LONDON (Alliance News) - UK stocks are mixed Friday while the dollar gains and the euro falls as traders price in expectation of central bank action.
By mid-morning Friday the FTSE 100 is marginally lower at 6,727.35, the FTSE 250 is down 0.3% at 15,437.77 and the AIM All-Share is up 0.2% at 809.91.
A lower close in the US markets on Thursday led to moves lower in Asian markets as global equities continued to consolidate following the more-hawkish-than-expected tone adopted by the Federal Reserve on Wednesday and the much stronger than expected Chicago PMI numbers on Thursday. Good economic news is continuing to be bad news for equities, as traders expect it will lead to sooner tightening on monetary conditions by the Fed.
The Hang Seng closed slightly higher Thursday, boosted by positive Chinese purchasing managers index data. The PMI, a measure of factory sector performance, rose to 51.4 in October from 51.1 in September. Economists expected a more modest rise to 51.2.
In the UK, growth in manufacturing activity eased slightly in October. The purchasing managers' index, fell to 56 in October from a downwardly revised reading of 56.3 in September. A PMI reading above 50, however, indicates expansion of the sector.
Poor consumer price numbers from the eurozone Thursday have added to concerns over the regions growth and supported expectations of continued loose ECB policy, with some even anticipating a rate cut at the next meeting. In a morning note to clients, Societe Generale strategist Kit Juckes notes that according to the Taylor Rule, which looks at how central bank interest rates should be adjusted for inflation, output, or other economic conditions, the ECB's base rate should currently be negative 2%, and therefore a 0.25% cut at the next meeting would be like "sticking a bandaid on a shotgun wound."
Whatever happens at the ECB meeting on Thursday, the speculation has caused weakness in the euro, which when added to a more bullish dollar has allowed the single currency to slip to a low of USD1.3505, down 2% from above USD1.38 earlier in the week. The pound has also gained against the euro, currently GBP0.8460, from euro highs of GBP0.8570 on Thursday.
RBS announced the details of plans to deal with its toxic assets along with its third quarter trading update Thursday. Following months of speculation over a potential "good bank/bad bank" split and concerns over whether small shareholders would lose out in such a move, the bank has announced plans to ring-fence the bad assets internally, avoiding a full split. With the banks underlying trading numbers coming in below expectations, the stock is down 6.3%. However, if that's as bad as it gets and it draws a line under the issue it will be a good outcome, says Shore Capital analyst Gary Greenwood.
About GBP38 billion of the RBS's most toxic assets will be internally ring-fenced and sold off over a three year plan. There had been speculation that the amount of toxic assets that would go in to the potential "bad bank" would be as high as GBP100 billion. Once the bad assets have been run down there will be more capital available for investment and return, with potential for the share price to rise back to about 600p, which would be above the governments "in-price," says Greenwood. The question will be how quickly RBS can get to that target and if the Government will be in a position to sell it's stake before the next election.
Meggitt are the only company losing more that RBS on the blue chip index, now down 10.8%. The aerospace and defence company said it expects 2013 revenue growth to be in the low-single digits, compared to its previous guidance for mid-single-digit growth. As the largest provider of wheels and brakes for military aircraft, generated 24% of first half group sales from the US defense budget. Those budgets are coming under increasing pressure, with the ongoing sequestration of US government spending effective from January 15. There is "increasing concern that the military draw down could be worse than even the (sequestration) caps imply," says Liberum analyst Ben Bourne.
Vodafone leads the FTSE 100 gainers, up 2% following Bloomberg reports that telecommunications giant AT&T Inc. is laying the groundwork internally for a potential takeover of British telecom giant Vodafone Group PLC. next year, though the companies haven't yet entered formal negotiations.
The US ISM manufacturing PMI are the big numbers to watch from the US this afternoon, due at 1400GMT. Following the huge upside surprise to the Chicago numbers on Thursday, the expectation here is for a reading of 55.0, down from 56.2 previously.
Also this afternoon St. Louis Fed head James Bullard is giving a speech that will be closely scrutinised for any clues as to the Fed?s thinking with respect to this weeks surprisingly neutral statement on the state of the US economy.
By Jon Darby; jondarby@alliancenews.com; @jondarby100
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