News Column

MARKET COMMENT: Shares Hit By Lufthansa Warning As Pound Rallies

June 11, 2014

Jon Darby

LONDON (Alliance News) - Major stock markets are lower across the UK and Europe Wednesday, led by falls in airline stocks after Germany'sLufthansa issued a profit warning that has hurt the whole sector, and as trading volumes remain well-below average.

Meanwhile, the pound jumped to a session high against other major currencies following the release of the best reading of UK unemployment since January 2009.

By mid-morning Wednesday, the FTSE 100 is down 0.5% at 6,842.44, the FTSE 250 is down 0.9% at 16,061.60, and the AIM All-Share is down 0.7% at 798.31.

Within major European markets, the German DAX is down 0.8%, and the French CAC 40 is down 0.7%.

Airlines are amongst the worst performing stocks, with International Consolidated Airlines, owner of British Airways, leading the FTSE 100 fallers, down 5.2%, and Easyjet not far behind, down 3.5%, and Ryanair down 2.2%.

The falls come after German flag-carrier Lufthansa said it will no longer achieve its 2014 and 2015 operating targets. The primary reason for the lowered expectations was the problem of a shortage of passengers and cargo, coupled with an over-abundance of seats and space on its planes in its European and US business. Lufthansa shares are down almost 15% in Frankfurt.

Adding to airline woes Wednesday, Emirates Airline has decided to cancel its order of 70 A350 XWB aircraft from Airbus Group. Airbus said that the decision came in light of Emirates' ongoing fleet requirement review.

Both of the shocks to the airline industry have impacted on partners and suppliers alike Wednesday, with Rolls-Royce, which makes engines for Airbus, down 2.3%, and GKN, which supplies parts, down 1.3%.

Even FTSE Small-Cap listed airline Flybe is underperforming Wednesday, down 2.2% despite reporting that it swung into profit for its 2014 financial year. The company reported a pretax profit of GBP8.1 million, compared with a pretax loss of GBP41.1 million a year ago.

Global appetite for equities has not been helped Wednesday by a late Tuesday announcement from the World Bank that cut its global growth forecast for 2014 to 2.8% from the 3.2% it had earlier estimated. The bank noted the shaky start to the year, both in terms of the bad weather in the US, and the political tension in Ukraine.

While equities struggle, the pound is rallying Wednesday on the back of some stronger-than-expected UK unemployment data. Unemployment in the UK dropped by 27,400 in April, after falling at 28,400 in March, and beating economists expectations of a 25,000 fall. The headline three-month rolling average unemployment rate dropped to 6.6% from 6.8%, beating the expectations for a drop to 6.7%.

The unemployment rate is now well below the original threshold set by the Bank of England of 7.0%, before which it would consider an interest rate rise. While the BoE's targets have since been expanded way beyond than this single economic measure, the lower unemployment falls, the louder calls for rate rises will grow, and that is reflected in the movement of the pound Wednesday, which has jumped against the dollar to a session high of almost USD1.68, and has recorded an 18-month high against the euro of EUR1.2413.

However, with the UK central bank now looking at a broad range of indicators before raising interest rates, average earnings data, released at the same time, were less positive. Average earnings growth had almost returned to above inflation in recent months, creating excitement about the return of real wage growth. However, earnings growth slipped back to 0.9% in the three months to April, well below current UK CPI of 1.8%.

"Unemployment may be falling but this is largely being driven by a boom in the self-employed and isn’t being matched by a corresponding boost in pay packets," said UFXMarkets Managing Director Dennis de Jong. "We might not be in the same bleak position as the slumbering Eurozone but with average weekly earnings (growth) half the CPI inflation rate there is still a long way to go before workers notice any day-to-day improvement to their standard of living."

Outside of the airline stocks, a number of big names UK equity names going ex-dividend Wednesday are also weighing on indices. Vodafone is down 3.1% after going ex a 0.0747p full year dividend, while Johnson Matthey is down 1.9% after going ex a 0.455 pence full-year payment. Morrisons has also gone ex-dividend, but the stock is being supported a well received first-quarter update from supermarket peer Sainsbury's.

Sainsbury's leads the FTSE 100 gainers, up 1.9% after publishing its first-quarter numbers. The supermarket posted its second consecutive quarterly price drop, as the price war between the big names in the UK continues, but it also said that it expects like-for-like sales growth to remain positive for the full-year.

"Compared to the generally overcast outlook for the sector, it has not been such a bad performance, and it seems that Sainsbury’s lead over its competitors is holding up for now," says IG market analyst Brenda Kelly.

The numbers were Chief Executive Justin King's swan song before he steps down next month. In his last journalist call, the CEO said: "We are playing our part in this pricing skirmish. We are toe to toe with our competitors, and we have never been more competitive than we are today."

The UK unemployment data was the major economic focus Wednesday, with no top-tier data due from the US. Futures trading currently indicates that stocks in the US are set to follow Europe lower, with the DJIA pointing down 0.2% and the S&P 500 pointing down 0.3%.

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Source: Alliance News

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