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LONDON (Alliance News) - UK equity markets opened in a positive mood Tuesday and held on to gains while digesting a busy morning of corporate earnings, only to be sold off on the release of updated growth forecasts from the European Commission.
The latest growth forecasts from the Commission say that the eurozone economy will shrink by 0.4% in 2013, unchanged from its previous estimate. It predicted growth of 1.1% in 2014, compared to a previous forecast of 1.2%. The forecasts also noted that only "very modest" labor market improvements can be expected in the eurozone by 2015.
Shortly after the Commission forecasts, the EU producer price index has come in at up 0.1% month-on-month for September, up from flat in August but lower than the expected reading of up 0.2%. The year-on-year number was down 0.9%, versus down 0.8% in August and worse than the down 0.7% expected.
The further evidence of deflationary pressure will add to that of the EU CPI numbers released last week, which showed a slowdown in price growth to 0.7% in October from 1.1% in September, and fuel speculation of an ECB rate cut ahead of its policy meeting later this week.
"As a summary, we have jobless up and growth lower which feeds into reinforcing rate cut talk", says CMC Chief Senior Strategist Michael Hewson.
UK equities took a tumble on release of the mid-morning forecasts and inflation numbers. The FTSE 100 is now down 0.5% at 6,733.05, the FTSE 250 is down 0.6% at 15377.22, and the AIM all share is down 0.1% at 810.60.
European markets also sold off on the release of the numbers. The DAX is now down 0.4% and the CAC40 is down 0.5%.
"Quite frankly, I think people are looking at the fact that European markets are near 5 year highs, the prospect of further stimulus, and then looking at earnings and thinking where?s the next growth phase going to come from", says CMC's Hewson.
British service sector activity expanded at the fastest pace in more than sixteen years in October, the Markit Economics and the Chartered Institute of Purchasing & Supply (CIPS) survey revealed. The index rose to 62.5 in October from September's 60.3, beating economist expectations of 59.8. The October reading represented the sharpest rise in activity since May 1997. "This has largely been the result of rising levels of incoming new business placed with service providers as market sentiment has improved in line with a strengthened economic climate," Markit said.
"Overall, this is a strong number from the UK, which suggests the recovery has not only been sustained at a high level but is also gaining momentum. This has defied some analyst fears that the UK economy would cool off, and hence why the market could reconsider the prospects for the pound", says Forex.com research director Kathleen Brooks.
The release of the UK data and EC forecasts spurred the most volatility seen so far this week in the forex markets. The pound has jumped about 0.6% against the dollar to a high of USD1.6058. The pound has gained against the euro which continues to struggle on rate cut fears. Against the pound the euro trades at GBP0.8410.
Within UK equities, metal and mining stocks are leading the sector gains for the second day on the back of continued positive PMI data from China. The FTSE 350 industrial metals sector is us 1.8% and the mining sector is up 1.6%.
Marks & Spencer lead the individual blue chip gainers after the high street retailer released interim results that showed strong growth in its online sales, although profits were flat overall. M&S shares are up 3.3%.
By Jon Darby; jondarby@alliancenews.com; @jondarby100
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