MARKET COMMENT: UK Stocks Fall As Eurozone Woes Trump Doveish Fed

LONDON (Alliance News) - UK stocks ended lower Thursday after an initial boost provided by surprisingly doveish minutes from the last US Federal Reserve meeting gave way to ongoing concerns about economic weakness in the eurozone.

The FTSE 100 closed down 0.7% at 6,435.84 points, the FTSE 250 down 0.8% at 14,811.33, and the AIM All-Share down 0.7% at 722.84.

Major European markets ended more mixed, with the French CAC 40 down 0.5% but the German DAX up 0.2%. US markets were lower, with the DJIA down 0.8%, the S&P 500 down 0.7%, and the Nasdaq Composite down 0.5% at the London close.

The September Fed meeting had been surrounded by speculation that US policy makers were about to make a more hawkish shift in the wording of their policy statement. However, Wednesday's minutes retained all of the same forward guidance, including there being "considerable time" until the first interest rate rise can be expected.

The minutes were therefore taken as accommodative, pushing back rate-rise expectations, which sent stocks up and the dollar lower. In fact, the S&P 500 recorded its best day so far in 2014 on Wednesday, gaining almost 1.8%. The positivity towards equities initially carried into the European session Thursday, and the FTSE 100 gapped 1.0% higher at the open.

The early gains were slowly eroded throughout the day, however, as investors refocused on the worrying signals of economic slowdown across the eurozone.

"Markets turned lower on a combination of concerns about the German economy, as well as concerns about the European banking system," said chief market analyst at CMC Markets Michael Hewson.

German economic data Thursday showed exports from Europe's largest economy fell by 5.8% in the month of August, the sharpest fall since January 2009. The disappointing data follows a warning from the International Monetary Fund on Wednesday that the whole eurozone is at 40% risk of slipping back into recession, amid continued price pressures and a series of global crises.

Further adding to concerns within the eurozone Thursday, Portugal's Espírito Santo Financial Group said it has filed for bankruptcy after its request for "controlled management" was turned down by a court in Luxembourg. The entity's main asset was a 20% stake in the collapsed bank Espirito Santo, so although the bankruptcy is not a surprise, it serves as a timely reminder of the fragility of the European banking system, analysts said.

German government bond yields reportedly hit an all-time low Thursday, as the flight to quality seen in the markets this week so far continued, amid further signs of economic weakness.

Around the time of the European market close, European Central Bank President Mario Draghi was talking in Washington about the European economic recovery and reform within the euro area. Draghi has been a strong critic of euro nations such as France and Italy that have not undertaken recommended reform, and on Thursday underlined the urgent need to raise potential output in the euro area through reforms.

"Put simply, I cannot see any way out of the crisis unless we create more confidence in the future potential of our economies," Draghi said, adding that "given demographic trends, raising structural growth will have to take place primarily through productivity."

A defensive play was evident within UK equities Thursday, with the tobacco, beverage, and utility stocks all holding up, while the travel and leisure stocks came under continued pressure amid ongoing concerns of the spread of the Ebola virus.

The mining stocks were the best performers on the London market, boosted by the higher price of precious metals, which rose strongly as the dollar fell.

The price of gold peaked at a two-week high of USD1,233.37 per ounce Thursday, while silver touched a near-two week high of USD17.72. The dollar fell against other major currencies, with the pound peaking at USD1.6227 and the euro hitting a near-two week high of USD1.2729, although the dollar has regained some strength towards the European equity close.

At the individual equity level, all of the best performing stocks were miners. Fresnillo was the best FTSE 100 performer, up 6.4%, with Randgold Resources up 6.1%, and Rio Tinto up 2.1%. Kazakhmys ended as the best FTSE 250 gainer, up 4.2%, with African Barrick gold up 3.3%, Polymetal International up 3.3%, and Vedanta Resources up 3.4%.

Vodafone was a big faller Thursday, closing down 2.6% after being downgraded to Reduce from Neutral by analysts at Nomura on Wednesday. Nomura is concerned by the increasing competition it sees in many of the markets where Vodafone is currently dominant.

FTSE 250-listed catalogue retailer N Brown fell heavily, closing down after it issued a profit warning, reducing its full-year pretax profit guidance to the range of GBP88 million to GBP92 million, compared to the market's previous expectation of about GBP103 million. The market reaction has been particularly negative given that the warning comes just three weeks after the company had guided "confidence in achieving the full year outturn".

The housebuilders underperformed after the latest survey from the Royal Institution of Chartered Surveyors showed a moderation in UK house prices, with the worst falls suffered in London. House prices in the UK as a whole were down in September, RICS said, with a seasonally adjusted index score of 30%. That was shy of forecasts for 36% following the downwardly revised reading of 39% in August.

Persimmon ended down 3.5%, with Barratt Developments down 3.4%, Taylor Wimpey down 4.2%, Bovis Homes down 3.7%, and property search site Zoopla down 4.1%.

The Bank of England Thursday kept UK interest rates on hold at 0.5% and maintained its stock of purchased assets at GBP375 billion, as expected.

The economic calendar looks a little quiet Friday, with just August trade balance data of note from the UK. In the UK corporate calendar, Vedanta Resources is scheduled to release a second quarter production update, while Jupiter Fund Management is due to release an interim statement.

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

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