LONDON MARKET CLOSE: Stocks Down As Fed's Hold Creates Uncertainty

LONDON (Alliance News) - London main indices ended down with Wall Street also trading in the red, as investors digested the decision from the US Federal Reserve to keep interest rates on hold in its last monetary policy meeting, and with Sunday's Greek parliamentary elections on the radar.

"Markets can be a fickle thing. Going into last night’s Fed meeting, talk revolved around how damaging a rate hike would be to equity markets," said IG analyst Chris Beauchamp. "It turns out that no hike can also be rather problematic, especially when accompanied by a sober statement and downgrades to economic forecasts. As a result, stocks moved swiftly into the red this morning and have stayed there all day."

The FTSE 100 ended down 1.3% at 6,104.11, meaning it lost 0.2% for the week as a whole. The FTSE 250 was down 0.7% at 16,932.74, and the AIM All-Share finished up 0.1% at 741.11. European major indices ended lower, with the CAC 40 in Paris down 2.6% and the DAX in Frankfurt down 3.1%.

Meanwhile, Asian stocks ended mixed Friday, with the Japanese Nikkei 225 down 2.0%, while in China, Hong Kong's Hang Seng index closed up 0.3% and the Shanghai Composite up 0.4%.

Wall Street was lower at the London close, with the Dow Jones Industrial Average down 1.1%, the S&P 500 down 0.9% and the Nasdaq Composite down 0.6%.

The Fed's decision to leave interest rates unchanged at 0-0.25% followed last month's Chinese stock market correction, which played havoc on global financial markets and drove up the dollar as panicked investors fled to US assets.

The Federal Open Market Committee decided to wait for more evidence of US economic strength "in light of the heightened uncertainties abroad and a slightly softer expected path for inflation," Fed Chair Janet Yellen said. "We want to take a little bit more time to evaluate the likely impacts on the US," she added.

The decision to keep rates on hold was not unanimous, as Richmond Fed President Jeffrey Lacker voted to raise rates by 25 basis points. The vote was 9-1. However, the Fed's 'dot-plot' showed 13 members still expect an interest-rate hike this year, down from 15 of 17 members in the Fed's last survey in June.

"Yes, October remains a possibility," Fed Chair Janet Yellen said in a press conference after the Fed decision was announced. The bank has two more scheduled 2015 policy statements: October 28 and December 16.

However, Colin Graham, chief investment officer of BNP Paribas Multi Asset Solutions business, told Alliance News that he sees a Fed rate hike in October as "unlikely". Graham believes that there are not enough data releases in the time before the October meeting for FOMC members to change their mind about raising interest rates.

BNP Paribas' Graham said that there is a possibility that the Fed will not raise rates this year, but he believes the Fed should raise rates in 2015 as it will send a "good signal" to the market about the US economy.

Analysts at Morgan Stanley said the window for a rate hike this year has narrowed, and said they feel the FOMC has "completely" taken October off the table. Morgan Stanley added that while December remains in play, a rate hike this year "is not a foregone conclusion".

"We maintain our view for a December hike, but acknowledge that global growth concerns will need to ease for the Fed to judge the US outlook will not be damaged," said Morgan Stanley.

Samy Chaar, chief economist at Lombard Odier also said December is now the base-case for the first rate hike. He added that the Fed is now data-dependent on both domestic and foreign conditions, making its task considerably more arduous.

"On that front, we believe global growth fears – with China at the epicentre of worries – will normalise at some point," Chaar said.

Meanwhile, Nick Gartside, chief investment officer for fixed income at JPMorgan Asset Management, said investors should closely watch the level of volatility in global markets and the growth picture in emerging markets.

"If both of these stabilise, and if their respective impact on the US economy remains limited, there’s no reason the Fed can’t hit the lift-off button this year," said JPMorgan's Gartside.

The dollar sunk following the Fed's decision, with the pound standing at the London close at USD1.5577 against the greenback, and the euro at USD1.1369.

Gold prices rose sharply following the Fed's decision as the dollar tumbled, with the yellow metal standing at USD1,137.30 an ounce at the close of European equity markets Friday. As a result, London-listed gold miners benefited, with Randgold Resources, up 3.6%, and Fresnillo, up 3.4%, as the biggest gainers in the FTSE 100.

Elsewhere on the London Stock Exchange, oil-related stocks took a hit on declining crude prices. At the London close, Brent oil price was standing at USD48.51 after touching an intraday peak of USD49.72, and West Texas Intermediate was at USD45.70, off from an intraday peak of USD47.00.

Royal Dutch Shell 'A' shares, down 3.8%, BG Group, down 2.9% and BP, down 2.8%, were amongst the worst blue-chip performers. In the FTSE 250, Premier Oil closed down 7.0% and Tullow Oil finished down 5.3%.

Also in the red ended banking stocks. CMC Markets analyst Jasper Lawler said that banks were hit after having rallied leading into the FOMC meeting in expectation of the beginning of a rising rate environment, which is supportive of margins on lending.

Barclays were down 2.8%, and Standard Chartered and HSBC Holdings were both down 2.4%. Shares in Lloyds Banking Group were down 2.1%.

Also in the red was Weir Group, down 3.0% at 1,245.00 pence, after Goldman Sachs cut the engineering company price target to 1,550p from 1,950p, though keeping a Buy recommendation on the stock. Weir was also hit by another slash in its price target by Panmure Gordon, which cut it to 1,047p from 1,160p.

UDG Healthcare led the mid-cap gainers, up 9.6%. The healthcare services company said it has entered into a conditional agreement to sell its United Drug Supply Chain Services and its MASTA unit for EUR407.5 million to McKesson Corp, the US drug distribution company.

After the completion of FTSE Russell's quarterly review earlier this month, the last changes in the FTSE 350 will take effect on Monday. Berkeley Group Holdings will be added to the FTSE 100 replacing Weir Group. While Sophos, Circassia Pharmaceuticals and P2P Global Investments and P2P Global Investments C shares will replace Lonmin, Premier Farnell and James Fisher & Sons in the FTSE 250.

In the corporate calendar Monday, Allergy Therapeutics, City of London Investment Trust and DX Group release full-year results. XL Media, French Connection and CDialogues publish half-year results. Meanwhile, Filtonic and Purecircle release full-year results.

In the economic calendar Sunday, Greece holds parliamentary elections.

On Monday, China's MNI business sentiment indicator is due at 0245 BST. Meanwhile, German producer price index is due at 0700 BST. In the US, existing home sales are expected at 1500 BST, while Federal Reserve Bank of Atlanta President Dennis Lockhart speaks before the Buckhead Rotary Club in Atlanta at 1800 BST.

By Daniel Ruiz; danielruiz@alliancenews.com

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