MARKET COMMENT: Housebuilders Lead Risk-Adverse UK Market Lower

LONDON (Alliance News) - UK blue-chip and mid-cap stocks closed firmly lower Monday, with rising geopolitical tensions following the airliner disaster in Ukraine at the end of last week and continued violence in the Middle East between Israel and Hamas weighing heavily on investor sentiment.

However, it was the UK housebuilding sector that led Monday's sell-off on the back of some disappointing house price data.

FTSE 100- and FTSE 250-listed housebuilding companies fell sharply Monday following the release of the latest Rightmove UK house price index, which declined month-on-month for the first time this year in July.

The index fell by 0.8% in the month, following a 0.1% gain in June, as the tighter mortgage lending rules recently introduced by the Bank of England to calm the rampant UK housing market appear to be having some effect. The Rightmove survey showed prices up 6.5% on a yearly basis, slowing from a 7.7% rise in June.

FTSE 100 stocks Barratt Developments and Persimmon closed down 2.6% and 1.3%, respectively, placing them among the biggest losers in the blue-chip index. In the FTSE 250, Bellway, Redrow, Berkeley Group Holdings, Bovis Homes Group, and Taylor Wimpey all closed down by between 1.8% and 3.4%.

As a whole, the FTSE 350 household goods sector closed down 1.1%, as the biggest sector loser.

The FTSE 100 closed down 0.3% at 6,728.44 Monday, and the FTSE 250 closed down 0.5% at 15,486.1. The small-cap AIM All-Share index marginally bucked the trend, closing up 0.1% at 769.34.

In Europe, the CAC 40 in Paris closed down 0.7%, while the DAX 30 in Frankfurt closed down 1.1%

"Scenes of conflict dominate news screens at present, be they in Gaza, Syria or Ukraine, and the result for financial markets has been an outbreak of risk aversion," said Chris Beauchamp, a market analyst at IG.

Worries about further sanctions against Russia have generated negative sentiment after Malaysian Airlines passenger jet MH17 was shot down near the Ukraine-Russia border last Thursday with 298 people aboard.

Following the announcement of a new round of sanctions against Russia by the US last week, US Secretary of State John Kerry upped the pressure on Europe to follow up with some tougher sanctions of its own, following the downing of the jet in an area of eastern Ukraine controlled by Russian-back rebels.

"We hope this is a wake-up call for some countries in Europe that have been reluctant to move," Kerry said as part of a number of weekend television interviews.

Meanwhile, Israel continues its ground offensive in the Gaza Strip even as the death toll has risen above 500.

"European shares started the week undoing some of Friday’s relief rally as uncertainty surrounding the downing of Malaysian airliner MH17 and the increasing death toll in Gaza fed into a negative tone," said Jasper Lawler, a market analyst at CMC Markets. "Details of what happened on Thursday’s crash are still in thin supply. After the initial fallout, investors have been left second-guessing the implications, if any, of the MH17 disaster for markets," he said.

At the individual UK equity level, and away from the housebuilders, tobacco companies were among the heaviest fallers in the FTSE 100 Monday, following weekend reports that a subsidiary of US tobacco giant Reynolds American Inc, has been hit with a potential USD23.6 billion judgement following a lawsuit filed by the wife of a smoker who died of lung cancer.

FTSE 100-listed British American Tobacco, which owns 42% of Reynolds, closed down 1.1%, while Imperial Tobacco Group closed down 1.5%.

Supermarket chains J Sainsbury and WM Morrison Supermarkets closed down 1.6% and 2.4%, respectively, following a profit warning from FTSE 100-listed peer Tesco. Tesco said that current trading conditions are "more challenging" than it had anticipated in early June, and warned that first-half sales and trading profit are "somewhat below expectations."

"The poor earnings from Tesco probably means industry-wide declines in profits for the quarter," said CMC's Lawler.

Tesco itself, however, ended the day among the leading gainers in the blue-chip index, closing up 1.3%. The company saw its shares jump on the news that Chief Executive Officer Philip Clarke is to step down on October 1, to be replaced by Dave Lewis, who is currently president of Unilever's Personal Care unit, as well as a non-executive director of British Sky Broadcasting.

Clarke's departure comes amid a difficult time for the retail giant, which has been trying to stave off increased competition in the UK by cutting prices. His departure follows the resignation of former Chief Financial Officer Laurie McIlwee, whose replacement, Alan Stewart, was poached from Marks and Spencer Group earlier this month.

Brokerage Shore Capital took the news positively and upgraded its rating on Tesco to Hold from Sell. "We welcome this appointment as Mr Lewis is a first class executive in our view who has been a great success at Unilever," said Shore Capital head of research Clive Black. "We see Mr. Lewis’ new appointment as a loss for Unilever," he added.

Anglo American, closing up 0.6%, was another big FTSE 100 riser. Shares in the company rose after its subsidiary Anglo American Platinum unveiled plans to sell off major platinum mines in South Africa, as part of its ongoing platinum review. The company said the decision has been made to exit its Union and Rustenberg mines, along with its Pandora joint venture operation through sales or public market exits. It is also contemplating an exit from its Bokoni joint venture operations.

Anglo American also revealed that Anglo American Platinum will contribute an underlying loss of USD1 million for the six months to end-June, which is adjusted to remove special items and re-measurements, and any related tax and non-controlling interests. In the prior year period, Anglo American Platinum contributed an underlying profit of USD92 million to Anglo American results. Anglo American Platinum reported IFRS headline earnings of USD14 million, compared to USD140 million a year ago.

Forex markets remained relatively quiet Monday, "with a lack of macro catalysts keeping traders on the sidelines," said Alastair McCaig, a market analyst at IG. "All moves in GBPUSD are being made with one eye on the Bank of England minutes on Wednesday, with the BoE still believed to be the bank that will move first [to raise interest rates] when compared to the Federal Reserve and European Central Bank," he added.

At the UK equity market close, the pound trades at USD1.7063, EUR1.2613, CHF1.5321, and JPY172.902. The euro trades at USD1.3524.

In the data calendar Tuesday, UK public sector net borrowing information is released at 0930 BST. In the afternoon, US consumer price inflation data are released at 1330 BST, ahead of the US housing price index at 1400 BST and existing US home sales data at 1500 BST. The Federal Reserve Bank of Richmond publishes its manufacturing index at 1500 BST.

In the corporate calendar, FTSE 100-listed ARM Holdings releases second-quarter results Tuesday, while FTSE 250-listed IG Group Holdings, Beazley, and Croda International are all scheduled to publish half-year results. Blue-chip Royal Mail and mid-cap QinetiQ Group are scheduled to release trading updates.

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

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