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LONDON (Alliance News) - UK equities indices have closed higher Monday, buoyed in general by positive economic readings and the possibility of monetary policy loosening by the ECB, and driven specifically by mining and financial stocks.
The FTSE 100 has closed up 0.4% at 6,763.62, the FTSE 250 has closed up 0.3% at 15,503.06 and the AIM All-Share has closed up 0.2% at 812.91.
Strong Chinese service sector growth numbers overnight kicked European equities off to a positive start. The Markit manufacturing PMI hit a 14-month high in October, rising to 56.3, up from 55.4 in September.
In the UK, construction output grew at the steepest pace since September 2007, survey results from Markit Economics and the Chartered Institute of Purchasing & Supply showed Monday. Construction PMI came in at 59.4 in October, up from 58.9 in September and above the 58.8 reading expected by economists. "The future is looking bright for the UK construction industry as it soars into the final quarter with its strongest performance in over six years, boosted by a strengthening surge in activity broadening out across all sectors," CIPS Chief Executive Officer David Noble said.
The latest economic forecast from the Confederation of British Industry showed that the economy would expand 1.4% this year, faster than 1.2% the business lobby had predicted in August. The upward revision mainly reflects the third quarter's better-than expected GDP growth and improving sentiment across the major business sectors. However the CBI also expressed concern over the UK's dwindling influence over EU rulings. "We are better off in a reformed EU than outside with no influence. Each year, membership is worth GBP3,000 to every household in this country," said CBI Director General John Gridland.
Speculation continues to grow that the European Central Bank will make a change to monetary policy at its Thursday meeting. The ECB has a mandate to maintain price stability, and numbers released last week that showed a fall in the eurozone Consumer Price Index to 0.7% in October, from 1.1% in September, have led to an expectation that the bank will need to act quickly to maintain that stability. "The ECB meeting later this week will now be more closely watched than ever," says IG market commentator Brenda Kelly.
Many investment banks are now predicting a rate cut by the central bank from 0.5% to 0.25%, to ease deflationary pressures. Given the two speed European economy, as evidenced further by this mornings manufacturing PMI data, the debate against a cut is that rates are already too low for Germany. Numbers from the morning showed growth in the manufacturing industry of France and Italy slowed more than expected while this sector continues to grow in line with expectations in Germany.
As traders also continue to speculate on when the Fed will begin to taper, analysts are looking at the issue from every angle. Once Obama's choice of incoming Chair, Janet Yellen, has been approved by the Senate, which could be later this month or in early December, "it is reasonable to expect Bernanke to resign," say strategists at Brown Brothers Harrimen, who state that it is in no one's interest to have two chairs. They also note that it seemed unlikely that Bernanke would taper at his last meeting, effectively tying Yellen's hands before she has started in the job. This, speculates BBH, would mean that Yellen could chair the late January 2014 FOMC meeting that is widely expected to be Bernanke's last. This in turn would mean that Yellen can get her feet under the table and wait until her second meeting to begin to taper in line with when most, including BBH, are now expecting.
Another possibility of course could be that Yellen takes the earliest opportunity possible to taper, but the point here is that markets, traders and analysts alike are fascinated by when tapering will eventually begin and at this point seem happy to continue to push equities higher until the moment it does.
Within the UK equity sectors, industrial metals and miners were the biggest gainers, up 4.1% and 2.1%, respectively, buoyed by the strong Chinese economic data overnight. Fresnillo and Rio Tinto ended the day as the biggest blue chip gainers, up 3.8% and 3.3%, respectively.
The banking sector was also driven higher by positive results from HSBC. The bank's shares closed up 2.4% after it reported a 3.5% rise in third quarter revenue, by far the best performance by the UK majors. Its underlying profit, which strips out debt movements, acquisitions and disposals and forex moves, rose to USD5.06 billion, from USD4.60 billion as it stripped out more costs and its UK and Hong Kong operations performed well.
It has joined the growing list of those being probed by regulators as part of their investigations into forex trading, although it hasn't suspended any traders because those named have already left the bank.
Analysts said they were particularly encouraged by the bank's outlook statement. HSBC said it was optimistic thanks to a broadening economic recovery, with the UK set to outperform Europe, the US recovery to continue, albeit at slower rates than historically, and signs of stabilisation in China which bodes well for its Hong Kong business.
Airlines hit some turbulence however after Ryanair issues its second profit warning in as many months, on the back of continues fare pressures. The revised full-year profit expectation is between EUR500 and EUR520 million, with the Irish carrier saying it expects fares to be down 9% in its fiscal third quarter and by up to 10% in the fourth quarter. Ryanair closed down more than 12%, wiping some EUR40 million from Michael O'Leary's company value.
The read across to London listed airline stocks saw easyJet close down 4.1% and International Consolidated Airlines close down 1.6%. Thomas Cook was the biggest faller in the FTSE 250, down 2.9%.
There were relatively small movements in the forex market Monday, in another sign of the overall market focus on Central Bank action still to come later in the week. The pound and the euro both managed to regain a small amount of ground against the dollar. The euro spent most of the day hovering not far above USD1.35, currently USD1.3515, while the pound at USD1.5950.
A busy day ahead in the earnings calendar sees full year results from Imperial Tobacco, as well as interims from Legal and General and Marks and Spencer and G4S.
Overnight data will likely provide the early driver for equities on Tuesday. Retail sales data from the British Retail Consortium will be released before market open, as will the HSBC China services PMI.
In the calendar for later in the morning, the UK Markit services PMI at 0928 GMT, the European Commission economic growth forecasts and EU producer price index at 1000 GMT, and the US redbook of retail sales at 1255 GMT.
Overall market focus is likely to remain further into the week, on the BoE and ECB meetings on Thursday and the October non-farm numbers from the US on Friday.
By Jon Darby; jondarby@alliancenews.com; @jondarby100
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