Johnson Matthey Share News (JMAT)

LONDON (Alliance News) - UK stocks closed mixed Wednesday, with the FTSE 100 at its lowest closing level in over a week, as investors continued to exercise caution ahead of Thursday's central bank meetings and Friday's monthly US jobs report.

The listed UK supermarkets were among the heaviest fallers in the FTSE 100 after Tesco reported a sharp drop in sales in the first quarter of its new financial year. It blamed deep price cuts across the business and the acceleration of its store refit programme, and also warned of more UK sales declines in coming quarters.

The UK's biggest retailer posted a 3.3% like-for-like decline in sales including petrol for the quarter ended May 24, and a 3.2% fall excluding petrol. It was hardest hit in the UK, where like-for-like sales were down 3.8% including petrol, and 3.7% excluding petrol. It was the third consecutive quarterly decline in UK like-for-like sales excluding petrol.

"Tesco's first quarter trading update was widely expected to be poor, the worst update from the company in a generation, and so it has turned out to be, following on from recent worrying market share data, which revealed another sharp contraction year-on-year," said Shore Capital analyst Clive Black, referring to disappointing market share data released by Kantar Worldpanel on Tuesday.

"Philip Clarke's stewardship does not appear to be going according to plan, boosting calls for his departure," said Alastair McCraig, a market analyst at IG. However, "the supertanker that is Tesco takes a long time to turn around, and patience may be rewarded," he added.

Tesco's shares closed down 1.0%, while J Sainsbury, which reports its own first-quarter numbers next week, closed down 1.9%, and Wm Morrison Supermarkets closed down 0.3%. The FTSE 350 food and drug retailer sector index ended the day down 1.1%.

The FTSE 100 closed down 0.3% at 6,818.63, its lowest closing level since May 23, while the FTSE 250 closed up 0.1% at 15,986.47. The AIM All-Share index closed up 0.5% at 812.31.

It was a similar story in Europe, where the CAC 40 in Paris closed fractionally lower, while the DAX 30 in Frankfurt closed fractionally higher.

At the UK equity market close, the DJIA is marginally higher, the NASDAQ Composite is up 0.4%, and the S&P 500 is up 0.2%.

"Markets have become increasingly cautious as the week has progressed," said Richard Perry, a market analyst at Hantec Markets. "This is in front of what could be a potentially profound ECB monetary policy meeting and not forgetting non-farm payrolls."

Wednesday's ADP employment change report, normally seen as a warm-up for the monthly non-farm payrolls on Friday, showed that private sector jobs growth slowed in May.

It showed that US private sector employment rose by 179,000 jobs in May following a downwardly revised increase of 215,000 jobs in April. Economists had been expecting an increase of about 210,000 jobs compared to the addition of 220,000 jobs originally reported for the previous month.

"The correlations between the two measures (ADP employment report and non-farm payrolls) is arguable, with many seeing the link as being tenuous at most," said Joshua Mahony, a research analyst at Alpari. "However, given the willingness of the Fed to examine all employment data, this is a major release nonetheless," he added.

US jobless claims data are released at 1330 BST Thursday.

The highly anticipated European Central Bank policy decision is due at 1245 BST Thursday, and bank President Mario Draghi gives a press conference at 1330 BST. The consensus is that the central bank's base interest rate will be cut to 0.1%, from its current all-time low of 0.25%, as the bank tries again to fend off the threat of deflation and put a rocket under the currency zone's tepid recovery.

“The ECB can't sit back and wait any more, its hand has been forced,” said UFXMarkets' managing director Dennis de Jong, after disappointing eurozone consumer price inflation data on Tuesday. “We are now in a situation where people are expecting a further cut in interest rates on Thursday, as well as the introduction of negative deposit rate for banks. That tells you just how bad things have become,” he added.

At the individual UK equity level, and away from food retailers, Smith & Nephew was one of the biggest blue-chip risers Wednesday, but, in the absence of any firm takeover offer, Berenberg expects the stock to drift in the near future.

The company's shares closed up 3.3%, meaning that they have jumped more than 10% in the past week after the Financial Times published an article last Wednesday that suggested that Stryker Corp was about to make an unquantified takeover bid for the company, even though the US maker of hip implants and knee replacements quickly denied the rumours.

"An offer for Smith & Nephew by Stryker would make both strategic and financial sense at up to, and possibly exceeding, GBP12 per share," said Tom Jones, an analyst at Berenberg. However, given the "notable anti-trust" concerns, "we do not expect any bid in the near term," Jones added.

Smith & Nephew's share price now includes a modest "bid premium", and, in the absence of a bid, the analyst expects this premium to gradually erode over the next six months and for share price to move lower.

RPC Group ended the day as one of the biggest winners in the FTSE 250, closing up 4.1%. The rigid-plastic packaging supplier reported a 22% increase in its full-year pretax profit, boosted by its acquisitions of M&H Plastics and Helioplast.

Workspace Group, closing up 4.2%, was another big mid-cap riser after it said its pretax profit for the year to end-March rose to GBP252.5 million, from GBP76.4 million in the previous year, as it reported a rent-roll and property portfolio valuation increase. Net asset value rose 43% over the year to 496 pence, from 348 pence, and it raised its total dividend to 10.63 pence, from 9.67 pence.

Liberum Capital called the level of growth "outstanding," beating the broker's forecast by 6%. Workspace picked up significant momentum in the second half of the year, meaning it's "only now hitting its late-cycle sweet spot," said analyst Michael Burt.

FTSE 100-listed National Grid and WPP were joined by FTSE 250-listed Evraz, Debenhams, and Laird, amongst others, in going ex-dividend Wednesday. The five companies were among the biggest fallers in their respective indices, with National Grid closing down 5.4%, WPP closing down 2.1%, Evraz closing down 7.1%, Debenhams closing down 3.1%, and Laird closing down 2.6%.

Meanwhile, following the completion of its quarterly index review, FTSE has confirmed that William Hill and Melrose Industries have been relegated from the FTSE 100, with 3i Group and Intu Properties replacing them. The changes will take effect from the market open on June 23.

The FTSE 250 changes were dominated by recent new listings, with Pets At Home, AO World, Just Eat, Poundland, BRIT, and Kennedy Wilson Europe Real Estate all entering the index after their recent initial public offerings. 888 Holdings and KCOM were among those demoted from the mid-cap index. Saga, the biggest IPO in London so far in 2014, listed too late to be considered in this review.

In the forex market Wednesday, the pound edged higher against its major rivals in early trade following the release of the UK service sector PMI from Markit, and pushed higher as the day wore on.

The PMI reading came in at 58.6 in May, fractionally lower that the recent high recorded in April at 58.7, but exceeding economists' expectations for a print of 58.2.

"The UK economic engine keeps running red hot," said Bernenberg senior economist Christian Schulz. "Services and construction PMIs may have fallen a bit below their peaks in recent months, but the speed of the economic recovery remains very impressive."

At the close of the UK equity market, sterling trades at USD1.6744, EUR1.2293, and JPY171.959.

Also in the data calendar Thursday, the HSBC China services purchasing managers' index for May is due at 0245 BST. French unemployment data are released at 0630 BST, shortly before German retail sales information at 0700 BST and eurozone retail sales data at 1000 BST.

The Bank of England interest rate decision is due at 1200 BST, with a consensus expectation of no change to policy at this stage.

In the corporate calendar, FTSE-100 listed Johnson Matthey releases full-year results Thursday, while FTSE 250-listed Bellway provides a trading update. AO World also reports its maiden full-year results as a listed company, while blue-chip airline easyJet releases traffic statistics for May.

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

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