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LONDON (Alliance News) - Flash purchasing managers' index readings painted a bleak picture of the post-referendum UK economy on Friday, causing a sharp sell-off in the pound but lifting equities on expectation of stimulus from the Bank of England.

The data from Markit showed the UK private sector activity contracted in July at the steepest pace since the height of the recent financial crisis in early 2009, following after the Brexit vote at the end of June.

The flash survey results showed the composite output index fell to its lowest level in over seven years of 47.7 in July from 52.4 in June. The services PMI dropped by more than expected to 47.4, also a seven-year low, from 52.3 in the previous month. The manufacturing PMI came in at 49.1, down from 52.1 in June, a three-and-a-half year low. A reading below the 50.0 mark indicates a contraction in the sector.

Markit said output and new orders in the UK private sector both fell for the first time since the end of 2012.

"A number of firms linked this to ongoing uncertainty pre- and post-EU referendum, with reports especially prevalent among service providers," the report said.

Chris Williamson, chief economist at Markit, said the preliminary data for July showed a "dramatic deterioration" in the UK economy. "The downturn, whether manifesting itself in order book cancellations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to Brexit," Williamson said.

"At this level, the survey is signalling a 0.4% contraction of the economy in the third quarter, though much of course depends on whether we see a further deterioration in August or if July represents a shock-induced nadir," the Markit economist added.

Lloyds Bank said that, while the Bank of England's monetary policy committee will want to see more evidence on the economy before deciding what measures to take, the weak PMI readings will increase its appetite for easing.

"The stark weakness of today's report will even weigh on the deliberations of MPC members like Martin Weale and Kristin Forbes who have only this week cautioned against expectations of a rapid easing of monetary policy," Lloyds said.

Azad Zangana, senior European economist at Schroders agreed, saying that, while the data only represented a few weeks of information after the June 23 vote and there may be a rebound after the initial shock of the outcome, the scale of the decline in activity is "alarming".

"A lack of reliable data on activity prevented the Bank of England from taking action at the last gathering of rate setters. However this data will likely support the Bank in potentially cutting interest rates for the first time in over seven years on 4 August. It should also support the government's view that austerity needs to be put on hold as the economy weathers the economic Brexit storm," Zangana said.

The pound fell like a stone after the data, trading at USD1.3121 at midday, versus around USD1.3275 before the PMI data release at 0930 BST.

Conversely, stocks were buoyed by expectations of stimulus from the BoE. The FTSE 100 reversed earlier losses to trade up 0.4%, or 25.05 points, at 6,724.94 by midday. The FTSE 250 was still down 0.3% at 17,003.04 points, but pulled back from heavier losses before the data. The AIM All-Share was up 0.1% at 739.11 points.

In Europe, the CAC 40 in Paris was up 0.1%, but the DAX 30 in Frankfurt was down 0.1%.

Futures indicated a higher open on Wall Street, with the Dow Jones Industrial Average and Nasdaq 100 both pointed up 0.1% and the S&P 500 up 0.2%. Amongst the companies reporting earnings in the US are American Airlines Group and conglomerate General Electric.

Vodafone Group led the FTSE 100 gainers, up 8.6%. The mobile telecommunications company reiterated its outlook for its current financial year and said it "continued to make good progress" during its first quarter.

In the quarter to end-June, Vodafone reported revenue of EUR13.38 billion, down 4.5% from EUR14.01 billion the year before, due to a 5.3% hit from foreign exchange movements.

However, Vodafone's preferred reporting measure, group organic service revenue, rose 2.2%, helped by a strong performance from Africa, the Middle East and Asia Pacific, and a stable performance in Europe. Organic figures are adjusted for merger and acquisition activity, as well as foreign exchange rate movements.

The company said that trading in its first quarter was consistent with its expectations for its financial year to end-March 2017, and as a result confirmed its outlook. At the time of its annual results in May, Vodafone gave its full-year expectations as organic growth in Ebitda of between 3% and 6%, which it said implies a result of between EUR15.7 billion and EUR16.2 billion.

CRH was up 4.0% after saying it now expects its first half earnings to be ahead of its previous guidance due to its trading performance in the latter half of the second quarter.

The Irish building materials company now expects earnings before interest, tax, depreciation and amortisation for the first half of 2016 of EUR1.1 billion. This is higher than its previous expectations of EUR1 billion outlined towards the end of April.

Marks & Spencer Group traded down 2.6% after Barclays cut its recommendation on the stock to Underweight from Equal Weight. The bank said the retailer's new strategy, which includes bringing the clothing business back to profitability, "could be a start, but things can get worse before they get better".

Acacia Mining led gainers in the FTSE 250, up 8.7%. The miner said revenue, earnings and pretax profit all soared in the first half of the year after selling more gold for a higher price and at a lower cost, but said it ultimately suffered a small net loss after tax.

The company which operates in Tanzania, said pretax profit rose to USD101.6 million in the first six months of the year compared to USD25.0 million a year earlier, more than a four-fold increase, as revenue for the half rose to USD504.9 million from USD446.8 million. The interim dividend was increased by 43% to 2.0 cents per share.

Vesuvius was the biggest mid-cap decliner, down 6.3% after Panmure Gordon cut it to Sell from Buy. The broker predicts "another almighty crash" in the steel market and thus feels molten metal flow engineering company Vesusvius will not be able to sustain its first-half performance in the second part of 2016.

Still ahead in the economic calendar, the US Markit manufacturing PMI reading is at 1445 BST, while the Baker Hughes US oil rig count is at 1800 BST.

By Neil Thakrar; neilthakrar@alliancenews.com; @NeilThakrar1

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