MARKET COMMENT: Ukraine And Gaza Weigh On UK Shares; Shire Deal Done

Fri, 18th Jul 2014 09:46

LONDON (Alliance News) - UK stock indices are trading lower across the board Friday, with investors finding little reason to be cheery as they follow development of the horrific stories of the airliner crash in the conflict region of eastern Ukraine and the Israeli ground invasion of Gaza.

With nothing of interest in the morning economic data calendar, and very few significant UK corporate updates, aside from pharmaceutical firm Shire, investors have been left with little option so far Friday but to consolidate their positions ahead of a weekend that could bring a further deterioration in global political events, although US futures are indicating that the sell-off there has gone far enough for now.

By mid-morning Friday the FTSE 100 has given up most of the gains made earlier in the week, trading down 0.6% at 6,596.72. The FTSE 250 is down 0.7% at 15,438.24, and the AIM All-share is down 0.3% at 767.67.

"Both flare-ups remain in flux, opening the door for any unexpected headline to jolt investors and send markets scrambling," said DailyFX currently strategist Ilya Spivak.

Israeli Prime Minister Benjamin Netanyahu has been holding a press conference Friday, at which he has said he is prepared to significantly expand the ground operation in Gaza if necessary. Tensions between Israel and Hamas have been bubbling away for some time, and hundreds of rockets have been traded between the two over the last couple of weeks, with little market impact.

However, coming at a time of heightened tension between Russian and Ukraine, which appears to have led to the deaths of 298 people in the downing of a passenger plane, it has added to an uncertain geopolitical landscape and therefore a "risk-off" attitude among investors.

Within UK equity movers, Shire leads the few FTSE 100 gainers, up 2.5% following the confirmation from US suitor AbbVie that the two companies have reached agreement for Shire shareholders to be bought out for GBP24.44 in cash plus 0.8960 of a share of the new company for each existing Shire share. The pricing arrangement matched the one Shire said earlier in the week that it would be "willing to recommend" to shareholders.

The deal will create a new company which will be listed on the New York Stock Exchange with a market capitalisation of USD137 billion.

The housebuilders are underperforming, with Barratt Developments leading the FTSE 100 lower, down 3.4%, after suffering a downgrade to Hold from Liberum Capital. In a note on the whole sector Friday, Liberum was positive about the outlook for the housebuilders over the coming year, saying that the market has been overestimating the risk of a near-term UK interest rate rise and that mortgage lending should begin to rise again. The brokerage forecasts a 16% total shareholder return across the sector over the next twelve months.

Even so, the brokerage lowered its price targets on most of the stocks in the sector to take account of recent weakness and said it has concerns over Barratt Development's relative valuation. Persimmon is also down 2.1%, while in the FTSE 250, Bovis homes is down 1.8%, and Berkeley Group is down 1.7%.

The UK banks are also lower, following the news that the UK Competition Markets Authority recommended an in-depth market investigation into the retail banking sector after finding that essential parts of it do not meet the needs of its customers. The big four banks account for more than 75% of all UK current accounts and, in a worst case scenario for the banks, the CMA could recommend that they are broken-up to increase competition form smaller financial service providers.

RBS is the worst performer among the banks, down 2.5%, with HSBC down 1.0%, Lloyds down 0.9%, and Barclays down 0.5%.

Still to come Friday, the main data event of the day is the Reuters/Michigan Consumer Sentiment Index at 1455 BST. Economists are expecting a small improvement in the index in June to 83.0 from 82.5 in May.

There's also some US corporate earnings to come, including from Bank of New York Mellon and General Electric Co.

"A forecast modest uptick in the Michigan confidence index might steady global markets, but the impact of major global events will continue to dominate the tone of the afternoon session," said IG market analyst Chris Beauchamp.

Following a heavy sell-off on Wall Street on Thursday, futures are currently indicating that US markets will open a little higher Friday.

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