MARKET COMMENT: Insurers Lead FTSE Lower Amid Investor Caution

LONDON (Alliance News) - UK stock indices are lower Wednesday for a third consecutive day, ahead of the latest Federal Reserve policy meeting minutes due at 1900 BST Wednesday.

Investors are finding little reason to turn around the cautious sentiment that has dominated the week so far, amid a notable softening in economic data since the strong US jobs report at the end of last week.

By mid-morning Wednesday, the FTSE 100 is down 0.6% at 6,698.75, the FTSE 250 is down 0.9% at 15,513.84, and the AIM All-share is down 0.2% at 781.20. In Europe, with both the French CAC 40 and the German DAX are about 0.1% lower.

The insurers lead the falls on the London market following some disappointing updates in the sector. Admiral is the biggest faller in the FTSE 100, down 5.5%, after saying that car insurance revenue in the UK decreased to GBP0.85 billion in its first-half, compared with GBP0.92 billion last year.

Admiral also said it intends to issue GBP200 million in ten-year debt. It's the first time the group will issue a bond and the market has been somewhat surprised by it. "For a company that has previously prided itself on having no debt, this represents something of a U-turn," said Berenberg analyst Peter Eliot.

Life insurer Aviva has set out some new targets at it's capital markets day. The company said it now wants to double the annual excess cashflow booked by the holding company to GBP800 million by the end of 2016, from GBP400 million in 2013, and reduce the operating expense ratio to below 50% by the same time, from 54% in 2013.

The initial market reaction to the new targets is that they do not go far enough and the stock trades down 3.%. "We sense the market may well be expecting a much more ambitious delivery, whilst the de-leveraging targets exclude a date for the achievement of the external leverage, which is disappointing," said Shore Capital analst Eamonn Flanagan. "The latter is particularly important in the context of the group's dividend paying ability."

Aviva only reiterated its deleveraging targets, saying it still wants to reduce the intercompany loan balance to GBP2.2 billion by the end of 2015 and reduce its gross external leverage ration to below 40% of tangible capital over the medium term.

Of the few gaining blue chip stocks, the airlines are seeing a small bounce following Tuesday's sell-off in the wake of a profit warning from Air France-KLM. EasyJet is up 3.1% and leading the gainers, while British Airways parent International Consolidated Airlines Group is up 2.0%.

The housebuilders have continued to slide Wednesday, with the sector suffering from uncertainty around the UK housing market and mortgage regulation, despite some broadly positive updates from both Bovis Homes and Taylor Wimpey earlier in the week.

UK house prices fell by 0.6% month-on-month in June, reversing some of the strong 4% rise recorded in May, and missing economists' expectations for a small rise of 0.2%, according to mortgage lender Halifax. On an annual basis, Halifax said prices rose by 8.8% in June.

A slowdown in mortgage approvals in recent weeks as banks continue to toughen up lending criteria and affordability monitoring has raised some concerns in the housebuilding sector, causing stocks to lose momentum. Redrow is down 1.1% Wednesday, while Bovis Homes and Crest Nicholson are both down 1.0%.

Some economists are looking for another pick up in the mortgage market however, once providers have adjusted to new regulations. "Tighter regulations introduced in April through the Mortgage Market Review are mainly an administrative problem for banks," says Berenberg chief UK economist Rob Wood. "It now takes much longer to process applications, which has slowed housing transactions without hurting prices much."

The US mortgage market will be in focus shortly, with the release of MBA mortgage applications data for the week ended June 6 at 1200 BST.

Otherwise it's a very quiet day in the economic calendar, leaving the focus on the US central bank announcement after the market close. The release of the minutes from the June Federal Reserve policy meeting at 1900 BST will be the main focus for investor later in the session, while European Central Bank President Mario Draghi is also scheduled to speak in London at the same time.

"There is no doubt that the US will dominate proceedings during today's session but we will have to wait until 7pm for the markets to get into full swing," said Alpari Chief market analyst James Hughes.

Indeed there's little movement in currency majors ahead of the main events. The pound is a touch lower against the dollar following the softer house price data, currently trading at USD1.7115, while the euro is little changed at USD1.3615.

Ahead of the Fed minutes, US stock futures indicate that a fractionally firmer open can be expected on Wall Street, with the DJIA and the S&P 500 futures both pointing 0.1% higher.

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

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