LONDON MARKET MIDDAY: China Stock Market Reversal Weighs On US Futures

LONDON (Alliance News) - Share prices in the UK and US stock futures both are trading lower midday Monday, following another session of heavy selling in Chinese stock markets.

The FTSE 100 trades down 0.2% at 6,566.37, the FTSE 250 is down 0.6% at 17,390.37, and the AIM All-Share is down 0.4% at 751.79.

European equity markets also are being hit by selling, with the French CAC 40 down 1.4% and the German DAX 30 down 1.2%.

US futures point Wall Street to a lower open, with the Dow Jones Industrial Average down 0.4%, the S&P 500 down 0.3%, and the Nasdaq 100 off 0.5%. While investors will be likely to continue focusing on the US second-quarter earnings season, many will be looking ahead to the US Federal Reserve interest rate decision on Wednesday evening.

In Asia Monday, the Shanghai Composite fell sharply, down 8.5%, its biggest one-day fall since February 2007, reversing recent gains after Chinese government efforts to support the market. It meant the index fell to its lowest level in three weeks at 3,725.558 points, dragged down by weakening commodity prices and soft Chinese industrial profit data.

After weak manufacturing data released last week, figures from the National Bureau of Statistics released Monday showed that profits earned by Chinese industrial enterprises fell 0.3% in June from a year earlier, reversing a 0.6% rise in the preceding month.

Nigel Green, founder and CEO of deVere Group, believes investors should "China-proof" their portfolios, adding that government intervention is unsustainable.

"The slide indicates that the Chinese authorities are perhaps reducing capital inflows following their frenzied measures to support the stock market three weeks ago. It appears that, unsurprisingly, those measures are unsustainable in the longer-term, that the market is currently vulnerable without government support, and investors remain uncertain of the situation," Green says.

Earlier in July, Chinese regulators and the People's Bank of China put fresh measures in place to try to curb the decline in the stock market. China's securities regulator banned senior management and investors who own stakes in businesses exceeding 5% from selling their shares for next six months. In addition, China's central bank said it would provide sufficient liquidity to China Securities Finance Corp, the state-backed margin finance company, via various channels.

Jasper Lawler, market analyst at CMC Markets, says that the fall in the Chinese stock market can only be called a complete capitulation considering the unprecedented government support.

"The stock market is like a volatile microcosm of the real economy; government intervention can give a short-term boost but over the long haul it makes things a lot worse. Global investors are heavily exposed to China as a source of global economic growth. The stock market crash in China is spreading to other markets because the risk is Chinese state control will eventually send the economy to the same fortune," Lawler says.

In Hong Kong, the Hang Seng closed down 3.1%, its biggest drop in three weeks, while the Japanese Nikkei index ended down 1.0%. The fall in the Chinese stock market has weighed on China-exposed stocks in London, with Fidelity China Special Solutions trading down 7.8%, and JPMorgan Chinese Investment Trust down 4.6%.

Also on the London Stock Exchange, gold miners Randgold Resources and Fresnillo are up 1.9% and 1.1%, respectively, benefiting from a slight rise in gold prices Monday. The metal had fallen to a five-year low last week at USD1,073.40 an ounce, but midday Monday it trades at USD1,096.67 an ounce.

Mining peers BHP Billiton, up 1.2%, Anglo American, up 1.0%, and Rio Tinto, up 0.6%, are rebounding from last week's losses, which saw shares in the mining majors end at multi-year lows.

However, FTSE 250-listed Lonmin is down 6.2% at 58.50 pence after being downgraded by HSBC to Hold from Buy, cutting its price target to 82p from 222p. Morgan Stanley also cut Lonmin to Underweight from Equal-Weight, with its price target slashed to 95p from 137p.

Reckitt Benckiser Group leads the gainers in the FTSE 100, up 2.8%. The consumer goods company said it has upgraded its like-for-like revenue growth target for the full year after its pretax profit rose in the first half thanks to a solid performance across the business. The company said its pretax profit for the six months to the end of June was GBP921 million, up from GBP838 million a year earlier.

Merlin Entertainments is the biggest faller in the blue-chip index, down 3.8%. The theme park operator said it expects its full-year results to be below its previous forecasts due to the roller-coaster crash at its Alton Towers theme park in June.

Merlin's Alton Towers theme park was shuttered back in June after a serious accident occurred on the Smiler ride. People on the Smiler ride were trapped 25 feet up at a 45 degree angle for up to four-and-a-half hours after two carriages collided, resulting in 16 people being injured, including four seriously.

Pearson confirmed on Saturday it is talks to sell its 50% stake in the Economist Group, just two days after it announced the sale of the FT Group, which includes the Financial Times, to Japanese media group Nikkei Inc for GBP844 million.

Pearson made the announcement following a report by CNBC that the company was in negotiations to sell the stake, which was not included in the deal to sell the FT Group, to other shareholders in the Economist, citing people familiar with the situation. The company trades down 3.3%.

Bwin.Party Digital Entertainment is up 1.7% after GVC Holdings made an increased takeover bid for the online gaming company, having previously seen its advance spurned in favour of a rival offer from 888 Holdings.

Earlier this month, Bwin.Party turned down GVC's first offer in favour of the 888 bid, despite it valuing the company for less. Bwin.Party said it had sided with the 888 offer due to the higher execution risks involved in the GVC offer, which had been backed by Canada's Amaya Gaming Inc.

GVC shares trade down 2.0%, while 888 Holdings is down 2.7%.

On AIM, PhotonStar LED Group is up 14% after the company said it has secured a supply contract for its Camtronics Vale manufacturing division with an unnamed professional electronics company. PhotonStar said the contract will cover the manufacturing of a sophisticated consumer product at the Camtronics factory in South Wales and is expected to generate revenue of around GBP0.5 million in the current financial year.

Online flash-sale retailer MySale Group said it is set to post a rise in revenue for the year to the end of June and said its performance improved in the second half as it said it has appointed a new chairman. MySale said its revenue for the year was up by 5% to AUD235 million and said its second-half underlying earnings before interest, taxation, depreciation and amortisation should be broadly break-even. The company trades up 11%.

Still ahead in the economic calendar, US durable goods orders are due at 1330 BST.

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

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