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LONDON (Alliance News) - UK stocks closed sharply lower Wednesday amid a global equity sell-off caused by a lack of clarity about China's economic plans and uncertainty about the outlook for the Federal Reserve's stimulus program in the US.
Stocks in London took a further hit, while the pound rose, after the Bank of England revised up growth forecasts and said unemployment was falling faster than it expected, prompting markets to price in an earlier interest rate rise than the central bank is predicting.
China's ruling communist party set out its plans for economic growth in coming years late Tuesday, saying it would continue reforms and let markets rather than the state dictate more resource allocation, but gave little in the way of detail.
In a TV interview with CNBC, US Treasury Secretary Jack Lew said that China needs to be more clear, and "spell out its policies". The reforms "can't just be a banner, there has to be some details underneath it," he said.
"The third Plenum of China's ruling Communist Party ended on November 12 with what appears to be a whimper and not a bang," said Michael Every, head of financial markets research at Rabobank.
Further uncertainty about when the US Federal Reserve might start reducing its asset-buying programme also weighed on global stocks after policy makes sent out conflicting signals.
President of the Minneapolis Federal Reserve, Narayana Kocherlakota, said there is no reason to scale back the central bank's USD85 billion-a-month bond buying scheme, arguing that it may in fact hinder an already tepid economic recovery. But Richard Fisher, president of the Federal Reserve of Dallas, believes that keeping the central bank's easy policy too long won't produce the desired outcome and expects it to be normal as soon as possible, increasing concerns that the Fed may begin to taper its asset buying programme in December.
The start of the end of the flow of cheap money to the US economy is deemed bad for stocks as that money has been key in lifting the world's biggest economy and helping its companies.
A speech Wednesday night by outgoing Fed chairman Ben Bernanke, followed by the confirmation speech by incoming chairwoman Janet Yellen Thursday, will both be watched closely for further hints on the direction of monetary policy.
In the UK, the pound was given a boost after Bank of England Governor Mark Carney said unemployment is now expected to fall faster than the central bank previously expected, prompting markets to pull in expectations of when interest rates will start to rise even though Carney retained the bank's previous "forward guidance".
Carney said the jobless rate is now more likely than not to reach 7% by the third quarter of 2015, compared to the bank's previous expectation for the rate being hit in late 2016. The 7% rate has been set as the moment that monetary policy makers will consider whether to raise the historically low interest rate of 0.5%, though the governor reiterated again that hitting 7% will not automatically trigger a rate increase.
The BOE is giving a two-in-five chance the jobless rate will fall to 7% in 2014, a three-in-five chance it will be hit in 2015 and a two-in-three chance it will be hit in 2016.
As widely expected, the bank raised its growth projections and lowered inflation estimates. It now projects 0.9% growth for the fourth quarter and 1.6% growth for the whole of 2013. Growth in 2014 is now seen at 2.8%. Inflation is projected to fall a little further over the next year or so and the near-term projection is lower than expected in August, the bank's inflation report showed.
Carney's comments came as the latest figures from the Office for National Statistics showed that unemployment had dropped to 7.6% in the three months to September, down from 7.8% in the previous quarter. The figure was the lowest since February-April 2009. The number of unemployed was 2.47 million, the lowest in more than two years.
"The Quarterly Inflation Report struck a more hawkish tone than anticipated, with the Bank of England upgrading its labour market forecast considerably," said DailyFX's Christopher Vecchio.
However, Carney told reporters that rate setters remain comfortable with the forward guidance put in place in August. "With the recovery taking hold, our task is now to secure it," he said.
That kept some market participants cautious. "The Bank appears to be reasserting their view that despite better than expected economic growth, the low inflationary pressure and the nature of the recovery with credit still not flowing to the corporate sector will delay the need to raise interest rates as early as being discounted by the market," said Gerard Lane at Shore Capital.
Still, market expectations for an interest rate increase have shifted forward so that the market is now pricing in a rise in rates by the third quarter of 2015, he said.
The pound surged in against its counterparts in the wake of the release. At the close of the UK equity markets, the pound was trading at EUR1.1907, CHF1.4670 and USD1.6030.
The FTSE 100 closed down 1.4% at 6,630, the FTSE 250 closed down 1.2% at 15,179.84, and the AIM All-Share index closed 0.8% lower at 802.6. In Europe, the CAC closed down 0.6%, while the German DAX closed down 0.2%.
In the US, at the close of the UK equity markets, the DJIA is down 0.4% at 15,692.73, the S&P 500 is down 0.1% at 1,765.74, while the Nasdaq is up 0.1% at 3,922.53.
At the individual UK stock level, on a day with very few blue-chip winners, J Sainsbury was the leading gainer, closing up 1.3% at 404.080 pence. The grocer said its market share of 16.8% for the year to October 13 is its highest for 10 years, as it kept outperforming its main rivals with strong sales and profit growth in the first half of the financial year. The company raised its interim dividend to 5p, from 4.2p, as it reported a 9.1% rise in pretax profit to GBP433 million for the 28 weeks to September 28, from GBP397 million a year earlier. Total revenue rose to GBP12.68 billion, from GBP12.16 billion, while like-for-like sales rose 1.4%, the 35th consecutive quarterly increase according to the company.
Fenner, closing up 11% at 450.00p, was the FTSE 250's biggest winner. Despite reporting a drop in profits, revenues and adjusted earnings-per-share, the company said it had recovered strongly in the second half and it expects to return to growth in 2014. The fact that the dividend was increased by 7% to 11.25p reflects the company's "confidence in prospects and strong financial position," Liberum Capital says. The brokerage raised Fenner's target price by 26% to 515.00p from 410.00p, maintaining a Buy recommendation. Numis raised its price target to 480.00p from 415.00p, retaining its Add recommendation.
At the other end of the spectrum, Partnership Assurance Group, closing down 16% at 347.5706p, was the biggest faller in the FTSE 250. The annuities provider revealed that it does not expect to see growth in its year-on-year retirement sales in the fourth quarter, as last year's figures were boosted by the introduction of gender neutral pricing.
AIM-listed Petards Group, ending up 69% at 19.44p, was a big winner. The security and surveillance systems company, which has won a string of train CCTV contracts in recent months, said it had won a deal worth over GBP7 million to provide and maintain secure radio systems for the Royal Air Force.
In the data calendar Thursday, a raft is gross domestic product releases is scheduled. French GDP data is expected at 0630 GMT, ahead of German data at 0700 GMT, Italian figures are released at 0900, before the EU equivalent is reported at 1000 GMT. UK retail sales data is due to be released at 0930 GMT. In the US, initial and continuing jobless claims data is expected at 1330 GMT.
In another busy day of corporate reporting, blue-chips Prudential, Centrica and Rexam are joined by FTSE 250-listed WH Smith, Perform Group, Taylor Wimpey, Ophir Energy, Serco Group and Ted Baker, amongst others, in releasing interim management statements. Burberry releases interim results, while Antofagasta provides third quarter results.
By James Kemp; jameskemp@alliancenews.com; @jamespkemp
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