News Column

MARKET COMMENT: FTSE Ends Week-Long Sell Off With M&A Positivity

July 11, 2014

Jon Darby

LONDON (Alliance News) - UK stocks had their best day of the week Friday, with the FTSE 100 closing just fractionally higher, breaking a four-day losing streak that has seen the UK's leading index fall from a near all-time high to its lowest level in over ten weeks, amid disappointing economic data, warnings over global growth, and the return of debt concerns within the eurozone.

Friday's gains were limited, but the route was stopped by some bargain hunting after the heavy falls earlier in the week, merger and acquisition activity in the tobacco sector, and US corporate earnings continuing to come in at least as well as expected.

An eleventh-hour news flash from Bloomberg that Shire is holding talks with potential US suitor AbbVie sent the UK drug makers' shares to the top of the FTSE 100 in the closing auction, providing a late boost to the whole index. Shire ended 5.9% higher.

The FTSE 100 has ended up 0.3% at 6,690.17, while the FTSE 250 has closed up 0.1% at 15,451.42, and the AIM All-Share has closed down 0.1% at 770.22.

Within European majors, the French CAC 40 closed up 0.4%, and the German DAX closed up 0.1%.

After the European market close, stocks on Wall Street continue to trade mixed, with the DJIA and the S&P 500 both down about 0.1%, and the Nasdaq Composite up 0.1%.

There's a huge focus on the start of the US second-quarter earnings season, with analysts and investors alike hoping for a strong bounce-back after the disappointing first-quarter there. Mortgage giant Wells Fargo has disappointed some Friday and trades more than 1% lower after announcing earnings per share of USD1.01, only matching the consensus expectation.

"The real start of earnings season is next week and so most US traders have opted to kick their heels in anticipation of bigger news to come," said IG market analyst Chris Beauchamp.

Over the week, the FTSE 100 has suffered its worst weekly fall in almost four-months, losing almost 3% and putting the UK's leading index well into negative territory over the year so far.

The week started on a negative note after the International Monetary Fund warned last weekend that it is likely to once again downgrade its global growth forecasts later this month. That sent stock markets lower from the near-all time highs that had been made at the end of last week in the wake of a particularly strong US jobs report.

The economic calendar was very light this week, but data that has been released was mostly disappointing. In the UK, industrial production unexpected fell by 0.7% in May, while construction data fell by 1.1%. Data from Europe has been even worse, where French consumer prices showed no growth at all in June, while Italian industrial output fell by 1.2% in May.

European stocks really started to unwind when fears over another debt crisis in the Eurozone were sparked by the news that Portugal's biggest listed bank, Espirito Santo, suspended its shares due to problems with a debt payment at its parent company.

Espirito Santo has now resumed trading and stocks have recovered a little of their losses, but markets around Europe end the week well off the highs they were making at the end of last week.

"After the panic comes the calm, and investors find themselves in a much more reflective mood about the outlook for Portugal than they were 24 hours ago, reassured that Espirito Santo is not about to emulate Samson and pull the eurozone edifice down with it," said IG's Beauchamp.

In London Friday, Imperial Tobacco led the FTSE 100 gainers for most of the day, closing up 3.0%, after confirming recent speculation it is in talks with US tobacco firms Reynolds American and Lorillard to potentially buy some of their assets. The confirmation from the UK tobacco group came amid news that a merger between the two US names is imminent, with a deal set to be announced as early as next week.

British American Tobacco, which already owns 42% of Reynolds, also gained Friday, closing up 1.2%. A ten-year standstill agreement between BAT and Reynolds is set to expire in July 2014, when BAT can make an unsolicited offer for the Reynolds shares it does not already own. BAT said in a statement Friday afternoon that, were such a deal to proceed, it would support the transaction by subscribing for additional shares in Reynolds with the aim of maintaining its existing 42% interest.

Mining stocks provided a drag to the UK indices Friday, after having been the support on Thursday following a big spike in precious metal prices. Gold peaked at USD1,345.28 per ounce on Thursday, while silver peaked at USD21.57 per ounce. Both metals have consolidated a little and stabilised since then, currently quoted at USD1,335.85 and USD21.432 respectively.

The biggest FTSE 100 fallers Friday were miners, with Randgold Resources leading, down 2.2%, Fresnillo down 1.8%, and Rio Tinto down 0.6%.

The pound slid steadily against the dollar throughout the day after the disappointing morning construction data, although volatility remains muted. Having been trading above USD1.7120 ahead of the equity market open, the pound is currently finding support just above USD1.71.

The calendars bring a quiet start to the coming week, with the economic highlight being eurozone industrial production numbers. The focus Monday will likely be on US earnings, with Citi the first of the big US banks to report. Markets will also likely have to deal with Germany being World Cup champions, maybe.

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Source: Alliance News

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