beatty's reaction. It said it had decided on Wednesday that it could only do a deal if Parsons Brinkerhoff was included because "it would be essential to retain the stability and dependability of Parsons Brinckerhoff's earnings".

In the forex market, the pound fell against both the euro and the dollar Thursday. At the UK equity market close, sterling trades at USD1.6888 and EUR1.2612.

In the data calendar Friday, China's NBS manufacturing purchasing managers' index and HSBC manufacturing PMI readings are released at 0200 BST and 0245 BST, respectively. Japan's Nomura/JMMA manufacturing PMI is released at 0235 BST.

The latest reading of Italian Markit manufacturing PMI is scheduled at 0845 BST, with the French equivalent at 0850 BST, the German reading at 0855 BST, and the figure for the wider eurozone area at 0900 BST. The UK Markit manufacturing PMI reading is due at 0930 BST.

In the US, employment data and the highly anticipated non-farm payrolls release are scheduled for 1330 BST. July's reading of Markit services PMI from the world's largest economy is scheduled for 1445 BST, ahead of the latest reading of ISM non-manufacturing PMI at 1500 BST.

Meanwhile, the Reuters/Michigan consumer sentiment index for July is released at 1455 BST.

In the corporate calendar, FTSE 100-listed Smith & Nephew, Rexam and IMI are joined by FTSE 250-listed Direct Line Insurance Group, Capital & Counties Properties, UBM, Man Group, Vesuvius, William Hill, and Rentokil Initial in releasing half-year results Friday.

Royal Bank of Scotland Group is scheduled to publish its finalised half-year results after it surprised the market by publishing preliminary results a week last Friday.

By James Kemp; jameskemp@alliancenews.com; @jamespkemp

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