MARKET COMMENT: China Data And Fading M&A Lead FTSE Lower

LONDON (Alliance News) - UK stocks are lower Monday as investors express concern over some weaker-than-expected Chinese house price data, while the FTSE 100 index is losing lustre as the possibility of big merger and acquisition activity fades.

By mid-morning Monday the FTSE 100 is down 0.7% at 6,811.58, the FTSE 250 is down 0.1% at 15,375.40, and the AIM All-Share is down 0.3% at 794.56.

Major European indices are also lower, with the French CAC 40 down 0.7%, and the German DAX 30 down 0.8%.

Stocks got off the a poor start after weekend data reignited concerns over the slowdown in China's economy. The Chinese house price index indicated house price inflation there of 6.7% in April, down from 7.7% growth in March and the fourth consecutive month of declines.

Taken as a bellwether for the health of the Chinese economy, the disappointing numbers see the sectors most exposed to Chinese investment underperforming Monday, with the Industrial Metals and Mining sectors down 2.7% and 0.8% respectively. Rio Tinto is amongst the heaviest fallers in the FTSE 100, down 2.1%.

AstraZeneca is providing the single biggest drag on the FTSE 100, however. The UK pharmaceutical company rejected a final takeover offer from US rival Pfizer Monday. The US company increased its offer to GBP55.00 per share from GBP50.00, previously, but AstraZeneca's management remained unconvinced that the price offered good value for shareholders.

Pfizer also said that it will not make a hostile offer direct to AstraZeneca's shareholders, pledging only to make an offer with the recommendation of AstraZeneca'a board. The possibility of a boosted offer either being accepted or going hostile had lifted the AstraZeneca share price by more than 40% over the last three weeks. Following Monday's developments the stock is down more than 11%.

"Such a big move in a weighty stock like AstraZeneca is bound to leave the index floundering," said IG market analyst Brenda Kelly.

Vodafone, another of the UK's biggest stock, is also providing a drag on the leading index Monday following the news that US telecommunications giant AT&T Inc has agreed a deal to take over DirecTV, a satellite dish service, for USD48.5 billion.

The move comes at a time of increased competition among cable, satellite and telephone companies to provide comprehensive services to customers which had led to speculation that AT&T may have been looking to make a takeover of Vodafone. The fact that the US company has just spent USD48.5 billion seems to make an offer for Vodafone very unlikely.

Vodafone shares are down 1.6% Monday, with the company due to report its fourth-quarter results on Tuesday. "We still like the shares, even if AT&T has folded up its tent and retreated back to the US pay-TV market," said Berneberg analyst Paul Marsch. Berenberg expects Vodafone to show an improved pace of revenue growth on Tuesday due to fading regulatory drags.

The house builders are also lower Monday after Bank of England governor Mark Carney raised concerns in the press at the weekend over the runaway UK housing market. Carney warned on Sunday that rapidly rising UK house prices posed the biggest single risk to the countries economic recovery, leading to increased speculation that the Prudential Regulation Authority will take action to soften the market at its meeting next month.

The latest reading of the UK housing market has shown further strong price inflation. The Rightmove house price index showed average house prices rose by 8.9% year-on-year in May, accelerating from 7.3% in April. Over the month of May alone, prices rose by 3.6%, accelerating from 2.6% last month, the survey said.

In the FTSE 100, Barratt Developments is down 1.3%, and Persimmon is down 0.8%.

easyJet is amongst the better performing blue-chip companies. The stock is up 0.8% after its low-cost rival Ryanair predicted that its passenger numbers and revenue will rise in the current financial year. Ryanair reported a drop in profits over the last financial year, but given the favourable timing of Easter, limited capacity growth, and strong forward bookings, average fares in the coming half year are seen as being 6% higher. Ryanair shares are up 6.7%.

The European Central Bank Governing Council member and Bundesbank President Jens Weidmann said that the bank is not targeting exchange rate alone, but added that it is relevant on monetary policy as it would affect inflation. While speaking at a Deutsche Bundesbank conference on Monday, Weidmann said that the central bank would consider the euro's impact on price stability while making decisions.

Weidmann has traditionally been seen as one of the key hawks within the ECB, but recently softened his stance on the possibility of further policy easing by the central bank, giving his words increased focus ahead of the June ECB policy meeting, at which many now expect a rate cut.

The euro is slightly higher against the dollar Monday after having reached a near three-month low last week, currently trading at USD1.3715.

Other than the Rightmove house price index, there is nothing in the UK data calendar Monday, leaving the pound trading fairly flat against the dollar at USD1.6817. Tuesday is a much busier day for UK data, with the latest inflation statistics due.

With little left in the data calendar to shift sentiment, and the US corporate reporting season close to an end, futures trading currently indicates that Wall Street will follow Europe lower, with the DJIA and the S&P 500 both set to open down 0.5%.

By Jon Darby; jondarby@alliancenews.com; @jondarby100

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