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(Alliance News) - Stocks in London were lower at midday on Friday as intensifying US-China tensions and stalled stimulus talks in Washington fuelled fears about the economic recovery.
China revoked the license for the US consulate in the southwestern city of Chengdu, in retaliation for the closure of China's Houston consulate earlier this week. The tit-for-tat move is a "legitimate and necessary response to the unreasonable measures by the US", the Chinese foreign ministry said in a statement.
US Secretary of State Mike Pompeo had said on Thursday that the Chinese consulate in Houston was a centre for espionage and operations to illegally obtain US companies' trade secrets.
In addition, the US Department of Labor on Thursday reported that 1.4 million people applied for jobless benefits last week, the first week-over-week increase in initial jobless claims since the early days of the coronavirus crisis this spring.
Meanwhile, Republicans have been struggling to come up with an economic stimulus bill to counter a USD3.5 trillion Democrat proposal, fanning concerns they will not pass a measure ahead of their August break.
The FTSE 100 index was down 111.30 points, or 1.3%, at 6,100.14. The flagship index is on track to end the week down 1.5%.
The mid-cap FTSE 250 index was 183.99 points, or 1.1%, lower at 17,303.09. The AIM All-Share index was down 6.39 points, 0.7%, at 884.11.
The Cboe UK 100 index was down 1.3% at 613.54. The Cboe 250 was down 0.8% at 14,725.54, and the Cboe Small Companies index was down 0.% at 9,175.06.
In mainland Europe, the CAC 40 in Paris was down 1.2%, while the DAX 30 in Frankfurt was 1.5% lower.
"Stock markets are showing large losses today as tensions between the US and China have risen. It was confirmed the Beijing administration ordered the US consulate in Chengdu to close. The move is a retaliation for the US's decision to close the Chinese consulate in Houston during the week. Chinese stocks incurred heavy losses overnight on account of the strained political relationship, and the sour sentiment has spilled over to Europe. Traders are fearful this could be the beginning of a tit-for-tat spat between the two largest economies in the world," said ÇMC Markets analyst David Madden.
On the London Stock Exchange, Ferguson was the best blue-chip performer, up 2.0% after the plumbing and heating products supplier said trading has improved steadily since April.
Ferguson said revenue from continuing operations shrank by 3.6% year-on-year in the quarter, starting May 1 and ending July 21, compared a decline of 15% in April alone. Revenue in the third-quarter to April 30 had increased by 0.9%, having only partially covered the pandemic period.
The US market did the best in the third-quarter, with revenue only declining 0.6%, owing to the quick easing of lockdown there now being partially reversed. Revenue trends have improved in both Canada and the UK as widespread lockdown restrictions have started to be eased, Ferguson said.
In the UK, recent revenue trends have been more encouraging as lockdown measures have been eased, the company said.
At the other end of the large caps, M&G was worst performer down 4.4% after Barclays downgraded the fund manager to Underweight from Equal Weight.
Vodafone Group was down 4.2%. The telecommunications firm said revenue growth in the first quarter of its financial 2021 was hurt by the Covid-19 crisis, driven by lower revenue from roaming and visitors, project delays and lower prepaid revenue in some smaller markets. Vodafone said, in the first quarter ended June 30, total revenue slipped 1.4% to EUR10.51 billion from EUR10.65 billion a year ago and was down 2.8% on an organic basis. However, service revenue rose 1.3% to EUR9.11 billion from EUR8.99 billion, though was down 1.3% on an organic basis.
"Trading has struggled a little under Covid-19, mainly because we've not been going on holiday and paying roaming charges so much. This is the sort of impact that should unwind once people start taking trips again. It could be some time before roaming revenue fully recovers, especially if we face a sustained recession, but in the long run we're not overly concerned," said Hargreaves Lansdown analyst William Ryder.
Pearson was down 4.0% after the education publisher said the first-half sales were hurt by test centre and school closures due to the Covid-19 pandemic. Pearson's sales for the six months to June 30, decreased by 18% to GBP1.49 billion from GBP1.83 billion, with portfolio adjustments reducing sales by GBP53 million and currency movements increasing revenue by GBP25 million. Covid-19 impacted sales by GBP260 million in the first half.
Adjusted operating profit - the company's preferred profit measure - declined to a loss of GBP23 million from GBP144 million, with a profit impact of GBP140 million from Covid-19 trading pressures after cost mitigations.
"The current crisis could end up being make or break for Pearson - if it can get customers to shift online and stick with it then all the pain of the last few years will have been worth it, if not the group risks becoming a lesson in how not to handle the looming digital revolution," said Hargreaves Lansdown analyst Nick Hyett.
