News Column

MARKET COMMENT: Geopolitical Tensions Set To Weigh On UK Equities

June 24, 2014

James Kemp

LONDON (Alliance News) - UK equities are called to open firmly lower Wednesday, following a sharp sell-off on Wall Street on Tuesday and in Asia overnight, as escalating geopolitical tensions take their toll.

US stocks reversed early strength to close significantly lower on Tuesday, with the DJIA closing down 0.7%, the S&P 500 down 0.6%, and the NASDAQ Composite down 0.4%.

The three indices moved firmly higher in the immediate aftermath of some stronger-than-expected US consumer confidence and home sales data, but gave up their gains late in the session as concerns about the ongoing conflict in Iraq escalated, prompting investors to cash in on the recent strength in the markets.

"The move higher proved short lived as the afternoon session saw a wave of selling unfold on reports from Iraq that Syrian fighter jets had bombed ISIS positions in the western part of the country, in the process adding a further thread to the geopolitical melting pot," said Michael Hewson, chief market analyst at CMC Markets.

Worries about political instability in Iraq have intensified further following reports that Syrian fighter jets had carried out air-strikes in western Iraq, killing at least 50 people.

US Secretary of State John Kerry, meanwhile, has urged Kurdish leaders to back the Iraqi government in its fight against militants storming across the country and to support the formation of a new national government in Baghdad by July 1.

"As time progresses towards a potential creation of a new government coalition (in Iraq), it is likely that markets will become more risk averse given the likeliness of US air strike and military intervention," says Joshua Mahony, a research analyst at Alpari.

Meanwhile, the ceasefire in Ukraine was rocked late on Tuesday after a military transport helicopter was shot down by pro-Russian forces, killing nine.

Just hours before, Russian President Vladimir Putin had sent a clear signal of de-escalation by asking the Russian Parliament to revoke its authorization for the use of force in Ukraine in order to back the peace process between government troops and separatists in that country.

"Ultimately, Putinís gesture is unlikely to win too many over, given that the Ukrainian forces have been fighting against forces carrying Russian issued firearms and where the flow of new recruits appears to be consistently coming from Russia," says Mahony.

Negative sentiment rolled into the Asian session overnight. Ahead of the UK equity market open, the Hang Seng trades down 0.2%, the Shanghai Composite index trades down 0.6%, and the Nikkei in Tokyo has closed down 0.7%.

"As a result of last nightís sell-off in US markets, European markets look set to open lower this morning, as geopolitical uncertainty grows over the prospect of Syrian intervention into the Iraqi situation, adding a whole new element to this particularly fluid saga," says Hewson.

The UK'sFTSE 100 is called to open firmly lower Wednesday. Both IG and CMC Markets call the blue-chip index to open down around 32 points at 6,755, having closed at 6,787.07 on Tuesday, while Alpari expects it to open even lower at around 6,744.

"While there is plenty of data out today most of it is second tier and unlikely to shift markets," says Rhys Herbert, senior international macroeconomist at Lloyds bank.

Recently released, Germany's forward looking GfK consumer sentiment index rose to 8.9 in July from a revised 8.6 points in June, as economic expectations rose to a three-year high. Economists had forecast the indicator to remain unchanged from June's original estimate of 8.5.

This is in stark contrast to the data that has been released from Europe's largest economy over the last two days. On Monday, German PMI data fell well short of economists' expectations, while Tuesday's IFO business survey results also surprised to the downside.

Still ahead in the data calendar Wednesday, French business climate data is released at 0745 BST, with Italian retail sales and consumer confidence data released shortly after at 0900 BST and 1000 BST, respectively.

In the US, the Mortgage Bankers Association releases its MBA mortgage applications data at 1200 BST. Durable goods and personal consumption data are released soon after at 1330 BST, with the preliminary reading of June's US Markit services and composite purchasing managers' index published at 1445 BST.

However, "the focus will be upon the third and final release of the (US) first quarter GDP figure, which appears to becoming progressively worse as time goes on," says Alpari's Mahony. Economists' expectations are for the figure, which is released at 1330 BST, to reveal a 1.7% contraction, compared with the 1.0% drop announced in the latest preliminary estimate and the 2.6% growth reported for the fourth quarter.

In corporate news, FTSE 250-constituents Stagecoach Group and Northgate have released full-year results ahead of the UK equity market open.

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Source: Alliance News

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