Taylor Wimpey Share News (TW.)

LONDON (Alliance News) - The FTSE 100 lost ground Tuesday, snapping a five day winning streak as investors returned from a long weekend, over which the conflict in Ukraine continued to escalate, to some disappointing corporate news from the likes of Barclays and Balfour Beatty.

The FTSE 100 has closed down 0.4% at 6,792.35, the FTSE 250 closed marginally higher 0.05% at 15,938.69, and the AIM All-Share has closed down 0.5% at 821.06.

Within major European equity markets, the French CAC 40 closed down 0.6%, while the German DAX closed down 0.6%.

Hope for a diplomatic solution to the conflict in Ukraine took a further knock on Tuesday as Russia said that any further talks on Ukraine need to include representatives of the insurgents fighting government troops in the country's east, a demand that was rejected by the government in Kiev. Ukrainian Foreign Minister Andrii Deshchytsia rejected Lavrov's demand. "I, as the Ukrainian legitimate government do represent all the regions in the Ukraine," he told a separate briefing.

The first round of Geneva based crisis talks of April 17 resulted in an agreement that called for the pro-Russian activist to vacate occupied buildings. However, since then the situation has only deteriorated, with more buildings occupied, hostages taken, and the death toll slowly rising. The situation remains volatile and of continued market concern.

The pound rallied to its highest level since August 2009 against the dollar Tuesday, peaking at USD1.6996 in afternoon trade following a stronger-than-expected Markit UK services PMI, and ahead of the next Bank of England policy decision on Thursday.

The PMI rose to 58.7 in April, up from 57.6 in March, beating the unchanged reading that economists had been expecting and marking a high for the year so far.

Berenberg Bank notes that the UK composite PMI, at 59.2, is comfortably above the first quarter average of 58.2. "Another very strong quarter is on the way in the UK," says the bank's chief UK economist Rob Wood. Berenberg currently expects the first interest rate rise in the first quarter of 2015, with a 35% chance of a rate rise this year, although "if the data remain as strong as now, that probability will rise," says Wood.

With UK unemployment now at 6.9%, below the Bank of England's original forward guidance threshold of 7.0%, monetary policy committee members are now free to vote for a rate hike without having to cite one of the "knock out" clauses in relation to stability risk. While very few will be expecting any of the nine members to vote for a rate rise at this week's meeting, the strength of the pound is one indication that the market believes the first dissenting vote may not be far off.

Indeed, the Markit services PMI report notes that companies kept on top of increasing workloads in April by "adding to their payroll numbers, reflective in part of sustained confidence in the economic outlook." This would appear to suggest that the "spare capacity" now being targeted by the Bank of England is being used up very quickly.

The pound pushed solidly higher throughout the session. Although it has failed so far to break above USD1.70, the pound was boosted against the dollar both by the strong UK data and by some weaker-than expected US data. The US trade deficit narrowed to slightly less than expected in March, reaching USD40.38 billion from USD41.87 billion in the previous month, while an economic optimism index from the Investors Business Daily slipped to 45.8 in May, down from 48.0 in April and missing the expectation for a reading of 47.6.

The euro also rose against the dollar Tuesday, reaching a six week high of USD1.3951, on the back of some broadly positive European data, which makes any further policy loosening by the European Central Bank at it's own policy meeting Thursday all the less likely.

A round of European Markit service sector PMI's came in broadly at, or better than, expected levels, with the exception of Germany, which recorded a print of 54.7 in April, up from 53.0 in February, but slightly missing the expectation of 55.0.

The eurozone wide services PMI rose to 53.1 in April from 52.2 in March, in line with expectations, while the composite PMI in the single currency region rose to 54.0 in April from 53.1 in February, also as expected.

Eurozone retail sales grew at 0.3% month-on-month in March, expanding from the 0.1% growth in February and beating economists expectations for a 0.2% fall in sales. On an annual basis, retail sales are growing at 0.9%, slightly slower than the 1.0% annual growth recorded in February.

