MARKET COMMENT: FTSE Suffers Worst Fall Of 2014 As Fear Grips Market

LONDON (Alliance News) - UK stock indices closed significantly lower Wednesday, with the FTSE 100 suffering its worst one-day fall of the year so far. The sell-off was mirrored across Europe as markets were gripped by concern about a slowdown in growth amid disappointing economic data from around the world.

Volatility has returned to the markets in a big way, with the VIX volatility index reaching its highest level since since mid-2012, while global bond yields plunged to their lowest levels of the year and gold reached its highest level in more than a month as investors fled to the traditional safe havens.

The FTSE 100 ended the day down 2.8% at 6,211.64, shedding 181 points, which leaves the UK's leading index at its lowest level in 15 months. The mid-cap FTSE 250 ended the day down 1.7% at 14,426.74, and the small-cap AIM All-Share closed down 2.4% at 681.22, its lowest level in almost two years.

Major European equity markets also suffered heavy falls, with the French CAC 40 down a massive 3.6%, and the German DAX 30 down 2.9%. US stocks continued lower, with the DJIA, S&P 500 and Nasdaq Composite all down about 1.5% at the time of the European close. The DJIA slipped below 16,000 for the first time since February.

European indices started lower Wednesday amid ongoing concerns over the health of the eurozone economy, after early data from Germany showed consumer prices stagnated in September, for the second consecutive month. Those concerns were only compounded by continued declines in the price of oil, with Brent crude hitting a near four-year low in early trade, bottoming at USD83.35 per barrel.

Investors also remain concerned over the spread of Ebola, after a second healthcare worker in the US was confirmed to have caught the virus. The infected person was on an internal US flight on Monday night, and authorities are looking to contact the other passengers on the flight.

Global indices unwound further in afternoon trade after some disappointing US economic data showed retail sales there fell by 0.3% month-on-month in September, exceeding expectations for a 0.1% fall. The New York manufacturing index also contracted sharply in September, coming in at 6.17, down from 27.54 in August, while US producer price growth also turned negative, recording a month fall of 0.1%. The apparent slowing in US economic activity comes as a particular concern to investors given that it coincides with the end of the Federal Reserves quantitative easing programme later this month.

In London, Shire led the FTSE 100 lower from the outset Wednesday, plunging by a quarter at the open after US authorities appeared to get their way when AbbVie Inc said it is reconsidering its takeover of the Irish drug maker. The deal, which valued Shire at GBP32 billion, had been thrown into some doubt after US Treasury Secretary Jack Lew announced new measures last month to make so-called tax inversion deals less appealing. The news that AbbVie actually has gotten cold feed still took the markets by surprise, and Shire ended the day heavily lower at GBP39.43, not far from its mid-June price, when it originally rejected an advance from AbbVie.

Oil stocks were weighed down by oil prices, with Tullow Oil dropping 4.7%, Royal Dutch Shell falling 2.3%, Enquest down 5.7%, and Cairn Energy down 3.3%. BG Group held up relatively well against the sector decline, ending down just 0.5% after announcing that it poached Helge Lund from Norwegian rival Statoil to be its new chief executive from next March. Deutsche Bank sees the appointment as a positive step for BG, calling Lund an "industry heavyweight". Separately, BG Group said it had started production on the Iracema area in block BM-S-11 in the Santos Basin offshore Brazil early.

Royal Mail was the only FTSE 100 stock to record any significant gains, significantly outperforming the market and closing up 1.9% following the news Tuesday that it has sold one of its sites that is "recognised a surplus" for GBP111 million. Analysts at Berenberg say that the sale price was 85% above its own valuation, therefore indicating that Royal Mail shares may be significantly undervalued.

FTSE 250 listed CSR surged 30% after the semiconductor producer said it agreed to be acquired by US-based semiconductor company Qualcomm Inc for GBP1.6 billion in cash, a deal that comes after it has been in talks about a potential takeover with Microchip Technology Inc since August. The 900 pence a share bid from the US semiconductor group comes after CSR rebuffed an approach from Microchip Technology for being too low in August.

Balfour Beatty rose 11% on the news that it has poached the chief executive of defence products company QinetiQ Group to be its own CEO from January 1, 2015, a job that will involve turning the struggling company around after a string of profit warnings, a failed merger attempt from rival Carillion, and the disputed sale of its US project management business. Analysts have been positive over the appointment of new CEO Leo Quinn. Jefferies says he has a good track record as a turnaround specialist. QinetiQ was the worst performer in the FTSE 250, closing down 12%.

The most positive economic news of the day came from the UK Wednesday, where the unemployment rate fell to a six year low of 6.0% in August from 6.2% in July, exceeding expectations for a fall to 6.1%. Average earnings also improved a little faster that expected, rising by 0.9% in August, up from 0.8% in July and beating the expectation for the growth rate to remain unchanged.

A combination of the better UK data and weakness in the US dollar after the poor data across the pond sent the currency pair briefly back above USD1.60, although at the time of the equity market close the pound has weakened again to trade at USD1.5955.

Safe haven demand sent gold up to its highest level in more than a month, peaking at USD1,249.61 per ounce. The firmer price provided support for precious metal miner Fresnillo, which closed up 0.4% after raising its 2014 gold production target to 590,000 ounces.

There may be more volatility still to come Wednesday, with European Central Bank President Mario Draghi due to speak at 1900 BST from an International Monetary Fund event in Washington. The Federal Reserve's Beige Book of economic conditions is also due to be released at the same time.

Looking towards Thursday, eurozone consumer inflation data will be the morning focus, while from the US in the afternoon there is a raft of data including jobless claims and industrial production, as well as a number of speeches from Fed officials.

In the UK corporate calendar Thursday, drinks giant Diageo is due to make an interim management statement, as are Evraz, Mondi, and Man Group, among others. British Sky Broadcasting is due to release first-quarter results.

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

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