MARKET COMMENT: Stocks Volatile After Fed Ends Stimulus Programme

LONDON (Alliance News) - UK stock indices ended mostly higher Thursday, after a volatile session influenced by contrasting economic data in the wake of the US Federal Reserve's confirmation that it has ended its stimulus programme and is now focused on interest rates.

The FTSE 100 ended up 0.2% at 6,463.55, the FTSE 250 closed up 0.4% at 15,298.23, but the AIM All-Share index closed down 0.1% at 714.58.

The FTSE 100 had made a strong start, even after the Fed announced a final taper of its quantitative easing programme, reducing new purchases of Treasury's and mortgage-back securities to zero, from USD15 billion. It was then buffeted by contrasting data out of Europe's biggest economy, Germany, and strong Gross Domestic Product figures from the US.

Stocks performed strongly in Europe, with the CAC 40 closing up 0.7% and the DAX up 0.4%.

At the London close, the S&P 500 was trading up 0.4% and the Nasdaq Composite was up 0.1%. The DJIA, meanwhile, was outperforming, trading up 0.9%, helped by a strong fiscal fourth quarter earnings report from credit card giant Visa.

After its positive start, the FTSE 100 fell into the red as German unemployment figures came in better-than-expected. The number of people out of work decreased by 22,000 to 2.887 million in October, data from the Federal Labor Agency revealed. Economists had forecast an increase of 4,000. The adjusted jobless rate remained unchanged at 6.7% in October, in line with expectations.

Weakness in the European economy has spurred calls for the European Central Bank to initiate its own quantitative easing programme. However, the German government and Bundesbank are strongly opposed to quantitative easing, and analysts say the more German data improves, the less likely the ECB is to approve any extraordinary stimulus. A stimulus programme is considered helpful to stocks as it would bolster the wider economy.

Stocks therefore found renewed support when German inflation data missed forecasts. The harmonized index of consumer prices rose 0.7% annually in October following a 0.8% increase in each of the previous three months. Economists had forecast a higher figure of 0.9%. Month-on-month, the HICP declined 0.3% in October after remaining flat in September. The fall was worse than the 0.1% drop predicted by economists.

"The fall in prices is not all together surprising given the fall in oil prices over the month and the German labour market has remained fairly resilient from the downturn anyway. The increase in employment is an indication that Germany is perhaps not quite as weak as some had feared. A strong German labour market may just be enough for the Bundesbank to keep resisting full blown QE from the ECB," said Jasper Lawler, a market analyst at CMC Markets.

Indices were also supported by strong growth in the US as third quarter annualised GDP grew 3.5%, beating estimates of 3.0% growth. However, initial jobless claims in the country saw a modest increase in the week ended October 25th, edging up to 287,000, an increase of 3,000 from the previous week's revised level of 284,000.

"When the 3.5% US GDP figure flashed on the screens it was traders’ worst nightmare! Dealers feared a rate rise must be around the corner but after closer inspection the jump in growth was largely down to Washington’s spending on defence. After nearly six years of QE from the US, traders still have the attitude that bad news is good news; old habits die hard," said IG market analyst David Madden.

Smith & Nephew was the best performing stock in the FTSE 100, rising 3.5%, after reporting strong third-quarter results. The medical devices maker said its outlook for the year remains unchanged, after it reported higher trading profit and revenue in the third quarter, buoyed by growth in sports medicine joint repair, wound bioactives and its emerging market business.

St James's Place was a strong performer throughout the day and closed up 2.6%. The wealth manager reported strong growth in funds under management in the third quarter, buoyed by a 23% increase in net inflows as clients took the opportunity of the higher limits now allowed on the amount that can be put into Individual Savings Accounts.

The US dollar rose in the wake of the Fed's decision, and this weighed on precious metals prices. Gold fell to its lowest level in three weeks, hitting a low of USD1195.60 per ounce, while the price of silver declined to its lowest level since March 2010, posting a low of USD16.326 per ounce.

Randgold Resources was the worst performing stock in the FTSE 100, down 6.0%, while Fresnillo fell 4.3% and Anglo American declined 2.4%.

Standard Chartered was also amongst the biggest fallers in the blue-chip index, down 2.9%. Societe Generale cut its rating on the company to Hold from Buy and its price target to 1,085.00 pence from 1,450.00p, saying revenue issues and rising costs require a more aggressive approach to tackle the problem.

On the FTSE 250, troubled Afren saw its shares end 16% lower, after reporting flat net profit for the first nine months of 2014 as a tax exemption credit offset a fall in pretax profit and revenue driven by sharply lower production.

National Express was the best performing stock on the mid-cap index, closing up 4.7%, after the transport operator said its third-quarter pretax profit was up nearly 15% on the year, driven by revenue growth, performance improvements and cost cutting, and said it is on track to meet its profit and cash expectations for the year as a whole.

The economic calendar Friday is fairly busy beginning with Japanese housing data at 0500 GMT. The focus will then turn to Europe, with German retail sales at 0700 GMT and eurozone CPI at 1000 GMT. Consumption data from the US will be released at 1230 GMT.

In the corporate calendar, International Consolidated Airlines Group releases third-quarter results, while Direct Line Insurance Group and Royal Bank of Scotland Group will put out interim management statements and media buying giant WPP will release a trading statement.

By Neil Thakrar; neilthakrar@alliancenews.com

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