MARKET COMMENT: UK Stocks Seen Lower Ahead Of Key Data Releases

Wed, 30th Jul 2014 06:41

LONDON (Alliance News) - UK stocks are expected to open fractionally lower Wednesday, as investors take their positions ahead of a busy day of macroeconomic releases from the US and Europe and as geopolitical concerns continue to weigh on sentiment.

UK and European stocks closed broadly higher Tuesday, but fell from their intra-day highs late in the session after EU slapped new economic sanctions on Russia over its involvement in Ukraine and the downing of a Malaysian Airlines passenger jet by Ukrainian separatists. They represent the toughest round yet of sanctions pursued by the bloc so far.

"It is meant as a strong warning: illegal annexation of territory and deliberate destabilization of a neighbouring sovereign country cannot be accepted in 21st century Europe," EU President Herman Van Rompuy and European Commission President Jose Manuel Barroso said.

Shortly after the EU announcement, the US upped its own sanctions against three top Russian banks, a ship builder and the energy sector. The US Treasury Department sanctioned Bank of Moscow, Russian Agricultural Bank, and VTB Bank OAO, limiting their access to US capital markets. Russian defence firm United Shipbuilding Corp was also targeted for sanctions.

The US sanctions, along with measures taken by the EU, "will have an even bigger bite" on the Russian economy, US President Barack Obama said.

"So far, the sanctions announced by the West have arguably not had the desired impact given that the Kremlin has continued to support the rebels in eastern Ukraine, even following the shooting down of flight MH17 a couple of weeks ago," says Craig Erlam, a market analyst at Alpari. "That said, the Russian economy is clearly feeling the pain of the sanctions and the latest round could be enough to send the country into recession and cause unrest among some of Putin?s closest allies," he adds.

The news of the sanctions knocked major UK and European equity indices from their daily highs, and saw US stocks close lower. The NASDAQ Composite, S&P 500, and DJIA all closed between 0.1% and 0.5% lower.

This negative sentiment is set to roll into the UK session Wednesday. Ahead of the UK equity market open, the FTSE 100 is called to open fractionally lower, having closed at 6,807.75 on Tuesday. IG, CMC Markets, and Alpari all expect the blue-chip index to open down at around 6,803.

"A certain amount of the weakness seen ahead of the open can also be attributed to traders sitting on the side lines ahead of some major economic releases and the FOMC decision," says Alpari's Erlam. "It?s been a very slow start to the week and any data we have seen has had little to no impact on the markets, but I am convinced that will not be the case today," he says.

The eurozone economic sentiment indicator is due at 1000 BST, at the same time as business climate, industrial and consumer confidence and services sentiment readings for the single currency area.

The economic sentiment index is expected to edge down to 101.8 in July from June's reading of 102.0, while the business climate index is expected to come in at 0.20 in July after the 0.22 score in June. The consumer and industrial sentiment indices are forecast to come in at -8.4 and -4.5, respectively in July, having posted readings of -7.5 and -4.3, respectively in June. The service sentiment index, meanwhile, is forecast to rise to 4.4 in July from June's reading of 4.2.

Later on, the preliminary release of German consumer price inflation is due at 1300 BST. Consumer prices are forecast to have risen 0.8% year-on-year in July following the 1.0% increase in June. On a month-on-month basis, consumer prices are estimated to grow at a slower rate of 0.2%, after the 0.3% rise in June.

The German harmonised index of consumer prices, which is released at the same time, is forecast to increase 0.8% year-on-year in July, slower than the 1.0% rise in June. On a monthly basis, the HICP is expected to climb 0.3% in July following the 0.4% increase in June.

However, "data released during the first half of the European session may not do much to the markets, despite it containing some valuable information regarding confidence in different areas of the eurozone economy," says Erlam.

While the data should not be ignored, the fact that it comes after alternative confidence readings and ahead of a raft of top-tier macroeconomic data from the US, means that investor focus may be elsewhere.

"Aside from coming just before some major economic releases, these numbers are generally seen as lagging because they are released after other, more widely followed confidence readings, so in theory should already be priced in," Erlam says. That said, "if we see a big swing one way or another, they could get a reaction," he adds.

In the US, the latest ADP employment change report, which is widely regarded as a warm-up for the monthly non-farm payrolls on Friday, is released at 1315 BST. Economists' expectations are for employment report to show an additional 230,000 jobs added in July after 281,000 were added in June.

Shortly after, the initial estimate of US second quarter gross domestic product and personal consumption expenditures data are released at 1330 BST. Expectations are for annualised GDP to come in at 3.0% for the second quarter, reversing the 2.9% contraction posted in the first quarter.

"For some time now we?ve heard all manner of speculation that the slowdown in the US economy seen in Q1 was an aberration, caused by the worst winter in living memory," says CMC Markets chief analyst Michael Hewson. "The slowdown in Q1, we were told, would be more than offset by a strong bounce back in Q2," he says.

"While this may well be true, the fact is that in the space of six weeks, expectations for Q1 growth went from a figure of 1% in April, to a contraction of 2.9%, in a matter of weeks, with no discernible effect on stock market valuations," Hewson adds.

Also of note, the US Federal Open Market Committee releases its latest monetary policy and asset purchase decisions after the UK equity market close at 1900 BST. The Fed is widely expected to retain its key interest rate at 0.25% and to cut its monthly bond-buying programme by another USD10 billion, lowering its asset purchases to USD25 billion a month.

"The FOMC is unlikely to deliver any major surprises," says Rhys Herbert, senior economist at Lloyds Bank. "There is no press conference and Fed Chair (Janet) Yellen has recently updated the markets on the Fed's thinking in her testimony to Congress," he adds.

Ahead of the UK equity market open and the data, the pound trades at USD1.6941, EUR1.2635, CHF1.5368, and JPY173.028. The euro trades at USD1.3405.

In a busy day in the corporate calendar, FTSE 100-listed, ITV, Barclays, British American Tobacco, and Tullow Oil have been joined by FTSE 250-listed Taylor Wimpey, National Express Group, Segro, amongst others, in releasing half-year results ahead of the UK equity market open Wednesday.

Blue-chip Antogasta has released a second-quarter production update, while mid-cap Vedanta Resources has published first quarter results. Compass Group, 3i Group, Diploma, and WS Atkins have provided trading updates.

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