MARKET COMMENT: FTSE 100 Falls As Geopolitics Continue To Weigh

LONDON (Alliance News) - The FTSE 100 closed significantly lower Thursday, adding to the losses it posted on Wednesday, as ongoing tensions between Russia and the West continued to weigh on investor sentiment.

London's blue-chip index spent the majority of the day trading within a relatively tight range, but a late sell-off saw it close firmly in the red.

"Stocks in Europe were ready to mimic the reversal of losses seen in the US yesterday but some of the bullishness was sucked out of the market when Russia retaliated with its own set of sanctions with a ban on food imports from certain regions notably the EU and US for one year," said Jasper Lawler, a market analyst at CMC Markets.

Russia has banned most food imports from the European Union, US, Norway, Canada and Australia, in retaliation for sanctions over its alleged role in the separatist uprising in eastern Ukraine and the downing of Malaysian Airlines flight MH17 by rebel fighters.

Prime Minister Dmitri Medvedev Thursday announced details of the ban that goes into effect today and will last a year. It includes meat, fish, poultry, milk products, vegetables and fruits, and he said it would bolster Russian domestic agriculture.

Russian President Vladimir Putin had ordered the agricultural import bans on these countries on Wednesday.

Medvedev described sanctions as a "dead-end track," but said Russia was forced to respond to the measures taken by Western countries. He also told a cabinet meeting that Russia was considering steps to close its airspace to flights by European and US airlines to and from the Asia-Pacific region.

The European Commission, meanwhile, called the ban "politically motivated" and warned it could take action in return.

"Some had predicted Russia would not retaliate to US/EU sanctions because it was thought they would hurt the Russian economy more than others. That has now been proved not to be the case," said Lawler. "The troubling thing about these Russian sanctions is that Putin is fighting back, and his best weapon is Russia’s energy exports," he said.

The FTSE 100 closed down 0.6% at 6,597.37, while the FTSE 250 closed down 0.2% at 15,240.1, and the AIM All-Share index closed down 0.2% at 750.12.

In Europe, the CAC 40 in Paris closed down 1.4%, while the DAX 30 closed down 1.0%.

"From airports to salmon fisheries, sanctions will have a wide impact, and when the damage to the ailing eurozone economy is considered the worried reaction of European markets becomes more understandable," said Chris Beauchamp, a market analyst at IG.

In the US, early gains were reversed and, at the UK equity market close, the DJIA and S&P 500 were trading down 0.1%, while NASDAQ Composite was fractionally higher.

The Bank of England and European Central Bank were both in focus Thursday, as they released their respective interest rate decisions.

As expected, the BoE once again kept its key rate at a record low 0.50%, and also maintained its stock of purchased assets at GBP375 billion, sticking to its forward guidance even as the strong pace of economic recovery has augmented speculation for a rate hike late this year. Investors will now be looking towards the minutes of the two-day meeting, which are released in a couple of weeks, to see if there were any dissenting voters among the nine-member Monetary Policy Committee.

The ECB, meanwhile, held its key interest rates steady for a second straight month, as had been expected. It kept the refinancing rate at a record low 0.15% and maintained the deposit rate at negative 0.10%.

"The introduction of record low interest rates from the ECB ... hasn’t had enough time to deliver the desired results yet, but Mario Draghi is committed to his strategy of trying to inject some life into the economy and combat the ever-increasing risk of deflation," said Dennis de Jong, managing director at UFX.com. "The situation in Russia remains a real concern for the ECB with the eurozone economy in its current state of stagnation, it may only be a matter of time before further monetary stimulus is introduced," he added.

Indeed, European Central Bank President Mario Draghi said at his usual post-ECB decision press conference that the central bank will closely monitor consequences of "geopolitical risks" that could weigh on the fragile economic recovery in the eurozone.

"Heightened geopolitical risks, as well as developments in emerging-market economies and global financial markets, may have the potential to affect economic conditions negatively," Draghi said. "We will closely monitor the possible repercussions of heightened geopolitical risks and exchange-rate developments".

Among individual UK stocks, FTSE 100-listed insurers Aviva and RSA Insurance Group continued to report contrasting fortunes, with the former ending the day among the blue-chip index's biggest winners and the latter closing as one of its heaviest fallers.

Aviva closed up 2.6% after reporting a rise in pretax operating profit from continuing operations as increases in its life business and from fund management more than offset a drop in general insurance and health. It increased its interim dividend by 4.5% to 5.85 pence from 5.60p, as it made a GBP1.05 billion pretax operating profit in the six months to end-June, compared with GBP1.01 billion in the corresponding period last year.

RSA, however, ended the day down 3% after it reported a substantial drop in first half pretax profit as Chief Executive Stephen Hester continues to implement his turnaround plans at the embattled insurer. RSA did not pay an interim dividend but said it is targeting a restart at the end of the year. It said it made a GBP45.0 million pretax profit in the six months ended June 30, compared with GBP240.0 million in the corresponding period last year.

