LONDON MARKET CLOSE: China Growth Fears Remain As Fed Choice Looms

LONDON (Alliance News) - Continued worries about China's weakening economic growth weighed on London-listed stocks with exposure to the Asian giant Thursday, while an in-line US job report gave no fresh clues about the timing of a potential interest rate hike by the US Federal Reserve.

In the UK, the Bank of England kept interest rates at record lows in an as-expected 8-1 policy-maker vote, judging it premature to conclude that events in China will have an adverse impact on the UK economy.

At its meeting on September 9, the Monetary Policy Committee voted 8-1 to maintain interest rate at 0.5%, as seen as well in the previous meeting held in August. MPC member Ian McCafferty repeated his call for a quarter-point rate hike as he assessed that building domestic cost pressures would otherwise be likely to lead to inflation overshooting the 2% target in the medium term.

BoE policymakers unanimously voted to retain quantitative easing programme at GBP375 billion.

"If anything, these minutes were rather optimistic. Whereas many had probably expected a more dovish tone to offset any worries about the near-term, the minutes were reluctant to draw any premature conclusions," said Kallum Pickering, senior economist at Berenberg. "Overall, there was no material change to the BOE’s outlook."

Pickering said that, after the minutes, Berenberg still expects the BoE to raise UK interest rates by 25 basis points in February 2016. Meanwhile, the analyst said the manifestation of external risks by the BoE and the need to see out their full impact "means that the risk of rate rise in 2015 has fallen materially".

Nevertheless, Governor Mark Carney said in a recent speech that developments in China are unlikely to influence the Bank of England's rate strategy.

The central bank lowered its estimate of third quarter gross domestic product growth to 0.6% from 0.7% after the release of some negative news on activity, the minutes of the MPC meeting said.

Members observed that uncertainty about the near-term path of inflation had increased, but said that a pickup around the turn of the year remained likely. Some of the members saw continued upside risks to inflation relative to the 2% target in the medium term.

At the London close, the pound was at USD1.5468, after standing at USD1.5392 prior to the minutes' release.

The FTSE 100 index ended down 1.2% at 6,155.81 points. The FTSE 250 lost 0.8% to 17,020.06, and the AIM All-Share shed 0.3% at 734.14. In Europe, the CAC 40 index in Paris closed down 1.5% and the DAX 30 in Frankfurt fell 0.9%.

In the US at the London close, the Dow 30 index was up 0.5%, the S&P 500 also up 0.5% and the Nasdaq Composite up 0.8%. Wall Street was trading higher after ending down on Wednesday, following a strong JOLTS job openings report that had lent support to a September rate hike.

US investors focused again Thursday on employment data coming from the US as they looked for clues as to whether the Fed will raise rates at next week's Federal Open Market Committee meeting.

The US Labor Department released a report showing that jobless claims fell slightly, in line with estimates in the week ended September 4. The report said initial jobless claims fell to 275,000, a decrease of 6,000 from the previous week's revised level of 281,000.

The report showed a slight increase in continuing jobless claims, a reading on the number of people receiving ongoing unemployment assistance. Continuing claims increased by 10,000 in the week ended August 28.

After the report, IG senior market analyst Alastair McCaig said market participants still are calling December the most likely month for interest rate "lift-off", but also noted that "September still hovers as a distant possibility".

Risk appetite among European equities participants was hit Thursday by a negative close by Asian stocks. The Japanese Nikkei 225 index closed down 2.5%, while Hong Kong's Hang Seng finished down 2.6%, and the Shanghai Composite ended down 1.4%.

China's inflation accelerated in August on soaring food prices, while producer prices fell at the fastest pace since late 2009 largely due to easing commodity prices. The divergence complicates matters for China's wavering economy, experts said.

The consumer price index was up 2% year-on-year in August, while the producer price index was down 5.9%, the biggest drop in more than five years, the National Bureau of Statistics said. Both shifts were greater than predicted. Analysts had forecast a 1.8% rise in consumer prices, up from a year-on-year inflation of 1.6% in July, and a 5.5% drop in producer prices, compared with 5.4% year-on-year the previous month.

Meanwhile, at the World Economic Forum's event in Dalian, known as the Summer Davos, Chinese Premier Li Keqiang promised to relax restrictions on foreign capital in financial markets and said the country would meet its economic targets.

"We are speeding up structural reform," Li said, adding that China faces a "painful and treacherous" transition from over reliance on manufacturing toward a "growth model driven by consumption and investment".

On the London Stock Exchange, miners ended down on the weak producer price inflation data from China. Glencore, down 7.6%, and BHP Billiton, down 5.8%, were the two biggest fallers in the FTSE 100. The FTSE 350 Mining Sector Index finished down 3.6%.

Banking stocks Standard Chartered, down 3.8%, and HSBC Holdings, down 2.7%, also suffered from their heavy exposure to Asian markets. Also Thursday, HSBC shares were raised to Neutral from Underperform by Merrill Lynch, according to traders, while Exane BNP remained Neutral on the stock while cutting its price target.

Meanwhile, London oil-related stocks took a hit after crude oil prices retreated overnight and did not recover throughout the session. Brent oil price fell to USD48.16 a barrel from a peak reached Wednesday of USD50.00. Similarly, the West Texas Intermediate oil price was at USD45.20 a barrel, having reached a USD46.29 peak on Wednesday.

Royal Dutch Shell A' shares ended down 1.6%, BP down 2.2%, BG Group down 0.9%. In the FTSE 250, Petrofac dropped 4.5% and Hunting fell 5.4%.

Tullow Oil shares closed down 6.8% to 193.67 pence. The oil and gas stock was hit by HSBC cutting its target price to 310p from 514p, though it kept a Buy rating on the shares. It was the second price target downgrade for Tullow this week, after UBS cut its target to 195 pence from 270 pence on Tuesday.

Grocers Tesco, down 3.0%, J Sainsbury, down 1.8% and Wm Morrison Supermarkets, down 2.9%, also ended in the red after the latter reported a sharp drop in profit in the first half of its financial year. Morrisons said its revenue and like-for-like sales continued to decline in a deflationary UK food market, as it competes on price with other supermarkets in the face of the challenge posed by discounters Aldi and Lidl.

Among blue-chip risers were housebuilders, with Barratt Developments, up 3.2%, Taylor Wimpey, up 1.6% and Persimmon, up 1.2%.

The stocks were in favour after UK house prices logged their biggest monthly increase in 15 months, according to data from Lloyds Banking Group's Halifax division. House prices advanced 2.7% in August from July, which was the fastest monthly increase since May 2014. Economists had forecast prices to climb 0.5% after falling 0.4% in July.

In a light UK corporate calendar Friday, JD Wetherspoon releases full-year results, while SThree issues a third-quarter interim management statement.

In the economic calendar, German consumer price index is due at 0700 BST, while UK consumer inflation expectations are expected at 0930 BST. In the US, the producer price index is due at 1330 BST, before the Reuters/Michigan consumer sentiment index, due at 1500 BST.

By Daniel Ruiz; danielruiz@alliancenews.com

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