Within UK equity movers Tuesday, Barclays ended as the heaviest blue chip faller, down 5.1% after reporting a drop in its first-quarter pretax profits as it was hit by a continued slump in the performance of its investment bank, where income was down by 28%. Investors are awaiting a strategic update from the bank that has been scheduled for Thursday morning. Barclays are widely expected to announce big cuts to the struggling investment bank.

AstraZeneca closed down 2.7% after setting out its defence against a GBP63 billion takeover offer from US rival Pfizer Inc, urging its investors to be patient because it is set to grow quickly once it has invested in its pipeline and transformed the company over the next three years.

AstraZeneca said it will accelerate the development of key developmental drugs it has in phase II and phase III trials, as it set out why it should remain independent. The UK drug maker Friday rejected Pfizer's latest approach because it would "dramatically dilute AstraZeneca shareholders' exposure to our unique pipeline and would create risks around its delivery."

Aberdeen Asset Management closed down 2.6% after saying its pretax profit fell by more than 10% in its first-half compared to a year earlier. Aberdeen, which completed the acquisition of Scottish Widows Investment Partnership from Lloyds at the end of the second quarter, has been struggling this year amid concerns over emerging market growth, leading to the outflow of funds. The emerging market-focused asset manager reported a further GBP8.8 billion net outflow over the six month period.

Balfour Beatty was the single biggest mover by far in the FTSE 250 index, closing down 20%. The infrastructure group said it expects a GBP30 million shortfall for its UK business this year as structural reorganisation changes take effect at a "slower pace" than expected, leading to pretax profit guidance to be revised significantly lower to between GBP145 million to GBP160 million. The group also announced that Chief Executive Andrew McNaughton has stepped down with immediate effect. Given that the executive departure has happened very quickly, and the search for a successor has not begun yet, "the risk is that this business, which is a people business, could unravel," said Liberum Capital analyst Joe Brent.

On the way up Tuesday, Persimmon led the housebuilders higher, closing up 3.8% after Barclays published a positive report on the sector that was particularly flattering for the York-based company, raising its price target by 15%. Barclays said that Persimmon, which has very little exposure to the London market has the most to gain from the recent extension of the Help to Buy scheme.

Fellow FTSE 100 listed Barratt Developments gained 2.2% Tuesday, while in the FTSE 250, Bellway gained 2.3% and Taylor Wimpey gained 1.8%.

The supermarkets will be back in focus Wednesday as Sainsbury's releases its preliminary full-year results. Ahead of the numbers, Sainsbury was a big blue chip gainer Tuesday, rising 3.8%, with analysts suggesting higher profits are to be expected for the groups last financial year under departing Chief Executive Justin King.

Data company Experian also releases full-year numbers, while interim results are due from FTSE 100 listed Imperial Tobacco Group, as well as AIM Listed GW Pharmaceuticals. Interim managements statements are due from HSBC, BAE Systems, Carillion, Meggit, Legal & General, esure, and Rightmove. The latest travel statistics are also due from easyJet.

The HSBC China Services PMI for April is due overnight. With the March print at 51.9, this particular index has managed not to slip into contraction territory so far.

German factory orders are due at 0600 GMT Wednesday, and are expected to be growing at 0.3% month-on-month, slightly slower than the 0.6% growth recorded in February. Combined with German industrial production numbers due on Thursday, the data will be amongst the last for the ECB to consider before pulling the trigger or not on ushering in some further policy easing at its meeting this week.

Tuesday is relatively light on data otherwise, but Federal Reserve Chair Janet Yellen will be speaking at 1400 GMT. Testifying before the Joint Economic Committee of Congress, Yellen will be giving an update on the economic outlook. With market participating still getting used to the new Fed Chair's communication style, some of the recent comments have created heightened volatility, meaning her words will be closely watched.


By Jon Darby; jondarby@alliancenews.com; @jondarby100

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