MARKET COMMENT: Geopolitics Weighs On FTSE But Miners Limit Downside

LONDON (Alliance News) - UK stock indices closed lower Monday as geopolitical concerns over both Iraq and Ukraine weighed on investor sentiment, while the mining stocks provided some support on the back of comments from Chinese Premier Li Keqiang.

Despite being lifted off intra-day lows by slightly firmer early trading in the US, the FTSE 100 closed down 0.3% at 6,754.64, the FTSE 250 down 0.7% at 15,706.73, and the AIM All-Share down 0.2% at 786.11.

"Although off the lows, the FTSE still looks quite vulnerable, and underlying sentiment has not really shifted from the doom of last week," said IG analyst Chris Beauchamp.

Major European markets also closed lower, with the German DAX 30 down 0.3%, and the French CAC 40 down 0.7%.

Mining stocks limited the downside the the UK's leading index Monday after Premier Li indicated that further state support to the Chinese economy can be expected, which would prop up demand for minerals.

"China’s economy needs to grow at a proper rate, expected to be around 7.5 per cent this year," Li wrote in an open letter in The Times newspaper Monday, ahead of a three-day visit to the UK. "Despite considerable downward pressure, China’s economy is moving on a steady course. We will continue to make anticipatory and moderate adjustments when necessary," he added.

Most of the top gainers in the FTSE 100 on Monday were minings stocks, with Fresnillo closing as the top gainer, up 2.4%, Anglo American gaining 1.6%, and BHP Billiton gaining 1.1%. The FTSE 350 mining sector as a whole gained 0.8%.

The general appetite for equities was held back, however, by the ongoing situation in Iraq, for which investors await a response from the US. Sunni jihadists continue to battle towards the capital of Baghdad, an advance that has been slowed somewhat by increased resistance by Shia militants.

US President Barack Obama made an early call to rule out sending ground troops into Iraq, but Secretary of State John Kerry said Monday that all other options, including drone strikes on the advancing Sunni rebels, remain on the table. Given that the US has spent the best part of a decade intervening in the country, it seems unlikely that the US will not take an active role in the current fighting, analysts say.

"Any intervention will give investors’ confidence that the US government is willing to act to prevent a supply-shock in crude oil and that could contain oil prices," said CMC Markets market analyst Jasper Lawler.

The rise in the price of Brent oil did remain contained on Monday, trading just slightly higher at the time of the equity market close at USD113.00 per barrel.

The oil producers continued to benefit from the higher oil price, however, with Tullow Oil closing up 1.6% and Premier Oil closing up 2.4%.

While Iraq is grabbing more headlines at the moment, the problems in Ukraine have not gone away. Russia on Monday said it would start charging Ukraine in advance for gas, after threatening to do so for some time in the face of what it calls "chronic non-payment".

Russia had given cash-strapped Ukraine until 0600 GMT Monday to settle about USD2 billion in gas payment arrears. The move comes after weeks of debate over the issue, with Ukraine at one point arguing that Russia was actually the party to owe money, after taking control of billions of dollars worth of gas located beneath the Crimea peninsular.

US markets moved a little higher at the open after some better-than-expected data that showed US industrial production expanded by 0.6% in May, reversing the 0.3% decline recorded in April and beating economists expectations for growth of 0.5%.

Stocks quickly gave up the gains though. At the European equity market close, the DJIA continues to trade down 0.3%, while the S&P 500 is down 0.2%.

Not helpful was a downgraded growth forecast for the world's largest economy from the International Monetary Fund. The IMF said it now expects the US economy to grow by 2.0% this year, a downward revision from the 2.7% it expected previously.

Among other UK stock movers Monday, housebuilders underperformed after the latest UK house price index indicated a significant cooling of the housing market. The Rightmove index showed house prices rose by just 0.1% in June, following a 3.6% jump in May. Prices rose 7.7% year-over-year in June, a slower rate of increase than the 8.9% rise the month before.

Persimmon was one one of the heaviest fallers in the FTSE 100, closing down 2.2%, while in the FTSE 250 Redrow lost 2.3% and Crest Nicholson lost 1.3%.

BT Group was the single biggest faller in the FTSE 100 Monday, closing down 2.6% following reports that its pension deficit is set to swell. The Sunday Times reported that BT will begin a review next month that is likely to lead to a 50% jump in its pension deficit to about GBP6 billion, something that could affect its ability to battle with BSkyB over sports broadcast rights.

Medical equipment group Smith & Nephew also was a big faller, closing down 2.3% following the news that a potential suitor, Medtronic Inc, has agreed to acquire Irish rival Covidien PLC instead.

In the UK corporate calendar Tuesday, full-year results are due from Ashtead Group, as well as Record, Consort Medical, Daisy Group, and Trifast. Interim numbers are due from housebuilder Crest Nicholson, along with a trading statement from Whitbread and an interim management statement from JD Sports Fashion.

While not in the calendar, Royal Dutch Shell and BP may be ones to watch after Sky News reported Monday that the UK's two biggest oil companies will unveil multi-billion pound deals with China on Tuesday, timed for Chinese Premier Li's visit.

The UK economy also will be in focus Tuesday morning, with inflation data due at 0930 BST and the Bank of England's Financial Policy Committee holding its regular quarterly meeting, although no announcement is expected from the FPC until the Financial Stability Report is published on June 26.

Consumer price growth is expected to slow, with core year-on-year prices, which exclude volatile items such as food and energy, forecast to be up by 1.7% in May after having hit the BoE's 2.0% target in April. Economists expect headline CPI to be up by 0.2% monthly and 1.7% annually in May, slowing from 0.4% and 1.8% respectively. PPI and RPI numbers are due at the same time.

The German and Eurozone ZEW surveys of current economic conditions are due at 1000 BST, with economists looking for a small improvement since last month when the surveys hit multi-month lows amid concern over the economic impact of the unrest in Ukraine.

Data from the US Tuesday includes CPI, which is expected to be stable year-on-year at 0.2%, housing starts, and the Redbook of retail sales.

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

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