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LONDON (Alliance News) - Stocks in London ended lower Tuesday, with banking stocks among the biggest decliners, but Direct Line Insurance Group defied the trend after saying it harbours only limited worries about Brexit, as it delivered operating profit well ahead of consensus estimates.

Shares in Direct Line rose 13%, by far the best performer in the FTSE 100. The home and motor insurer said it was well-prepared ahead of the UK's referendum on European Union membership, and the immediate volatility which followed the vote was actively managed, with no operational impact felt by the business.

Chief Financial Officer John Reizenstein, speaking to journalists on Tuesday, said the UK leaving the European Union "isn't that important" to Direct Line and the group is "not too worried from a top-line perspective".

Direct Line reported operating profit for the half-year to the end of June of GBP323.6 million, a huge beat against company-compiled consensus of GBP263.0 million. The group declared a special dividend of 10.0 pence per share, in addition to an interim dividend of 4.9p per share, up from 4.6p a year before. Shore said the special payout was ahead of the 6.0p expected.

The FTSE 100 ended down 0.7%, or 48.55 points, at 6,645.40. The FTSE 250 fell 0.4%, or 76.20 points, at 17,063.01, and the AIM All-Share fell 0.1%, or 0.53 point, at 758.03.

Other general insurers also appeared to benefit from Direct Line's results Tuesday, with blue-chip rival Admiral Group up 2.9%, and RSA Insurance Group up 0.7%.

London-listed lenders ended firmly in the red, with the FTSE 350 Banks Sector index down 1.5%, after a better-than-feared reading on the health of the UK construction sector wasn't quite good enough to dissipate expectations of an interest rate cut by the Bank of England on Thursday. Lower interest rates put pressure on banks' margins.

The UK construction sector contracted in July, albeit less than expected, according to survey results published by Markit. The Markit/Chartered Institute of Procurement & Supply Purchasing Managers' Index dropped to 45.9 in July from 46.0 in June. However, it had been forecast to fall as far as to 43.8. A reading below 50.0 reflects contraction in the sector.

Tim Moore, senior economist at Markit, said the July survey is the first construction PMI compiled entirely after the EU referendum result. Moore said "the figures confirm a clear loss of momentum since the second quarter of 2016, led by a steep and accelerated decline in commercial building".

The better-than-expected PMI score supported the pound. Sterling was quoted at USD1.3199 prior to the 0930 BST data release but stood at USD1.3314 at the European equities close. At the same time Monday the pound was at USD1.3202.

Following a disappointing manufacturing PMI on Monday, economists believe these data open the way for the Bank of England to ease monetary policy on Thursday. The Monetary Policy Committee is widely expected to cut interest rates to 0.25% from the current record low of 0.50%, and some analysts are looking for a more chunky package of measures, including an expansion in the central bank's quantitative easing programme.

The BoE will release its monetary policy decision and the minutes of the meeting at noon on Thursday, alongside the August Inflation Report. After that, Governor Mark Carney will speak at 1230 BST.

Ahead of the BoE meeting, the Reserve Bank of Australia lowered its key interest rate for the first time in three months. The board of the RBA, governed by Glenn Stevens, reduced the cash rate to 1.50% from 1.75%. The decision was in line with expectations. The bank last cut its interest rate by 25 basis points in May, which was the first reduction in a year.

Banking stocks also were hit by the UK Financial Conduct Authority's proposed deadline of June 2019 for consumers to make payment protection insurance claims. The date was later than banks had been anticipating and could result in lenders having to book more provisions.

Gary Greenwood, an analyst at Shore Capital, noted Lloyds has made provisions to cover PPI compensation until mid-2018, so the deadline indicates it may have to book another year worth of provisions.

Elsewhere among stocks, Intertek Group shares fell 2.0% after the testing, inspection and certification services provider was cut to Sell from Hold by Societe Generale. Similarly, Johnson Matthey dropped 3.3% after Berenberg downgraded the platinum and chemicals company to Hold from Buy.

In the FTSE 250, BBA Aviation shares rose 8.9%, by far the mid-cap biggest gainer. The aviation services company booked a substantial volume of impairment charges which sent it swinging to a pretax loss, but said its Signature flight support business continued to perform well and offset ongoing problems in its Aftermarket Services arm.

At the other end of the index, Rotork fell 7.9% after the actuators manufacturer reported lower pretax profit for the first half of 2016 due to restructuring costs booked as the company works through tough end-market conditions in the oil and gas sector.

In mainland Europe, the CAC 40 index in Paris and the DAX 30 in Frankfurt both dropped 1.8%. The euro was quoted at USD1.1225 at the European equities close, compared to USD1.1175 on Monday.

Brent oil was at USD41.70 a barrel at the equities close Tuesday against USD42.16 on Monday. Meanwhile, Gold stood at USD1,366.31 an ounce, compared to USD1,350.50 an ounce on Monday. The precious metal's price jumped following a decline in the dollar after US personal spending and personal income data painted a more stable picture of the US economy.

This could open the door for a lift to US interest rates by the Federal Reserve later in the year. Following its Federal Open Market Committee meeting last month, the Fed opened the possibility of a rate hike in September, noting that "near-term risks to the economic outlook have diminished".

Stocks in New York were lower at the European equities close, with the Dow 30 down 0.6%, the S&P 500 down 0.9%, and the Nasdaq Composite down 1.1%.

In the corporate calendar Wednesday, China's Caixin services PMI is at 0245 BST. There are also Markit services PMI readings for France, Germany, the eurozone and the UK at 0850 BST, 0855 BST, 0900 BST and 0930 BST, respectively. The same for the US is at 1445 BST, after US mortgage applications at 1200 BST.

The Bank of Japan releases the minutes of its monetary policy meeting of June 15 at 0050 BST.

Highlights in the UK corporate calendar are a trading statement from retailer Next, while miner Rio Tinto, and price comparison service Moneysupermarket.com Group release half-year results. Lenders HSBC Holdings and Standard Chartered publish interims at 0500 BST and 1000 BST, respectively.

By Daniel Ruiz; danielruiz@alliancenews.com

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