MARKET COMMENT: FTSE 100 Unwinds Further Amid Emerging Market Flight

LONDON (Alliance News) - The UK's leading share index is trading in the red once again Friday, led lower by Diageo and other stocks with high emerging market exposure, while defensive and small cap stocks perform better. Meanwhile, eurozone inflation falls further and sends the the euro to a new weekly low against the dollar.

By mid-morning Friday the FTSE 100 is down 0.6% at 6,495.45, the FTSE 250 is down 0.2% at 15,677.05, and the AIM All-Share is up 0.2% at 857.35.

Eurozone consumer prices growth slowed again in January, growing at just 0.7% year-on-year, down from 0.8% growth seen in December, according to the advance estimate of CPI inflation released by Eurostat Friday. Economists had expected the reading to accelerate slightly to 0.9%.

Eurozone unemployment is slightly more encouraging, coming in unchanged at 12% in December, beating expectations of an increase in unemployment to 12.1%. A look at the country breakdown of that number highlights the major issue for the eurozone, with German unemployment at 5.1% but Spain at 25.8%, for example.

In the southern parts of Europe unemployment remains at "eye-wateringly high levels", says Michael Hewson, chief market analyst at CMC Markets.

With deflationary pressure in Europe of ever-increasing concern, and the potential for a further loosening of monetary policy by the European Central Bank, the euro dropped to an 8-day low against the dollar of USD1.3514.

The pound also a little lower against the dollar, which is gaining across the board, currently USD1.6455.

The euro remains relatively well supported against many emerging market currencies, however, of the selling continues. The Turkish lira and the South African rand have continued to suffer, having each lost more than 5% against the dollar on Thursday, and the rout is spreading to other currencies, with the Hungarian forint more than 3% lower against the greenback since the European equity market open.

"We are now at the panic stage of the sell-off whereby contagion is spreading and there is broad-based dumping of EM assets while speculators are moving from target to target", says Rabobank analyst Michael Every.

The same theme is driving the UK equity market, with large cap international stocks with EM exposure suffering the most. Diageo is one of the heaviest fallers for the second consecutive day, currently down 2.6%, after receiving a downgrade to Neutral from Conviction Buy from Goldman Sachs following its interim results announcement Thursday.

Sector peer SABMillier also is a heavy faller, down 3.4%, with Coca-Cola HBC close behind, down 2.3%.

Defensive tobacco and utility stocks are gaining, however. Imperial Tobacco is the biggest FTSE 100 gainer, up 2.4% after receiving an upgrade to Buy from Goldman Sachs. British American Tobacco is following it higher, up 0.9%. BG Group and National Grid are both gaining, up 1.4% and 0.8% respectively.

BT is a stand out gainer on its earnings release at the open Friday. The group saw its revenue increase by 2% in the fourth-quarter as a result of its new sports service.

Still to come Friday, US personal income and consumption numbers at 1330 GMT, followed by the Chicago PMI at 1445 GMT and the Michigan Consumer Sentiment Index at 1455 GMT.

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

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