News Column

MARKET COMMENT: FTSE 100 Ends Flat, Royal Mail Plummets

May 22, 2014

Jon Darby

LONDON (Alliance News) - The FTSE 250 outperformed London's bluechip index for a fourth consecutive day Thursday as it continued to take back some of the losses it suffered last last week, whileRoyal Maildropped almost 10% after it warned of intensifying competition in its markets.

The FTSE 100 ended fractionally lower at 6,820.56, while the FTSE 250 closed up 0.5% at 15,675.09, meaning the mid-cap index has now outperformed the blue-chip index by almost 2.5% this week. The FTSE 250 index was heavily sold late last week after it had outperformed the FTSE 100 by more than double over the previous two-and-a-half years. The AIM All-share closed up 0.7% at 796.96.

Royal Mail was the most notable of the individual UK equity movers Thursday, ending a by far the biggest individual faller in the FTSE 100 after it warned that competition is increasing in the fast-growing parcels market and it is facing a big potential hit from rival TNT Post UK's plans to expand its own letter delivery service to new UK cities.

Reporting its first set of annual results since it was privatised last October, the company said its pretax profit excluding gains from reforms of its pension schemes rose to GBP363 million in the 52 weeks ended March 30, from GBP304 million a year earlier, as revenue increased to GBP9.46 billion, from GBP9.15 billion. Parcels revenue growth again more than offset declining letters revenue.

"Royal Mail certainly has managed to meet expectations with respect to its profits today," said CMC Markets chief market analyst Michael Hewson. "But the increasing competition it is likely to face from much nimbler rivals is likely to make its profit forecasts much more difficult to attain without making further cost efficiencies in what is becoming an increasingly crowded market place."

Royal Mail shares had risen by more than 15% over the month prior to the results.

Economic data and central bank news was also in focus again Thursday, with markets in London supported to some extent by reassuring UK GDP data. A much mixed picture in Europe provided concern for both investors and the European Central Bank ahead of next month's ECB policy meeting.

A rise in UK government borrowing figures also sent the pound lower against other major currencies.

Stocks opened firmly Thursday, buoyed by a Chinese manufacturing PMI figure that beat expectations. It rose to a five-month high in May of 49.7, from 48.1 previously. Although the reading below 50.0 still indicates contraction, the improvement helped boost a mining sector that has been relatively suppressed so far this week, and the FTSE 350 mining sector index closed up 0.7%.

The UK economy grew by 0.8% in the first-quarter of the year, slightly faster than the 0.7% growth recorded in the fourth quarter of 2013, the latest estimate showed. That was in line with economists' expectations and unchanged from the initial estimate at the end of April. Similarly, on a yearly basis, the GDP reading also matched the first estimate of 3.1% growth.

The latest round of European PMI data indicated that Germany continues to drive growth, while France continues to struggle. The French manufacturing and services PMI's both missed expectations and, significantly, slipped back into contraction for the first time since February, with readings of 49.3 and 49.2 respectively.

"France's stuttering economic performance continued in May," said Markit senior economist Jack Kennedy. "With new orders and employment both falling at sharper rates in the latest month, the malaise looks set to persist, dashing hopes of any convincing recovery taking hold."

Germany's services PMI roared ahead to 56.4 in May, from 54.7 in April, easily exceeding expectations for a print of 54.5. The manufacturing PMI was a little weaker however, down to 52.9 in May, from 54.1 previously, although still comfortably signalling growth.

The Markit composite PMI for the eurozone as a whole came in exactly as expected at 53.9 in May, factionally lower that the 54.0 recorded in April.

"This two-speed nature of Europe presents a difficulty for the ECB," said CMC Markets market analyst Jasper Lawler. "The bank has implied monetary easing at its June meeting to ward off deflation, but how necessary is that in Germany when the country is booming?"

"I think that is fair, the ECB decision on 5th June is likely to have a major impact on the markets and it's not unusual to see this kind of paralysis in the lead up to such a big decision," said market analyst at Alpari Craig Erlam.

Within major European equity markets, the French CAC 40 spent most of the day in the red following the disappointing numbers, but managed to close up 0.2%, while the German DAX closed up 0.3%.

European equities were lifter somewhat in the afternoon session by a positive open on Wall Street. When the European markets closed, with the DJIA was up 0.1%, the S&P 500 up 0.4%, and the Nasdaq Composite up 0.7%.

A positive US Markit services PMI helped boost US stocks. The reading rose to 56.2 in May, from 55.4 in April and exceeding economists' expectations for a rise to 55.5. Investors in the US managed to brush off a slightly more disappointing initial jobless claims number that showed 326,000 people making new claims for unemployment benefits in the week ended May 16, up from 298,000 in the previous week.

The dollar broadly gained on Thursday, particularly against the pound. Strerling took a knock in morning trade after data released along with the UK GDP figures showed UK borrowing jumped unexpectedly in April. Public sector net borrowing rose to GBP9.63 billion, from GBP6.07 billion in March, disappointing a market that had been expecting borrowing to fall to GBP3.5 billion.

At the close of the European equity markets, the pound trades at a near-session low of USD1.6860, while the euro has continues its recent slide and currently trades at USD1.3655.

SABMiller lead the FTSE 100 gainers from the open and closed up 3.5% after the brewer reported higher full-year profits, supported by further growth in emerging markets. It reported pretax profit of USD4.82 billion for the year ended March 31, a 3% increase on the USD4.68 billion reported a year earlier.

British American Tobacco saw its shares rise 0.5% as the recent pickup in merger and acquisition acquisition activity threatened to spread to the tobacco sector. Two of the biggest tobacco companies in the US are in advanced takeover talks, according to Reuters. Reynolds American, of which British American Tobacco owns 42%, is said to be looking to acquire Lorillard. British American Tobacco's sizeable stake should give it a significant say in any deal.

Leading the FTSE 250, Halfords Group helped the index outperform, closing up nearly 10% after saying it is continuing to see a big benefit from the UK's growing cycling market. For the year ended March 28, the retail chain recorded pretax profit of GBP72.6 million, up 2.3% from GBP71.0 million a year earlier, driven by a 7.9% increase in revenues to GBP939.7 million, from GBP871.3 million. Halfords is one year into its three-year 'Getting into Gear' revamp programme, refocusing the shops on the most successful lines of cycles and car maintenance products.

FTSE 250-listedImagination Technology closed up 5.5% after saying it has signed a collaboration deal with Oracle Corp, intended to enhance Java for embedded and Internet of Things applications and optimize Java for the MIPS CPU processor architecture.

Dairy Crest was the worst performer on the mid-cap index, closing down 7.0% despite reporting results broadly in line with expectation. Shore Capital reiterated its Hold rating on the stock and said it expects to make downgrades to forecasts for the current year, reflecting "a tough dairy market".

The early economic focus Friday will be on the second German GDP estimate at 0700 BST. Economists expect the quarter-on-quarter estimate to remain unchanged from last week's initial print of 0.8%. German May IFO economic sentiment survey results are due out at 0900 BST.

From the US Friday there is just new home sales data due in the afternoon, while there is no data scheduled from the UK.

In the UK corporate calendar, full-year results are due from Quintain Estates & Development, along with fellow real estate development company Assura Group. Interim management statements are due from Close Brothers Group, Moss Bros, and Smiths Group.

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Source: Alliance News

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