MARKET COMMENT: UK Stocks Close Mixed; Lloyds, Babcock Down

LONDON (Alliance News) - The FTSE 100 ended slightly higher Monday, while its mid-cap peer index lost ground, in a subdued session that had little in the way of economic or major corporate news to drive it.

The corporate news that there was for blue-chip stocks was mainly negative, with Lloyds Banking Group down as it priced the TSB initial public offering at below book value, and Babcock International falling as it lost out on potential UK defence contracts.

London stocks got an early boost from some encouraging economic data from China and Japan overnight, but struggled to get any momentum as some European markets remained closed for the f Whit Monday holiday.

The FTSE 100 held on to the slim early gains to close up 0.2% at 6,875.00, while the FTSE 250 slipped in afternoon trade to close down 0.1% at 16,218.36, and the AIM All-share closed down 0.02% at 805.04.

In Europe, markets that were open remained relatively flat all day, with the French CAC 40 closing up 0.1% and the German DAX up 0.2%.

After the European market close, US stocks were trading slightly higher with the S&P 500 and the DJIA both up about 0.1%. Those indexes closed at all-time highs on Friday after strong US non-farm payroll data.

Second estimates released by Japan's Cabinet Office Monday showed that the nation's gross domestic product rose at a faster-than-initially-estimated pace in the first quarter. GDP rose 1.6% quarter-over-quarter, faster than the 1.5% growth estimated initially and the consensus estimate of 1.4% growth. The annualised GDP growth was also revised up to 6.7%, from 5.9%.

The strong growth was to some extent driven by a surge in consumer spending ahead of a sales tax increase in Japan on April 1. "Growth should be significantly lower in the second quarter as a result, with some already forecasting a 4% contraction on an annualised basis," said Alpari market analyst Craig Erlam.

Japan's Cabinet Office also said that consumer confidence rose to a four-month high in May, according to it's confidence index, which beat expectations at 39.3, up from 37.0 in April.

Weekend data from China showed the country's trade surplus increased to USD35.92 billion in May, from USD18.45 billion in April, exceeding economists' expectations.

The Peoples Bank of China also announced that it will lower the amount of deposit that lenders need to set aside as cash with the central bank by 0.5%. The lowering of the Reserve Requirement Ratio is the latest of China's targeted measures aimed at achieving its growth targets in the face of a slowing economy, and is aimed ta persuading financing companies and leasing companies to loosen the supply of consumer credit.

"This is an interesting move, reflecting the PBoC's use of its monetary tools to try to bring about desired structural change," said Capital Economics Chief Asia Economist Mark Williams.

Within UK equity movers, Lloyds Banking Group dropped 1.8% Monday after announcing that the upcoming initial public offering of its retail banking arm TSB will be priced at a discount to the current book value. Lloyds said Monday that the IPO will be priced at between 220 pence and 290 pence per share, which would value the spun-off retail bank at about GBP1.28 billion at the mid-point of the range, about a 15% discount to its net asset value.

Lloyds is selling off TSB in response to European Commission demands that were attached with the government bailout. It is selling up to 35% of the bank in the IPO, but must sell all of the retail bank by the end of 2015, providing quite an incentive to ensure the first tranche of the IPO is a success. However, it comes at a time when several recent IPOs have suffered mixed fortunes.

"This just seems like another sign that UK investors have seen one too many IPOs of late and demand is fading," said CMC's Jasper Lawler.

Babcock International Group closed as the heaviest blue-chip faller, down 1.9% after announcing that it won't be awarded any of the tranche 2 Next Generation Estates contracts by the Defence Infrastructure Organisation.

Dixons Retail and Carphone warehouse both saw their shares fall Monday, closing down 0.4% and 0.9% respectively, after The Telegraph reported over the weekend that a supplier may scupper their GBP3.6 billion merger ambitions. EE, the UK's biggest mobile operator, is reviewing its consumer retail strategy, with a conclusion due "within weeks," and a complete withdrawal from Carphone Warehouse is one potential result, The Telegraph said. The loss of EE as a partner would make the new Dixons Carphone a lot less relevant, analysts say. A spokesperson for EE told Alliance News that its review of its distribution strategy and talks with "all relevant parties" are continuing.

AIM-listed Leni Gas & Oil saw its shares surge once again Monday after announcing that its well at the Goudron Field in Trinidad has intersected 687 feet of oil bearing sand. Shares gained 23% Monday and more than tripled over the last two weeks following a string of positive updates.

Building materials company Hightex led the fallers on AIM, its shares closing down 27% after it posted a widened pretax loss of EUR2.8 million in 2013, from EUR1.1 million in 2012, on nearly halved revenues. The company said it has made provisions to cover receivables from its joint venture in Brazil, which has been involved in building the World Cup stadiums, as difficulties in obtaining financial information has cast them into doubt.

In the UK corporate calendar Tuesday, while there are no scheduled updates from the blue-chips. Full-year results are due from FTSE 250-listed Oxford Instruments, as well as small-caps Phoenix IT Group, Sepura, and Carclo, while a quarterly trading update is expected from Spirit Pub company, as well as an interim management statement from Ted Baker.

Asian data will likely be the early driver for UK and European stocks again Tuesday as Chinese consumer price inflation data will be released overnight, along with monthly new loans numbers. Economists are expecting Chinese CPI to rise back up to 2.4% year-on-year in April, after having slipped from that level to 1.8% in April.

The British Retail Consortium sales monitor is released overnight, and the main economic focus of the morning will be industrial and manufacturing production numbers, due at 0930 BST. The National Institute of Economic and Social Research will release its estimate of UK GDP growth over the three months to end-May at 1500 BST.

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

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