News Column

MARKET COMMENT: Stocks Fall As Eurozone Inflation Points To ECB Action

June 3, 2014

Jon Darby

LONDON (Alliance News) - Stocks are are broadly lower across the UK and Europe Tuesday, amid a busy morning of economic data that looks like to pile pressure on European Central Bank President Mario Draghi to take action at a highly anticipated policy meeting on Thursday.

Eurozone consumer price inflation was reported at 0.5% year-on-year in May, down from 0.7% in April, and lower that the 0.7% expected by economists. Core inflation is seen at 0.7% year-on-year, down from 1.0% in April.

As Thursday's all-important ECB policy announcement draws near, the data were amongst the last that might have been able to avert some form of policy easing by the central bank, but the continued fall in inflation makes some kind of action all the more likely, analysts say.

"The guessing game will begin after the data as to what the ECB will actually do, from the likely options of a main refinancing rate cut, negative deposit rates, an LTRO extension, and full quantitative easing," says Hantec Markets market analyst Richard Perry.

By mid morning Tuesday the FTSE 100 is down 0.4% at 6,839.72, the FTSE 250 is down 0.5% at 16,006.64, and the AIM All-Share is down 0.2% at 810.60.

In Europe, the French CAC 40 is down 0.1% and the German DAX 30 is down 0.3%.

"European markets started the day on a negative note as investors find little value after recent gains," says Spreadex Financial Sales Trader Lee Mumford.

Eurozone unemployment data will have done little to ease price and growth concerns at the ECB. The headline rate of Italian unemployment remained stable at 12.6% in April, while the youth unemployment rate in the troubled economy rose to 43.3% from 42.9% in March. A slightly better picture in Spain saw a 111,900 drop in the number of people unemployed in May, while across the whole Eurozone the headline rate ticked down to 11.7% in April from 11.8% in March.

The euro actually rose a little against the dollar in the wake of the low eurozone CPI print, as it did on Monday in the wake of a weak German print, suggesting that some amount of policy easing at Thursday's meeting is already priced in by the markets. Indeed, the euro has been the worst performing major currency since the last ECB meeting, when action this time around was first hinted at, falling almost 3% from USD1.40 to currently trade at about USD1.36.

"The rally in the euro was nothing spectacular, but it does make me question exactly what the markets have priced in ahead of the ECB meeting on Thursday," says Alpari market analyst Craig Erlam. "This would suggest that the markets are pricing in something much more aggressive than I am currently anticipating, be it quantitative easing or negative deposit rates."

UK data Tuesday has shown the construction industry operating slightly behind expectations, with a construction PMI of 60.0 in May, down from 60.8 in April. a reading economists had expected to remain unchanged.

The Nationwide house price index has shown further strong gains, rising 0.7% month-on-month in May, ahead of expectations for a 0.6% rise, while on an annual basis, prices rose by 11.1%, faster than the 10.9% expected.

Within UK equity movers, the supermarkets are amongst the worst performers after data from the research Kantar reportedly showed the slowest rate of growth in the UK grocery market for eleven years.

"The Kantar data represents a continuum of recent trends with the limited assortment discounters gaining share at a rapid rate whilst Tesco in particular looks to be the big loser," said Shore Capital head of research Clive Black. "There is little going the way of the big supermarket groups at the moment with weak overall demand and rising competition, not just from discounters but also from more eating out of the home. Tough times indeed."

Tesco shares are down 1.3%, Morrison is down 1.1%, and Sainsbury's is down 1.0%.

Plumbing and heating product supplier Wolseley leads the few gainers in the FTSE 100 after reporting higher trading profit for its third-quarter. The shares are up 2.7% after Wolseley said its trading profit for the three months to April 30 was GBP153 million, up from GBP150 million a year earlier.

William Hill and Melrose Industries are underperforming the FTSE 100 Tuesday, down 2.1% and 1.4% respectively. Both stocks look set to be deleted from the leading index following the quarterly index review that takes place after the market close Tuesday and is announced after the market close on Wednesday. The stocks are likely to be replaced by current FTSE 250 listings 3i Group and Intu Properties.

Tullet Prebon leads the FTSE 250 gainers, up 2.5% following a report in the Financial Times that it is in advanced talks to appoint a successor to Chief Executive Terry Smith. The FT reports that former Nomura and Lehman Brothers executive John Phizackerley is emerging as the leading contender to succeed him.

Foxtons is performing less well in the wake of its own directorate change announcement. The estate agent said Chief Executive Michael Brown had decided to step down on July 1 after seven years at the helm, for personal reasons.

Still to come Tuesday, after the disastrous release on the US ISM manufacturing PMI on Monday, that saw two market-moving revisions, the New York ISM index for May is due at 1445 BST, followed by US factory orders at 1500 BST.

Ahead of the US opening bell, futures trading currently indicates that markets there will follow Europe lower, with the DJIA and the S&P 500 both set to open about 0.2% lower.

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Source: Alliance News

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