MARKET COMMENT: Stock Slide Into Weekend As Ukraine Concern Grows

LONDON (Alliance News) - Equity indices across the UK and Europe opened lower and stayed lower Friday, finishing a muted day of trading in the red ahead of a weekend likely to bring further developments in the simmering conflict between Russia and Ukraine.

The economic effect of that standoff was noted Friday by ratings agencies and corporations alike.

The FTSE 100 closed down 0.3% at 6,685.69, the FTSE 250 down 0.7% at 15,888.21, and the AIM All-Share down 0.6% at 819.41.

Within major European markets, the French CAC 40 closed down 0.8%, while in Germany, where trade ties with Russia are particularly strong, the DAX 30 has closed down 1.5%.

After the European equity market close, US markets also continued lower, with the DJIA down 0.8%, the S&P 500 down 0.7%, and the Nasdaq Composite down 1.4%.

Russia had its credit rating cut to just one notch above junk Friday by ratings agency Standard & Poor's. S&P downgraded Russia's rating to 'BBB-' from 'BBB'. "In our view, the tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy," the agency said in its downgrade announcement.

The Russia central bank acted almost immediately to defend the value of the ruble by raising interest rates by 0.5% to 7.5% Friday, citing increased inflation risks.

The cost of conflict has also started to affect corporate earnings, with shares in Visa Inc, the world's largest credit and debit card company slipping as much as 5% on Wall Street early Friday, after the company said that sanctions on Russia are hurting its card transaction volumes.

Investors have therefore adopted a cautious approach to risk assets heading into the weekend. Moscow has warned Ukraine that it faces consequences for its "bloody crime" of shooting dead five pro-Russian separatists during clashes when reclaiming occupied buildings in eastern Ukrainian cities. While the situation has been bubbling away in the background for a number of weeks, the markets appear to have become more nervous in recent trading, as evidenced by the sharp equity sell-off Thursday afternoon on the rumour that Russian President Vladimir Putin had called an emergency press conference.

"A lot can happen over the weekend in Ukraine and there’s plenty of traders that will not want to be caught on the wrong side of things," said Alpari market analyst Craig Erlam.

The pound traded with a positive bias against the dollar Friday. Backed by strong UK retail sales, and following recent inflation and wage growth data that suggests real wages are once again rising in the UK for the first time in three years, sterling reached a high of USD1.6830.

UK retail sales accelerated faster-than-expected in March, growing at 4.2%, up from 3.3% in February and exceeding economists expectations for growth of 3.8%. In the month of March alone, retail sales grew by 0.1%, lower than the 1.3% growth in February, but far better than the 0.4% contraction that had been expected.

"With more people in jobs, wage growth returning and inflation coming down, the squeeze on real incomes has ended. Households need to dip less into their savings to spend, making the upturn more sustainable," said Berenberg senior economist Christian Schulz.

The current UK housing market boom may prove to be somewhat less sustainable, with the latest mortgage data Friday indicating a slight slowdown in lending. The British Bankers Association issued 45,900 loans in March, slightly lower than the 47,600 issued in February, and missing economists expectations for a rise to 48,900 approvals.

The data comes just days before the introduction of new rules around mortgage lending, imposed by the Bank of England as part of its effort to ensure the sustainability of household finances as the economic recovery in the UK takes hold and interest rates inevitably start to rise. From this weekend the Mortgage Market Review means that lenders will place higher scrutiny on household spending, reportedly testing their ability to repay mortgages at interest rates of up to 7%.

Shore Capital expects these new rules to lead to lower mortgage lending in the coming months, and therefore a dampening of the rampant house price inflation. "These interest payment burdens are at levels similar to those that stalled the housing market in the past," says Shore Capital equity strategist Gerard Lane.

Within UK equities Friday, the banks underperformed amid controversy over their bonus payments. Royal Bank of Scotland Group PLC closed down 0.2% after the part-government owned bank was blocked from paying bonuses at 200% the level of base pay. Barclays PLC, which also suffered strong opposition to its own remuneration packages at its AGM on Thursday, closed down 1.3% Friday.

"Public and shareholder opinion is that bankers need to actually earn larger pay checks by earning larger profits for the bank first," said CMC Markets analyst Jasper Lawler. Lloyds Banking Group lost 0.9%, while HSBC Holdings Group fell 2.1%.

Tullow Oil PLC was amongst the heaviest FTSE 100 fallers, closing down 2.6% after announcing that its Tependar-1 exploration well will be plugged and abandoned as the mining group failed to encounter hydrocarbons there.

At the other end of the leading index, Pearson PLC closed at the top of the table, up 3.8% after announcing a "solid start" to 2014 and maintaining its full-year earnings guidance. "Our major programme of restructuring and investment is on-track and will drive a leaner, more cash generative, faster growing business from 2015," said Chief Executive John Fallon in a statement.

William Hill PLC closed up 1.3% despite announcing a fall in profits and the closure of 109 betting shops before the end of the year. The bookmaker said the decision to close shops was in response to the government's decision to increase the tax rate on high-speed gambling machines to 25% from 20% from next year. "William Hill managed to convince investors last quarter’s drop in profits was temporary as it looks to a big year with the football World Cup," said CMC's Lawler.

Aside from any weekend developments in Ukraine or otherwise, the week ahead looks set to start quietly, with no UK corporate or economic data releases scheduled Monday. Things will ramp up as the week goes on, with preliminary first quarter UK GDP due on Tuesday, followed by the same numbers from the US on Wednesday.

Good weekend all.

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

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