MARKET COMMENT: M&A Disappointment, China Data Keep FTSE Suppressed

LONDON (Alliance News) - UK stocks got off to a bad start Monday and never fully recovered after a further softening in Chinese house prices brought concerns over slowing growth in the world's second largest economy to the fore, while the reduced chance of some heavyweight merger and acquisition activity weighed particularly on the UK indices.

The FTSE 100 closed down 0.2% at 6,844.55, the FTSE 250 closed down 0.1% at 15,379.44, and the AIM All-Share closed down 0.6% at 792.02.

Major European markets performed notably better Monday, with the French CAC 40 gaining 0.3%, and the German DAX 30 ending 0.4% higher.

A slightly better start for US stocks helped to boost those in Europe, but while the FTSE 100 was lifted off its low, it could not get out of the red. After the European close, the DJIA continues to trade up 0.1%, the S&P 500 is up 0.3%, and the Nasdaq Composite is up 0.8%.

The Chinese house price index indicated house price inflation there of 6.7% in April, down from 7.7% growth in March and the fourth consecutive month of declines.

"Disappointing data from China over the weekend added to concerns that the country cannot achieve its ambitious 7.5% growth target," said market analyst at Alpari Craig Erlam. "At some point the government or the central bank is going to have to provide some form of stimulus, otherwise I don’t see how the country will come close to achieving its growth target."

Taken as a bellwether for the health of the Chinese economy, the disappointing numbers saw the sectors most exposed to Chinese investment underperform Monday, with the FTSE 350 Industrial Metals and Mining sectors closing down 1.3% and 0.5%, respectively.

In a day with very little in the data calendar, AstraZeneca provided the major story. The UK drugs maker provided a significant drag on the UK's leading index after rejecting a final takeover offer from US rival Pfizer Inc Monday. The US company increased its offer to GBP55.00 per share from GBP50.00, previously, but AstraZeneca's management remained unconvinced that the price offered good value for shareholders.

AstraZeneca did leave the door ajar for an improved bid from the US drugs giant, saying that it might be prepared to recommend a bid that was more than 10% above the new proposal. Investors appeared to think such an increased offer is unlikely, as AstraZeneca shares plunged heavily at the open and ended the day down 11%.

Vodafone Group, another of the UK's biggest stocks, also provided a drag Monday, closing down 0.9% following the news that US telecommunications giant AT&T Inc agreed a deal to take over DirecTV, a satellite dish service, for USD48.5 billion.

There had been speculation that AT&T may have been looking to make a takeover of Vodafone, but given Monday's expenditure, such a move now seems very unlikely. Vodafone will be back in focus on Tuesday when the group reports its full-year results, with analysts expecting a broadly positive update. "We still like the shares, even if AT&T has folded up its tent and retreated back to the US pay-TV market," said Berneberg analyst Paul Marsch.

Airline stocks had a notably better day, flying to the top of the winner tables on the back of a well received update from Ryanair Holdings. The Irish low-cost carrier reported a drop in profits over the last financial year, but only in-line with analyst expectations, and given the favourable timing of Easter as well as strong forward bookings, average fares in the coming half-year are seen as being 6.0% higher.

Irish-listed Ryanair shares had their best trading day in many months, closing up almost 11%. The read across saw easyJet close as the strongest FTSE 100 gainer, up 4.7%, while British Airways owner International Consolidated Airlines Group closed up 3.5%.

The housebuilders had a mixed day as investors reacted to the latest strong UK house price data, but also a warning from the Bank of England governor Mark Carney, both of which came on Sunday.

The Rightmove house price index showed prices rising at 8.9% year-on-year and 3.6% month-on-month in May, up from 7.3% and 2.6%, respectively in April; the fastest annual increase in the index for more than six-and-a-half years.

While raging house price inflation has been boosting housebuilder profits in recent months, there is a growing likelihood that the BoE's Prudential Regulation Authority will soon step in with new measures to cool the market, especially given Carney's comments in the weekend press where he said that rapidly rising UK house prices posed the biggest single risk to the countries economic recovery.

In a day bereft of further data drivers, the housebuilders opened notably lower before recovering throughout the day. FTSE 100 listed Persimmon and Barratt Developments both closed down 0.4%, while those listed in the FTSE 250, the index that heavily underperformed last week, mainly managed to close the day slightly higher.

"The BoE needs to take action to reduce the risks of a dangerous bubble developing," said Berenberg chief UK economist Rob Wood. "Expectations are dynamite in the housing market. The faster house prices rise, the faster people could expect them to continue rising, driving bubble behaviour."

Carney has explicitly stated in recent appearances that the hosing market is an issue for the Prudential regulation authority rather than the Monetary Policy Committee, meaning that the BoE will not use interest rates to calm the housing market but may use its power to rein in the Help to Buy scheme - a subject likely to be politically sensitive in the coming months ahead of next year's general election.

While not technically the MPC's responsibility, all eyes will be on the minutes of the May BoE policy meeting when they are released on Wednesday for any clues it gives on the members thinking on asset bubbles and the timing of the first interest rate rise.

"We may well start to see some signs of dissent amongst some MPC members with respect to the timing of a future rate rise," said CMC Markets chief market analyst Michael Hewson.

Ahead of that, Tuesday's economic focus will be the release of the latest UK inflation and retail sales data at 0830 GMT. Economists expect consumer prices to tick up to 1.7% year-on-year in April from the 1.6% recorded in March, which would inch the rate closer to the central bank's official 2.0% target.

A rise in the UK CPI, alongside any dissent in the central bank minutes, would ad further pressure for interest rates to rise before the general election next year, said CMC Markets analyst Jasper Lawler.

In the UK corporate calendar Tuesday, as well as the Vodafone Group numbers, full-year results are also due from Marks & Spencer Group, BTG, Homeserve, Big Yellow Group, Bloomsbury Publishing, Intermediate Capital Group, First Derivatives, and blur Group.


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

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