MARKET COMMENT: Stocks End October On Front Foot As Banks Rally

LONDON (Alliance News) - The Bank of Japan provided the biggest treat for equity markets this Halloween when it announced an expansion of its quantitative easing, while banking stocks rallied in response to the UK Financial Policy Committee's new leverage ratio proposals, which were less stringent than some had feared.

The FTSE 100 closed Friday up 1.3% at 6,546.47, the FTSE 250 also up 1.3% at 15,501.37, and the AIM All-Share up 0.8% at 720.17.

European stocks outperformed London, with the CAC 40 in Paris closing up 2.2% and the DAX 30 in Frankfurt up 2.3%.

US indices were posting strong gains at the European close. The DJIA was trading up 1.0%, having hit a new record high earlier in trade at 17,395.54 points. The Nasdaq Composite was trading up 1.2%, having hit its highest level since March 2000. The S&P 500 is also performing well, up 0.9%.

London indices made a strong finish to a volatile month, opening higher Friday and maintaining the gains throughout the day. The Bank of Japan provided the main driver for global equity markets after it announced it will expand its quantitative easing programme at an annual pace of about JPY80 trillion, more than previously planned.

Meanwhile, eurozone inflation rose slightly in October but it remained consistently below 1%, still indicating a risk of deflation in the currency bloc. Consumer price inflation showed a 0.4% year-on-year growth, accelerating from 0.3% in September. Core inflation, which excludes energy, food, alcohol and tobacco, slowed to 0.7% year-on-year in October from 0.8% a month ago. It was forecast to remain unchanged at 0.8%.

The risk of deflation in the region has seen calls for the European Central Bank to initiate quantitative easing ,but UBS economist Reinhard Cluse believes this is unlikely.

"Given (a) the politicised nature of sovereign QE and (b) our base-case scenario that Eurozone inflation and growth will pick up modestly over the coming months, our central scenario remains that the ECB will not activate large-scale sovereign QE," Cluse said. "Yet, should our inflation and growth projections turn out to be too optimistic, larger-scale QE, including sovereign bond purchases, might still be activated, perhaps as early as Q1 2015."

Bank shares rose sharply after the proposed new leverage ratio by the Bank of England's FPC could result in the total leverage ratio requirement rising to up to 4.95% for certain banks, but that's not much higher than existing ratios reported by leading UK banks this weak.

Earlier Friday, Royal Bank of Scotland Group said that its leverage ratio had increased to 3.9% from 3.7% during the third quarter ended Sept 30. The bank said it has a medium term target of attaining a leverage ratio of between 3.5% and 4.0%, while wanting to maintain a ratio of at least 4.0% in the long-term.

On Thursday, Barclays said its own leverage ratio had increased to 3.5% from 3.4% over the same period. On Tuesday, Lloyds Banking Group said its leverage ratio rose 0.2 percentage point to 4.7% over the course of the third quarter. HSBC Holdings provides its interim management statement for the third quarter on Monday.

"We think today’s proposals are eminently manageable – a clear relief for Barclays and positive for mortgage banks more generally," said Investec analyst Ian Gordon.

"The proposals are clear, simple and further enhance the safety of the UK banking industry. They will help to ensure that the UK has one of, if not, the safest and most competitive banking markets in the world," said BBA Executive Director Simon Hills.

Barclays closed Friday as the best performing FTSE 100 stock, gaining 8.2%. RBS closed up 6.2% and Lloyds Banking up 2.4%. The FTSE 350 Banks sector index rose 2.9%, the second best performing sector index after technology hardware and equipment.

Separately, RBS reported a swing to third-quarter pretax profit, but results included hundreds of millions of pounds of litigation and conduct costs, relating to matters such as regulators' probe into the foreign exchange markets and a further charge taken for the payment protection insurance scandal.

International Consolidated Airlines Group also performed well, rising 4.7% after it posted an increase in third quarter operating profit and revenue on a constant currency basis, with both British Airways and Iberia performing well in the quarter.

Miners took a hit as the price of precious metals fell heavily. Gold fell to a low of USD1,160.90 per ounce, the lowest it has been since July 2010, while silver fell to USD15.742 per ounce, its lowest price since February 2010.

Randgold Resources, down 2.7%, and Fresnillo, also down 2.7%, were the two heaviest fallers in the FTSE 100, while African Barrick Gold, down 3.8%, was amongst the worst performing stocks in the FTSE 250.

SuperGroup shares declined 6.2% after the company issued a profit warning, as the warmer weather in the UK hurt sales. In an earlier-than-scheduled trading update, the FTSE 250 retailer said it would downgrade its full-year profit guidance to between GBP60 million and GBP65 million, down from the previous guidance of GBP67.1 million to GBP70.3 million. Cantor Fitzgerald analyst Freddie George says the 'blip' in results puts pressure on the company to start paying dividends.

Monday's economic calendar is fairly busy with Chinese HSBC manufacturing PMI for October at 0145 GMT, followed by Markit manufacturing PMI for a host of European countries and the eurozone itself. The UK manufacturing PMI will be at 0930 GMT.

The US will dominate Monday afternoon, with construction spending for September and ISM manufacturing PMI for October both being released at 1500 GMT.

The last of the big UK banks to provide a third-quarter update, HSBC Holdings, highlights Monday's corporate calendar, while FTSE 250-listed data centre provider Telecity Group also will release an interim management statement.

By Neil Thakrar; neilthakrar@alliancenews.com

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