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MARKET COMMENT: UK Stocks Struggle While Pound Rallies On PMI Data

May 6, 2014

Jon Darby

LONDON (Alliance News) - UK stocks are trading slightly lower Tuesday with a number of individual movers weighing on indices, while the pound has continued its recent strong run as data shows the UK service industry expanding faster-than-expected.

By mid-morning Tuesday the FTSE 100 is down 0.2% at 6,811.30, the FTSE 250 is down 0.1% at 15,919.00, and the AIM All-share is down 0.2% at 823.70.

Within major European markets, the French CAC 40 and German DAX are both down 0.2%.

A cut to global growth forecasts may be weighing on sentiment as slowing growth in emerging markets, especially China, prompted the Organization for Economic Cooperation and Development on Tuesday to trim its global growth outlook for 2014. In its latest economic outlook, the Paris-based OECD forecast the global economy to grow by 3.4% this year, down from a forecast of 3.6% in its November 2013 review.

The pound has risen to its highest level since August 2009 against the dollar at USD1.6953. Although the pound was already looking strong throughout the morning, it was boosted to its peak by a better-than-expected Markit UK services PMI reading.

The PMI rose to 58.7 in April, up from 57.6 in March, beating the unchanged reading that economists had been expecting and marking a high for the year so far.

Berenberg Bank notes that the UK composite PMI, at 59.2, is comfortably above the first quarter average of 58.2. "Another very strong quarter is on the way in the UK," says the bank's chief UK economist Rob Wood.

With UK unemployment now at 6.9%, below the Bank of England's original forward guidance threshold of 7.0%, monetary policy committee members are now free to vote for a rate hike without having to cite one of the "knock out" clauses in relation to stability risk. While very few will be expecting any of the nine members to vote for a rate rise at this week's meeting, the strength of the pound is one indication that the market believes the first dissenting vote may not be far off.

Indeed, the Markit services PMI report notes that companies kept on top of increasing workloads in April by "adding to their payroll numbers, reflective in part of sustained confidence in the economic outlook". This would appear to suggest that the "spare capacity" now being targeted by the Bank of England is being used up very quickly.

A round of European Markit service sector PMI's have broadly come in at, or better than, expected levels, with the exception of Germany, which recorded a print of 54.7 in April, up from 53.0 in February, but slightly missing the expectation of 55.0.

The eurozone wide services PMI rose to 53.1 in April from 52.2 in March, in line with expectations, while the composite PMI in the single currency region rose to 54.0 in April from 53.1 in February, also as expected.

Eurozone retail sales grew at 0.3% month-on-month in March, expanding from the 0.1% growth in February and beating economists expectations for a 0.2% fall in sales. On an annual basis, retail sales are growing at 0.9%, slightly slower than the 1.0% annual growth recorded in February.

The euro is also stronger against the dollar on the back of the broadly positive data from the region, which makes any further policy loosening by the European Central Bank all the less likely. The single currency has reached a six-week high Tuesday of USD1.3931.

Within UK equities, Aberdeen Asset Management leads the blue chip fallers, down 4.0% after saying its pretax profit fell by more than 10% in its first-half compared to a year earlier. Aberdeen, which completed the acquisition of Scottish Widows Investment Partnership from Lloyds at the end of the second quarter, has been struggling this year amid concerns over emerging market growth, leading to the outflow of funds. The emerging market-focused asset manager reported a further GBP8.8 billion net outflow over the six month period.

Barclays leads the bank sector lower, down 3.9% after reporting a drop in its first-quarter pretax profits as it was hit by a continued slump in the performance of its investment bank, where income was down by 28%. The disappointing update has sent the shares 4.0% lower in early trade, with investors awaiting a strategic update from the bank that has been scheduled for Thursday morning. Barclays are widely expected to announce big cuts to the struggling investment bank.

The mining sector is also dragging Tuesday following the news that a platinum miners strike in South Africa is set to continue into its fifteenth week. The platinum sector in the country has been crippled by strikes at mines owned by Lonmin and Anglo American as the union attempts to achieve significantly better wages. Anglo American shares are down 2.1%, while Lonmin is down 1.8%.

Balfour Beatty is the single biggest mover by far in the FTSE 250 index, the stock currently down almost 20%. The construction group said it expects a GBP30 million shortfall for its UK business this year as a structural reorganisation changes take effect at a "slower pace" than expected, leading to pretax profit guidance to be revised significantly lower to between GBP145 million to GBP160 million. The group also announced that Chief Executive Officer Andrew McNaughton has stepped down with immediate effect.

Still to come Tuesday, the US IBD/TIPP economic optimism index at 1400 GMT, followed by a speech from Federal Open Market Committee member Jeremy Stein.

Ahead of the open of US markets, futures are indicating a fractionally higher start to trading.

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Source: Alliance News

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