MARKET COMMENT: FTSE 100 Closes Down As Airline Companies Nosedive

LONDON (Alliance News) - The FTSE 100 closed firmly lower Tuesday, adding to the heavy losses posted on Monday, with airline stocks International Consolidated Airlines Group and easyJet ending the day as two of the biggest losers in the blue-chip index.

IAG and easyJet saw their respective shares fall sharply Tuesday after Air France-KLM became the latest in the sector to issue a profit warning.

The Franco-Dutch airline reported a 2.9% improvement in traffic in June, with a 1.8% increase in capacity, but also lowered its earnings before interest, tax, depreciation and amortisation target for the year as a whole as it warned about overcapacity affecting routes to North America and Asia.

The warning came just weeks after a similar negative update from the German flag-carrier Lufthansa, and sent the UK-listed airlines firmly lower Tuesday.

EasyJet ended the day as one of the heaviest fallers in the FTSE 100 Tuesday, closing down 4.0%, at its lowest level since November 2013. British Airways-owner International Consolidated Airlines was the index's biggest loser, closing down 5.7%, at its lowest level since October 2013.

Overall, the FTSE 100 closed down 1.3% at 6,738.45, the FTSE 250 closed down 1.5% at 15,652.48, while the AIM All-Share index closed down 0.7% at 782.62.

The losses came after a sharp sell-off of UK equities on Monday, which saw the three indices close firmly in the red following a warning from the International Monetary Fund that it is likely to downgrade its global growth forecast once again later this month.

"This latest leg of the equity rally is being subjected to ‘death by a thousand cuts’, driven primarily by a lack of good news – what little economic data there has been has tended to the downside, giving a further excuse to sell risk assets," said David Madden, a market analyst at IG.

In data released on Tuesday, UK industrial production fell by 0.7% month-on-month in May, significantly missing economist expectations for a 0.2% rise, while on a yearly basis production grew by 2.3%, missing expectations for growth of 3.1%. Manufacturing production fell by 1.3% on a monthly basis, also missing the expected 0.4% rise, while on an annual basis manufacturing grew by just 3.7%, compared with the expectation of 5.6% growth.

While Robert Wood, chief UK economist at Berenberg, noted that industrial production only accounts for about 15% of the UK economy, he said that the weaker-than-expected reading poses a downside risk to the Berenberg's second-quarter growth forecasts, which currently stands at 0.9%.

Also released Tuesday, the National Institute of Economic and Social Research's estimated that UK GDP grew 0.9% in the three months to June, following the 0.9% in the three months to May.

At the individual UK equity level, and away from the airline stocks, FTSE 100-listed pharmaceutical company Shire ended the day among the heaviest fallers in the blue-chip index, closing down 3.3%.

Shares in the company moved sharply higher immediately after US drugs maker AbbVie Inc said it had made a fourth, sweetened proposal for the FTSE 100-listed company, raising its bid by 11% to GBP30.1 billion and encouraging shareholders of Shire to consider the proposal and "communicate their perspective" to Shire's board.

However, they quickly reversed these gains, falling significantly, after Shire strongly advised shareholders to take no action, and added that there was no certainty any firm offer will be made. The UK firm confirmed that AbbVie did not make the revised proposal to Shire before announcing it.

Shire said that its board will meet to consider AbbVie's proposal and said it will make a further announcement "in due course."

Marks & Spencer Group, closing down 1.2%, also fell Tuesday. The retailer reported a hefty drop in online sales for the first-half of its financial year, which it blamed on the transition to its new website platform and a cutback in promotions.

Sales at M&S.com dropped 8.1% in the 13 weeks to June 28. Management struggled to give a clear reason for the extent of the decline, telling journalists that the "settling in" of the new website has held back "re-registration and conversion rates," as customers have to re-register for the new website.

The online woes are the latest setback for the storied UK retailer that has struggled for over a decade to turnaround an ailing clothing business, despite doing very well with sales of its food range. It has previously predicted that the "settling in" of its new website would take up to six months, meaning it needs to show investors a strong turnaround in the second-half of the financial year.

It wasn't all bad news, however. Total sales across the group rose 2.3% in the quarter, with overall UK sales up 2%, or 0.3% on a like-for-like basis. The growth was driven by food and international sales, while its general merchandise business was hit by lower home furnishings sales, which are mostly done online. Clothing sales continued to struggle, rising just 0.1%. They were down 0.6% on a like-for-like basis.

At the opposite end of the spectrum, Glencore ended the day as the biggest among just a handful of risers in the FTSE 100, closing up 0.9%.

The mining company rose after Barclays upgraded its view on the European mining sector to Positive, from Negative, saying that the global macroeconomic outlook for mining companies is promising and that the potential for strong returns in the sector has improved dramatically. "There are a number of lights blinking green at the moment with respect to the mining sector," said David Butler, an analyst at Barclays. "We believe a number of factors are coming together that could potentially deliver a secular shift in returns from the mining sector," he added.

Rio Tinto and Antofagasta had spent much of the day among the leading risers in the blue-chip index, but turned negative shortly before the UK equity market close. Rio Tinto ended the day down 0.1%, while Antofagasta closed down 0.1%.

In the FTSE 250, SIG ended the day as one of the biggest losers, closing down 6.1%. Shares in the building products distributor fell, even though it said it is expecting to report a strong rise in pretax profit in the first-half of the year, as sales growth in the UK and Ireland helped offset a hit on revenue earned elsewhere due to the strength of sterling.

The company warned that sales growth moderated in the last two months of the half, but kept its guidance for "good progress" for the year as a whole despite currency movements going against it. It said it expects to report underlying pretax profit of at least GBP40 million for the first six months of 2014, up from GBP33.6 million last year excluding the sale of its former German roofing and Miller Pattison businesses, as sales from continuing operations rose by about 6.5% to about GBP1.29 billion.

It said its sales performance moderated in May and June, with like-for-like sales up 2.9% for both months combined. It blamed the stronger comparative figures for those months. It said like-for-like sales in the whole first-half were up 11.5% in the UK & Ireland, 3.2% in mainland Europe, 2.1% in France and 5.1% in Germany.

In the forex market, the pound fell against its major rivals in the wake of the disappointing UK industrial and manufacturing production readings, but managed to regain some of its strength throughout the day.

"The market rubbed its eyes in disbelief this morning at weaker UK economic data, quite a novelty these days when we have become used to figures beating expectations," said Chris Beauchamp, a market analyst at IG. "Even so, the world continues to turn and the rally in GBPUSD doesn’t look under threat at the moment," he added.

At the UK equity market close, sterling trades at USD1.7123, EUR1.2576, CHF1.5283, and JPY173.861.

In the data calendar Wednesday, Chinese consumer and producer price inflation data are released at 0230 BST.

Later on, the US Mortgage Bankers Association releases its MBA mortgage applications data at 1200 BST. The US Federal Open Market Committee releases the minutes from its latest monetary policy meeting at 1900 BST.

In the corporate calendar, FTSE 250-constituents Galliford Try, Centamin, Interserve, JD Wetherspoon, and Booker Group release trading updates.


By James Kemp; jameskemp@alliancenews.com; @jamespkemp

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