News Column

MARKET COMMENT: FTSE Has Best Day In 4 Mos As China Hits GDP Target

July 16, 2014

Jon Darby

LONDON (Alliance News) - The FTSE 100 recorded its biggest daily gain in over four months Wednesday, lifted by the news that China achieved its 7.5% growth target in the second-quarter and UK unemployment fell to a five-and-a-half-year low.

The FTSE 100 closed up 1.1% at 6,784.67, the FTSE 250 up 1.0% at 15,600.23, and the AIM All-share up 0.3% at 775.40.

Major European markets enjoyed even stronger gains, with the German DAX 30 closing up 1.4% and the French CAC 40 up 1.5%.

The Chinese economy grew at an annual rate of 7.5% in the second-quarter, accelerating from 7.4% in the first-quarter and matching the government's stated target, according to official data released overnight. The slew of Chinese data also showed that industrial production, urban investment, and retail sales continue to grow at least as strongly as expected in the world's second-largest economy.

"Today's Chinese data has been a real boost for investors who have been looking for any reason to buy the dips recently," said Alpari market analyst Craig Erlam. "Given the concerns about Chinese growth earlier this year, it is a big relief to see the country growing at the target rate in the second-quarter, even if this is largely due to the targeted stimulus efforts of the government and central bank. As long as this continues, investors will be happy."

Stocks exposed to Chinese demand therefore performed well Wednesday, with Mining and Industrial Metals the best performing sectors. Rio Tinto performed particularly well, closing up 2.7% after saying that global iron ore production for the second quarter grew 11% from last year, and that its own production matched that growth. Rio Tinto is the world's second largest producer of iron-ore, from which the company generates about 90% of its profits.

Even Fresnillo ended the day fractionally higher, despite some early weakness after it said its silver production remained flat in the second quarter, while its gold production also continues to be subdued as a result of explosion permit problems and stoppages earlier in the year.

UK investor sentiment received a boost in morning trade as UK unemployment fell to 6.5% in May from 6.6% in April, reaching the lowest level since January 2009. The headline unemployment rate is a three month rolling average, and in the month of May alone it was 6.2%, suggesting that momentum is building in the job market. Indeed 36,300 fewer people claimed unemployment benefits in the UK in May, beating expectations for a fall of 27,000 claims.

Despite the improvement, the pound lost a little ground against the dollar Wednesday, ending the day at USD1.7128, as the Bank of England has said it is more concerned by sluggish wage growth than improving employment.

Average earnings growth decelerated for the third consecutive time in the three months to May, to 0.7% from 0.9% in the three months to April, missing economists expectations for 0.8% growth. Average earnings including bonuses were even more disappointing, growing by just 0.3% in the three months to May, slipping from 0.8% growth in the three months to April.

At 6.5%, official UK unemployment is now well below the Bank of England's original 7.0% forward guidance threshold, and has reached the level that the central bank last year estimated to be the equilibrium rate, or level that doesn't cause inflation. However on Tuesday, BoE Governor Mark Carney told MP's on the Treasury Select Committee that he now thinks that equilibrium rate has fallen to about 6.0%. Combined with the anaemic wage growth, this may mean that the BoE can maintain the current historic low base rate for longer.

After the European market close, US stocks are continuing modestly higher, with the DJIA up 0.2%, the S&P 500 up 0.2% and the Nasdaq Composite up 0.1%.

Merger and acquisition activity in the media sector has provided a boost across the pond with Time Warner confirming that it rejected a formal takeover offer of USD80 billion from 21st Century Fox. With markets speculating that Fox's owner Rupert Murdoch is unlikely to walk away, Time Warner shares are up by more than 15% in New York.

There remains the potential for some increased volatility in the US session, given that Fed Chair Janet Yellen is still facing questions from the House Financial Services Committee in the US Congress, having just delivered the second part of her semi-annual testimony.

Within individual UK equity movers Wednesday, aerospace equipment group Meggitt led the FTSE 100 higher from the open and ended almost 10% higher amid rumours of a potential takeover offer form US-based United Technologies Corp. According to speculation heard at the annual Farnborough International Airshow, originally reported by the Daily Mail, Meggitt could be about the receive a GBP5 billion, or 625 pence per share takeover offer.

A spokesperson for Meggitt declined to comment on the rumours. Meggitt shares ended Wednesday at 537.00 pence, giving it a market capitalisation of GBP4.33 billion.

UK chip micro-makers ARM Holdings andImagination Technologies performed well, gaining 2.3% and 2.0% respectively, following the surge in profits reported by US competitor Intel on Tuesday. The world's biggest chip-maker announced a 40% increase in earnings compared to the previous year. With US earnings season in full flow, the chip makers are likely to be in focus again next week when technology giant Apple, to which both ARM and Imagination Technologies are suppliers, releases second quarter numbers.

Of the few FTSE 100 fallers Wednesday, Shire was the worst performing, closing down 2.3%. The UK drug maker has been sliding since its spike on Monday, when Shire management said it is "willing to recommend" US suitor AbbVie's latest takeover offer to shareholders.

Some investors have decided to take profit given that the shares were at an all-time high on Monday and there is an increasing risk that the US Congress may crack down on takeover deals that are driven by the tax benefit for a US company of domiciling overseas. US Treasury Secretary Jack Lew has written to Congress to urge an immediate change in the law. AbbVie has until Friday to come back to Shire with a firm offer.

Royal Mail closed down 1.5% after saying that one of its subsidiaries, GLS France, is involved in an investigation by the French competition authority into a potential breach of antitrust laws, and that at this stage it has no idea what the potential cost could be.

Sports Direct International Executive Deputy Chairman Mike Ashley surprised everyone Wednesday by withdrawing from the retailer's 2015 Bonus Share Scheme, just weeks after shareholders finally, at the fourth time being asked, voted in favour of giving him his first share bonus since the company listed in 2007. Shares of the online sports retailer marginally outperformed the market Wednesday, closing up 1.3%. Sports Direct will be back in focus Thursday when the company releases its full-year results.

Also in the UK corporate calendar Thursday, the mining sector production reports keep coming, with second-quarter numbers due from Anglo American andLondon Mining. Interim management statements also are due from Land Securities and SSE, along with trading statements from Hilton Food Group, Mothercare, and Computacenter.

Dixons Retail and Carphone Warehouse shareholders will vote Thursday, at separate meetings, on whether to approve the merger between the two companies, allowing the creation of the imaginatively named Dixons Carphone.

There is no UK data of note in the calendar on Thursday. Instead, the morning focus will be the final reading of eurozone consumer price inflation, which is expected to be confirmed as having ticked up to 0.8% in June from 0.7% in May when the data is released at 1000 BST.

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Source: Alliance News

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