MARKET COMMENT: UK Stocks Knocked As Eurozone Growth Revised

Tue, 05th Nov 2013 17:35

LONDON (Alliance News) - London's blue-chip and mid-cap indices closed lower Tuesday after the EU Commission revised down its forecasts for growth in the eurozone next year, weighing on stocks across the continent.

Predicting a slightly more gradual recovery that it had previously, the Commission lowered its forecast for GDP growth in the eurozone next year to 1.1%, from 1.2% previously, keeping its forecast for a 0.4% contraction this year. It also warned that unemployment is forecast to remain at its record high of 12.2% through 2014.

"The revision is a further reminder of the hurdles still facing a European recovery, expecting near record levels of unemployment to remain until 2015," said Toby Morris, senior sales trader at CMC Markets.

The EU producer price index also weighed on sentiment, growing 0.1% on the month in September compared with flat in August, but lower than the expected rise of 0.2%. The year-on-year number was down 0.9%, compared with August's 0.8% decline and worse than the 0.7% fall expected by economists.

"The recovery is indeed weak, fragile, and uneven," said European Central Bank Executive Board Member Jorg Asmussen. "We are basically running on one engine, net exports; the other engine, domestic demand, is sputtering but has not yet really taken off."

The ECB will announce its latest interest rate decision on Thursday. Economists expect the bank to maintain status quo for now, even as low inflation and record high unemployment have fuelled market speculation of a rate cut.

The FTSE 100 closed down 0.3% at 6,746.84 and the FTSE 250 closed down 0.7% at 15,367.61, although the AIM All-Share index outperformed its larger peers, closing up 0.1% at 811.63. In Europe, the German DAX was down 0.3%, while the French CAC was down 0.8%.

Wall Street was firmly lower at the London close, despite activity in the US service sector unexpectedly expanded at a faster rate in the month of October, according to a report released by the Institute for Supply Management.

The ISM said its non-manufacturing index climbed to 55.4 in October from 54.4 in September, ahead of an expected fall to 54.0.

?After the October ISM Manufacturing last week suggested that the US economy isn?t in too poor of a position coming out of the government shutdown, the ISM Services index confirmed the improving conditions," said Christopher Vecchio, currency analyst at DailyFX.

US economic data is being used as an indication of when the Federal Reserve mights start reducing the amount of money it is pumping into the economy through its asset buying programme. The start of so-called tapering is deemed bad for equities because the flow of cheap money has been lifting the economy and companies.

Despite the decline in UK equities, the pound got a big lift against other major currencies Tuesday from strong UK economic data.

Activity in the British service sector increased at the sharpest pace in more than sixteen years in October, reinforcing expectations that the ongoing economic recovery will gather pace in the fourth quarter. The headline business activity index for the service sector climbed to 62.5 in October, from 60.3 in September, marking the fastest growth in activity since May 1997, according to a survey by the Chartered Institute of Purchasing and Supply and Markit Economics.

"UK performance continues to diverge from the mainland, with record services PMI growth sending sterling into orbit," said CMC's Morris .

The forward-looking component of the survey revealed that companies retained a positive outlook, with nearly half of the respondents saying that they expect a further rise in activity in the next twelve months.

"Overall, this is a strong number from the UK, which suggests the recovery has not only been sustained at a high level but is also gaining momentum. This has defied some analyst fears that the UK economy would cool off, and hence why the market could reconsider the prospects for the pound", said Forex.com research director Kathleen Brooks.

The National Institute of Economic and Social Research also raised its growth outlook for the UK, saying rising house prices will boost consumer spending. Gross domestic product is set to grow 1.4% in 2013 and 2% next year, an upward revision of 0.2 percentage points for each year.

At the close of the UK equities market, the pound was trading at USD1.6043, EUR1.1911, and CHF1.4641, having traded at 1.4659 against the Swiss Franc for the first time since October 2 earlier in the day.

Non-life insurance was the biggest falling FTSE 350 sector index, closing down 2.2%, with RSA Insurance the biggest faller on the FTSE 100, ending down 6.3% at 121.00 pence. The company warned that it expected its full-year weather losses to be "materially above planning assumptions," as it felt the force of severe weather in Europe, Scandinavia and the worst Canadian natural catastrophe on record in the case of the Alberta floods.

Associated British Foods, closing down 2.5% at 2,198.6594p, was another big faller in the FTSE 100. The food producer and owner of fashion retailer Primark reported higher profits and revenues for its last financial year, but is expecting its profits excluding one-off items to be flat this year as price declines and EU regulatory changes will weigh on its sugar business. Last year's results beat Numis' expectations, but the investment bank downgraded the company to Reduce, from Hold, with a price target of 1,845.00p. Analyst Charles Pick said it was "time to take some profits" after a run up in the share price ahead of the results.

Marks & Spencer, up 3.9% at 505.9847p, closed as the top gainer on the FTSE 100. The company reported flat pretax profits for the first half of the year but an uptick in group sales, as its food business continued to offset lagging fashion sales. The M&S food division reported like-for-like sales growth of 2.5% in the first half, driven by a strong second quarter. M&S also reported a strong performance from its international business, and M&S online. International sales were up 8% in the first half, while M&S's online sales rose 29%.

It's another busy corporate reporting day Wednesday, with blue-chips Persimmon and Old Mutual joined by FTSE 250-listed Mondi, Hunting, and Wetherspoon, amongst others, in releasing interim management statements. Lancashire Holdings and New World Resources both report third quarter results, while FirstGroup and Experian release interim results.

A raft of FTSE 100 companies also go ex-dividend on Wednesday, including BP, Unilever and Barclays, which is likely to weigh on the index as market makers readjusts prices to take account of the payouts.

In the data calendar Wednesday, there is a raft of PMI figures in the morning, with Italian data at 0843 GMT, French at 0848 GMT, German at 0853 GMT, and EU at 0858 GMT. UK industrial and manufacturing numbers are scheduled for 0930 GMT, ahead of EU retail sales at 1000 GMT, and German factory orders at 1100 GMT.

By James Kemp; jameskemp@alliancenews.com; @jamespkemp