News Column

MARKET COMMENT: FTSE At Two-Month Low On Iraq, US Growth Shock

June 25, 2014

Jon Darby

LONDON (Alliance News) - UK and European stock markets fell on Wednesday due to continued concerns about the crisis in Iraq and as official figures showed that the US economy shrank by 2.9% in the first-quarter, missing even the most pessimistic of expectations.

Final figures from the US Bureau of Economic Analysis Wednesday showed that the US economy contracted by 2.9% in the first-quarter of 2014, revising down the previous estimate of a 1.0% contraction and erasing all of the 2.6% growth recorded in the fourth-quarter of 2013. Government analysts blamed the historically cold winter.

"Today's dramatic fall in US GDP proves May's numbers were far from being just a blip," said UFXMarkets managing director Dennis de Jong.

The disappointing data only served to weigh further on equity markets across the UK and Europe that had opened firmly lower after a sharp sell-off in US stocks on Tuesday amid a deteriorating situation in the Middle East.

Iraqi Prime Minister Nuri al-Maliki remained defiant on Wednesday as he rejected calls from US Secretary of State John Kerry for a national unity government, a move that can only deepen the country's political rifts as an Islamist-led insurgency gains ground.

The FTSE 100 ended the day down 0.8% at 6,733.62, recording its lowest close in almost two months, and meaning the blue-chip index is now down for the year so far. The FTSE 250 ended down 0.6% at 15,453.95, while the AIM All-Share closed down 0.6% at 778.10.

Concerns over Iraq overshadowed a positive German consumer confidence index. Following two consecutive days of disappointing economic data from Europe's largest economy, including disappointing PMI's and a low ZEW survey, the Gfk survey rose to a seven-and-a-half year high. The forward-looking consumer sentiment index rose to 8.9 in July, from a revised 8.6 points in June, as economic expectations and willingness to spend strengthened after the European Central Bank lowered its key rate early this month.

Still, the major European markets also closed lower, with the German DAX down 0.7% at 9,867.75, and the French CAC 40 down 1.3% at 4,460.60.

The US gross domestic product reading showing the US suffered its worst first-quarter of growth since 2009 meant Wall Street opened lower. However, they quickly turned positive after a better-than-expected Markit PMI reading for June, which raised hopes of a strong bounce back in the second-quarter.

At the time of the UK equity market close, the DJIA, the S&P 500, and the Nasdaq Composite were all trading about 0.2% higher.

The US Markit service sector PMI surged to 61.2 in June, from 58.1 in May, recording the sharpest rise in activity since the survey began in October 2009.

"As bad as the GDP for the first quarter was; the Dow and S&P 500 traded higher because investors are putting more emphasis on the forward-looking services PMI data with the idea that the economy can still pull-back for the rest of the year," said CMC Markets market analyst Jasper Lawler.

"The GDP is backwards looking and shouldn't be the basis for Fed policy but the central bank must be aware that even if the US saw 3% for each quarter for the rest of the year, annual growth would still be less than their forecasts," the analyst cautioned.

All eyes will now be on the advance estimate of US second-quarter GDP, due for release on Monday, to see if it backs up the surging PMI reading.

Shire was the top FTSE 100 gainer, ending up 1.9%, after a little of the uncertainty about its future value was removed by a US court ruling that upheld the patents protecting it's Vyvanse drug from being replicated by generic competitors. While potential suitor AbbVie set out its case for a takeover of the UK company Wednesday, Shire continues to argue that it can offer shareholders the best value by remaining independent, in part because of it's pipeline of products.

The Vyvanse drug, which is used to treat Attention Deficit Hyperactivity Disorder, is Shire's best-selling drug. The US court ruling, upholding the patent until 2023 unless it is overturned on appeal, will assist Shire in reaching its stated target of doubling annual product sales by 2020.

The interest-rate-sensitive real estate investment trusts outperformed the market Wednesday following the watering down by Bank of England Governor Mark Carney of his previous message about an early interest rate rise. A significant deal in the industry also has provided a boost to the sector.

Land Securities bought a 30% stake in the Bluewater shopping centre in Kent from Australian property business Lease Group, in a deal worth GBP656 million in cash. Land Securities ended the day fractionally lower. However, fellow REIT's Hammerson and British Land were also said to be in the running for the deal. While they missed out, both companies' shares gained on the news, closing up 0.9% and 0.5% respectively, as there had been concerns over the viability of the deal for both of them, particularly Hammerson, which would likely have had to carry out a share placing to finance the transaction, analysts say.

Bunzl closed down 1.8% after the company reiterated that its results will be hit by foreign exchange fluctuations. In addition, Bunzl said that it has made two new acquisitions, as it looks to give a boost to its safety business in the Netherlands and expand its cleaning and hygiene supplies business in Brazil.

A number of stocks going ex-dividend also weighed on the UK indices Wednesday, with FTSE 100- listed Experian ending down 2.2% after going ex a USD0.26 interim payment. In the FTSE 250, Tate & Lyle lost 3.9% after going ex a 19.8 pence full year dividend, Aveva dropped 2.9 pence after going ex a 22 pence full year payment, and Paypoint ended 1.8% lower after going ex a full year 23.9 pence payment.

On Thursday, soon-to-be-merged Dixons Retail and Carphone Warehouse both report full-year results. The two companies said Wednesday that their merger plans have been cleared by the European Commission. An interim trading statement is also due from John Wood Group, along with an interim management statement from Punch Taverns, and a trading statement from Standard Chartered.

BoE chief Mark Carney will be firmly back in focus Thursday, when he delivers the central bank's financial stability report. The report, born out of discussions at the recent Financial Policy Committee meeting, will be closely watched by investors for any mention of, or indeed recommendations to, contain asset bubbles or other risks to the UK's economic recover.

UK house price inflation is likely to be in focus, with the FPC able to recommend changes to the controversial Help to Buy housing scheme is it sees fit, while disappointing business lending data may also have been discussed.

"We expect the decision from the FPC to focus on the mortgage market and the lack of corporate lending growth," says Shore Capital investment strategist Gerard Lane.

From the US Thursday, there's initial jobless claims numbers for the week ended June 20, along with personal income and spending data at 1330 BST.

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Source: Alliance News

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