LONDON MARKET MIDDAY: Blue Chips Underperform On Big Earnings Day

LONDON (Alliance News) - Shares in the UK were mixed Wednesday midday, with large-cap stocks under-performing mid- and small-caps and with a US Federal Reserve interest rate decision due after the London market close.

Shares in blue-chip bank Barclays were slightly lower after its first-quarter earnings issued prior to the market open, while those of drug-making giant GlaxoSmithKline were flat after reporting at midday an "encouraging" start to 2016.

The FTSE 100 index was down 0.4%, or 21.91 points, at 6,262.61 at midday. At the same time, the FTSE 250 was up 0.4% at 17,016.66 and the AIM All-Share was flat at 729.44.

In Paris, the CAC 40 index was up 0.2%, and the DAX 30 in Frankfurt was adding 0.4%.

"Risk aversion is once more creeping into European markets as last week's gains are eroded away ahead of tonight's Federal Open Market Committee announcement," said IG analyst Joshua Mahony, noting that "it comes as no surprise that some element of profit taking should take hold with such a significant risk event ahead of us."

The Fed monetary policy decision is scheduled for 1900 BST. Economists overwhelmingly expect the central bank to leave its Federal Funds rate target unchanged, but a calmer global macroeconomic backdrop could mean the Fed hints at a rate rise at its next meeting in June.

IG's Mahony said that, with markets implying the chances of a rate hike stand at 0% probability and a rate cut at 2%, the interesting part of the meeting will be the tone of the Fed's statement with regards to future rate hikes. Mahony added that, with a 21% probability of a June rate hike, the Fed "will want to align expectations with the likeliness of it happening".

Following technology giant's Apple report of a drop in profit in the second-quarter, hurt largely by a double-digit revenue decline that reflected weak iPhone sales, the US corporate calendar brings on Wednesday first-quarter results from Facebook after the Wall Street close.

Wall Street futures were down, with the Dow 30 pointed down 0.2% and the S&P down 0.3%. The Nasdaq 100 was likely to suffer most from the results reported by Nasdaq-listed Apple Tuesday after the US equities close, called down 1.1%.

In the economic calendar, US goods trade balance is due at 1330 BST, pending home sales at 1500 BST, and the Energy Information Administration's crude oil stocks change at 1430 BST.

In addition to the Fed this week is a Bank of Japan policy decision set for early Thursday. The Japanese central bank will conclude its two-day policy meeting, with analysts widely expecting it to announce a slew of measures to help weaken the yen.

The UK economy grew at a slower pace, as expected, in the first quarter, preliminary estimates from the Office for National Statistics showed. Gross domestic product grew 0.4%, from a quarter ago, when it expanded 0.6%. This was in line with expectations.

Output increased in the dominant services sector by 0.6%. The other three main industrial groupings within the economy decreased, with production falling by 0.4%, construction output by 0.9% and agriculture by 0.1%.

On a yearly basis, UK GDP grew 2.1% in the first quarter, slightly faster than the expected growth of 2.0%.

"This is not a cause for concern," said Berenberg analyst Kallum Pickering, noting that it was anticipated. "The slowdown was caused by largely idiosyncratic and transitory risks, namely the financial market rout at the start of the year and the forthcoming EU referendum on June 23."

Another report from the ONS showed the UK index of services rose 2.5% in February from last year, with the largest contribution coming from distribution, hotels and restaurants and business services and finance. Month-on-month, services output edged up 0.1%, the same pace of growth as in January.

The pound gyrated heavily before and after the economic data, with sterling reaching an intraday high of USD1.4621 prior and then declining to a low of USD1.4550 shortly afterwards. The pound stabilized by midday, quoted at USD1.4600.

On the London Stock Exchange, Worldpay Group was up 2.6%, benefiting from an upgrade by UBS to Buy from Neutral. The Swiss bank said Worldpay's exposure to online transactions and significant investment in new value-added services will enable the company to outgrow its peers.

Shares in events and business publishing company Informa were up 1.2%, supported by an upgrade by Barclays to Overweight from Equal Weight.

Barclays itself was having an intense day following its first-quarter earnings. The bank said the results showed a core business in rude health even as the bank saw a 25% drop in pretax profit.

Pretax profit fell to GBP793 million in the three months ended March 31, Barclays said, down from GBP1.06 billion the corresponding quarter a year earlier, with income net of insurance claims down 11% to GBP5.04 billion and credit impairment charges up 15% to GBP443 million. The results were ahead of analyst expectations, reflecting a strong performance in the bank's core business and resilience in its investment banking business.

"In our view, the results reflect relative resilience, with notable outperformance versus peers in investment banking where revenues fell just 6% Q1/Q1," said Investec. Meanwhile, Jefferies said: "Barclays' first-quarter is uncontroversial in our view. The overall message is that the new CEO is executing well on plans, and we do not see consensus estimates moving either way."

Shares in Barclays opened higher Wednesday, reaching 182.00 pence, their highest level since early-February. However, the stock has declined since, trading down 0.5% at 173.10p at midday.

Emerging-market-focused peer Standard Chartered was down 3.5%, among the worst blue-chip performers, having been downgraded to Sell from Hold by Deutsche Bank. The stock was giving back only part of its gains on Tuesday, when it added 9.8%, reaching its highest level in 2016, after its first-quarter loan impairment charges and capital strength proved better than the market had expected.

Amec Foster Wheeler was up 3.2%, among the best performers in the FTSE 250. The company said it has appointed Jonathan Lewis, who has held several senior roles at US giant Halliburton, as its new chief executive as the company reported a drop in revenue in the first quarter of 2016.

The FTSE 250-listed oilfield services company said Lewis will takeover as chief executive from the start of June. Current interim Chief Executive Ian McHoul will step down from his role but remain as Amec Foster Wheeler's chief financial officer.

McCarthy & Stone was down 5.4% after funds managed by Anchorage Capital, TPG Special Situations Partners, Goldman Sachs European Special Situations Group and Strategic Value Partners sold 85.0 million shares in the retirement housebuilder, increased from the 75.0 million they had initially planned to sell.

The gross proceeds from the sale to the selling investors were around GBP200.0 million. Following the sale, Anchorage holds a 7.6% stake, TPG a 3.9% stake, Goldman Sachs a 3.9% stake and Strategic Value Partners a 4.2% stake.

Transport company Stagecoach Group was down 3.5% after saying like-for-like revenue grew in the first 48 weeks of its financial year in most of its operations, with only its North American arm suffering a decline. However, Liberum said that although revenue growth trends at the other divisions appear similar to the last update, "we see downside risk to 2017 estimates. Combined with bus re-regulation risk and looming rail franchise renewals, caution is still warranted."

Specialty chemicals company Elementis was down 1.5%. The group said it was working to manage its margins to keep its performance in line for 2016 following a mixed start to the year. The company said sales for its coatings and personal care segments in its Specialty Products division were "satisfactory" in the first quarter to the end of March, but total sales were down 7.0% amid a slump in oilfield revenue.

By Daniel Ruiz; danielruiz@alliancenews.com

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