In the FTSE 250, Centrica was best performer, up 16% after the British Gas parent said it will sell its North American business Direct Energy for USD3.63 billion to Houston, Texas-based energy company NRG Energy on a debt free, cash free basis.
The disposal increases the long-term strength of its balance sheet, Centrica said, with proceeds intended to be used to reduce net debt significantly and to make a contribution to the defined benefit pension schemes.
The sale is also expected to result in a more stable financial profile for Centrica, with an increased proportion of its cash flows generated from contracted services, and removal of volatility that is inherent within Direct Energy business, the company added.
Separately, Centrica said it delivered a resilient first half performance overall against the backdrop of the Covid-19 pandemic. For the six months to June 30, the company's revenue fell to GBP10.70 billion from GBP11.57 billion last year and its pretax loss narrowed to GBP264 million from GBP569 million.
The pound was quoted at USD1.2738 at midday, soft from USD1.2752 at the London equities close on Thursday.
Sterling staged a mild recovery from early lows of USD1.2715 against the greenback following upbeat UK economic data releases.
UK private sector output growth hit a five-year high in July as the reopening of the domestic economy gathers momentum, IHS Markit said.
The flash UK manufacturing purchasing managers' index reading was 53.6 in July, rising from 50.1 in June. The July score was higher than the market forecast of 52.0.
The UK flash UK services business activity index was 56.6 in July, up from 47.1 in June. The print was back above the 50.0 mark which separates expansion from contraction. The July reading was the highest in five years and comfortably beat market expectations of 51.1.
In addition, the flash UK composite output index was 57.1 in July, up from 47.7 in June - the July score was also a five-year high.
However, some analysts were quick to point out that PMI data was not the best indicator if one wanted to gauge the true strength of the UK economic recovery.
Analysts at ING explained: "The general point is that, while PMIs are usually the gold-standard when it comes to nowcasting growth in normal times, they aren't all-that-helpful at economic turning points.
"Like other survey-based data, they are calculated by netting out the number of businesses saying conditions are improving against those that say they are worsening. So what these latest PMI numbers tell us is that on balance, a higher proportion of firms are seeing things getting better - but it doesn't tell us much about the magnitude of that improvement."
Elsewhere, UK retail sales were recovering in June as lockdown measures eased following the sharp falls experienced since the start of the coronavirus crisis, the Office for National Statistics said.
UK retail sales were down 1.6% in June on an annual basis, having decreased 13% in May. Market consensus, according to FXStreet, was for a 6.4% annual decline. On a monthly basis, UK retail sales were up 14% in June, having jumped 12% in May. The reading easily beat market consensus for an 8.0% rise.
The euro stood at USD1.1600 at midday in London, flat from USD1.1597 at the European equities close, in the wake of the EU's massive stimulus agreement earlier this week.
On the economic front, business activity across the eurozone rose for the first time since February, according to the latest data from IHS Markit.
The flash Eurozone purchasing managers' composite output index set a 25-month high of 54.8 in July, up from 48.5 in June. Both manufacturing and services returned to growth with index scores above 50. The rise in service sector output was the first since February, while the increase in factory production was the first reported since January 2019.
The flash Eurozone services PMI activity index read 55.1 in July compared to 48.3 in June. The manufacturing PMI was at 51.1, up from 47.4 in June. The flash Eurozone manufacturing PMI output index stood at 54.0 in July compared to 48.9 in June.
In addition, the flash Germany PMI composite output index rose in July to 55.5 compared to 47.0 recorded in June, reaching a 23-month high.
"The recovery in economic activity along with agreement on the EU stimulus package should serve as a good catalyst for growth into the year-end and it is not inconceivable to imagine that EU growth could exceed US growth for the first time in years. All of which should continue to compress the interest rate differentials between US and EU yields and provide a tailwind to the EURUSD rally with longer-term bulls now eyeing the 1.2000 level as the year proceeds," noted analysts at BK Asset Management.
Against the yen, the dollar was trading at JPY106.31 in London, down from JPY106.91 late Thursday.
Brent oil was trading at USD43.75 a barrel at midday, down from USD44.02 at the London equities close Thursday.
Gold was priced at USD1,889.57 an ounce at midday, lower against USD1,894.10 late Thursday. The precious metal has risen 5.0% over the past week alone.
Stocks in New York look set to open lower as tensions between the US and China reached new highs, while the coronavirus pandemic continues to rage across the country.
The DJIA was called down 0.1%, the S&P 500 index down 0.1% and the Nasdaq Composite down 0.6%.
Ahead in the US earnings calendar, credit card company American Express is slated to report second-quarter results.
By Arvind Bhunjun; arvindbhunjun@alliancenews.com
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