MARKET COMMENT: UK Supermarket Price War Weighs FTSE 100

LONDON (Alliance News) - Supermarkets are heavily underperforming within UK stocks Thursday after Morrisons joined the race to slash costs and cut prices, while European markets as a whole are trading mixed, lacking any clear direction after Wednesday's heavy falls.

By mid-morning Thursday the FTSE 100 is broadly flat at 6,616.67, the FTSE 250 is down 0.2% at 16,294.94, and the AIM All-Share is down 0.3% at 884.18.

Equity markets seems to be taking a breather for now from the knee-jerk selling reaction seen in recent weeks to weaker-than-expected Chinese economic data. The latest data from the world's second largest economy showed industrial production growth, retail sales growth, and urban investment growth all slowed unexpectedly in January.

Despite this, the Shanghai Composite index has closed up 1.1%, and major European markets are positive, with the CAC 40 up 0.2% and the DAX 30 up 0.3%.

"On Monday, markets took a negative reaction to poor data but have failed to react this morning. Gains are likely to be capped as investors digest the state of the second largest economy," said Spreadex trader Lee Mumford.

Germany in particular has strong trade links with China and Russia, and the recent concerns over the tension in Ukraine and a slowdown in China has seen the DAX fall by 5% in the past two weeks, meaning a pause for breath my be less surprising.

European inflation data may have reassured investors that the European Central Bank is unlikely to move for any further policy easing for now. French consumer prices rose by 0.6% in February, reversing the 0.6% decline recorded in January and beating expectations of a 0.5% rise. On a yearly basis prices rose by 1.1% in February, faster than the 1.1% expected.

In Italy, consumer prices fell by 0.3% in February, a deceleration from the 2.1% decline in January, in line with expectations. Over the year, Italian CPI was up 0.4%, slightly lower than the 0.5% expected by economists.

Within UK equities, the supermarkets are proving a significant drag after Morrisons said that it swung into a loss last year and announced significant cost-cutting measures. The announcement stoked concerns over a supermarket price war, after peers Tesco and Sainsbury's already announced similar measures. The food and drug retailers are significantly underperforming, with the FTSE 350 sector down 4.0%, while the FTSE 350 index as a whole is close to flat.

Morrisons reported a pretax loss of GBP176 million for its 2013 full-year, down from a profit of GBP879 million in 2014. However, "the major imponderable item in Morrisons' statement relates to price investment and the company's new profit guidance," says Shore Capital analyst Clive Black.

The supermarket's management has guided that it expects profits in the current year to be between GBP325 million and GBP375 million, "a collapse on prior year run-rates," says Black. The stock opened more than 10% lower and although it has recovered from the low, continues to trade down 7.8%.

The read-across sees Sainsbury's down 6.8% and Tesco down 3.4%. The decline of the three FTSE 100 supermarkets Thursday wiped GBP1.5 billion off their combined market caps.

In the FTSE 250, Morrisons' partner Ocado is down 2.5%.

Banks are the top gaining sector, with Barclays up 1.8% after receiving an upgrade to Add from Hold from Numis Securities. Numis notes the improving European macro-economic outlook in its investment note. HSBC is also up 1.0%. The Hong Kong central bank has announced that, after a year long investigation, it found no successful manipulation of the local benchmark interest rate, for which HSBC was one of the banks under investigation, the Wall Street Journal reports.

Home Retail Group leads the FTSE 250 gainers, up 5.0% after the home and general merchandise retailer reported strong like-for-like sales growth from both its Argos and Homebase chains. The group said it now expects profit before tax to be slightly ahead of the top end of the current range of market expectations of GBP107 million to GBP111 million.

Larger sector peer Kingfisher has also received a boost from the Home Retail Group results, with the stock leading the FTSE 100 gainers, up 2.5%.

Bwin.party shares are up 4.8% after the FTSE 250 listed gaming group said it swung to a full-year pretax profit of EUR44.9 million in 2013 from a EUR23.5 million loss in the previous year.

As German Chancellor Angela Merkel said on Thursday that Europe was ready to stand by former Soviet republics in the face of possible Russian aggression, the situation in Ukraine continues to weigh on sentiment and keep precious metal prices well supported.

Gold has peaked at a near six-month high Thursday of USD1,375.09 per ounce, while silver is at a weekly high of USD21.39 per ounce.

Still to come Thursday, US monthly retail sales are expected to have risen by 0.2% in February, which would signify a turnaround from the 0.4% decline recorded in January. US weekly initial jobless claims are released at the same time and are expected to show a small rise to 330,000, from 323,000 in the previous week.

"Retail sales and unemployment claims will help investors analyse the state of the US economy later today. Investors are likely to keep a sharp eye on the data to try gauge any sign of a recovery in the US economy after the recent frigid weather," said Spreadex's Mumford.

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

Copyright © 2014 Alliance News Limited. All Rights Reserved.