Coca Cola HBC, closing down 3.7%, was the heaviest faller in the FTSE 100. The world's second-largest bottler of Coca-Cola products said that its pretax profit rose in the second quarter despite a continued fall in net sales revenue, and that the strong second quarter drove profit growth in the first half as whole.

The bottling group reported a pretax profit of EUR178.7 million for the three months to June 27, up from EUR120.0 million a year earlier, supported by an increased operating profit and lower total net finance costs. Its profit for the first half of the year was EUR129.2 million, up from EUR89.0 million in the first half of 2013, but lower than its profit in the second quarter alone as the bottler suffered a loss in the first quarter.

However, the group said that difficult economic and trading conditions, and a sudden deterioration of trading in Russia and a small number of other markets, means it now expects the volume decline trend seen in the first half to persist in the remainder of the year.

"While second-quarter profits may have risen and margins expanded nicely on reduced costs, offsetting a fall in volumes and revenues, management’s comments about a challenging outlook based on Russia/Ukraine geopolitics, still squeezed consumers," said Michael van Dulken, head of research at Accendo Markets.

Old Mutual was another big blue-chip loser, closing down 1.7%. The investment, savings, insurance and banking group reported a drop in first-half profit, as the group, which operates across numerous countries from the UK and South Africa to sub-Saharan Africa, was hit by the strength of sterling.

It said it made a GBP564.0 million pretax profit in the six months to the end of June, compared with GBP805.0 million in the corresponding period last year, while revenue fell by GBP1.68 billion to GBP7.96 billion.

InterContinental Hotels Group closed down 1.3% after it said it has received a binding offer from Constellation Hotels Holding Ltd to acquire IHG's InterContinental Paris Le Grand hotel for EUR330 million. The owner of the Crowne Plaza and Holiday Inn chains said Constellation Hotels has made a commitment to invest an estimated EUR60 million over time in renovating the 470-room hotel. IHG said that as at June 30, the hotel had a book value of EUR342 million.

In the FTSE 250, Cobham saw its shares close up 3% after it said it remained confident in its full-year expectations because it expects an improvement in trading margins in the second half of the year thanks to higher volumes and better sales of higher-margin products. It also expects to generate mid-single digit organic revenue growth from 2015.

The company's pretax profit and revenue declined in the first-half after the large orders that boosted the prior year result weren't repeated. Pretax profit fell to GBP118 million in the six months to end-June, from GBP137 million a year earlier, while revenue declined 3% to GBP834 million, from GBP864 million, and order intake fell 25% to GBP728 million, from GBP976 million.

"We believe the course of Cobham's evolution has not run entirely to plan, but substantial progress has been made towards returning to mid-single digit organic revenue growth in 2015," said Sandy Morris, an analyst at Jefferies.

Real estate advisor Savills was another big mid-cap winner, closing up 2.7%. The gains came after it posted a rise in pretax profit in the first half and it hiked its interim dividend, as a strong performance in its UK and European businesses offset continued weak volumes for its Hong Kong, mainland China and Singapore arms.

The company's pretax profit in the six months to end-June was up 15% to GBP24.7 million, against GBP21.4 million a year earlier, prompting the company to hike its interim dividend 7.1% to 3.75 pence from 3.50 pence last year.

At the other end of the spectrum, Henderson Group ended the day down 5.6%, making it one of the heaviest fallers in the FTSE 250. The investment manager reported a decline in assets under management over the course of the second quarter, as the creation of a 40%-owned real estate joint venture with IAA-CREF and the additional stake it took in 90 West came into effect.

It said assets under management fell to GBP74.71 billion at the end of June, from GBP79.20 billion at the end of March. This was due to a GBP6.68 billion reduction due to those deals coming into effect, more than offsetting GBP1.86 billion of net inflows from retail clients and GBP179.0 million of institutional net inflows.

Still, Henderson said its first half pretax profit almost trebled, to GBP209.7 million over the six months to end-June from GBP72.0 million in the corresponding period last year. The group reported that net income increased by GBP25.6 million to GBP261.9 million, more than offsetting a GBP23.4 million increase in expenses to GBP171.2 million.

Drax Group, closing down 8.2%, was another big mid-cap loser. The energy provider's shares plummeted after it said the UK Court of Appeal has backed the Department of Energy and Climate Change in its decision not to allow the conversion of the second unit at Drax's power station to be eligible for new subsidies.

In a relatively quiet day in the data calendar Friday, trade data from Japan and China are released at 0050 BST and 0300 BST, respectively. The German equivalent is released at 0700 BST, with UK trade information scheduled for 0930 BST.

In the corporate calendar, FTSE 100-listed TUI Travel releases third-quarter results, while FTSE 250-listed Catlin Group publishes half-year results and Bellway releases a trading update.

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

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