News Column

MARKET COMMENT: IMF Upgrade Puts Positive End On Mixed London Session

July 24, 2014

Jon Darby

LONDON (Alliance News) - Geopolitical issues took a back seat for most of Thursday, allowing UK equity investors to focus on mixed releases from busy economic and corporate calendars.

While sentiment received an early boost from some better-than-expected PMI data from China and the eurozone, gains amongst London indices were capped by some disappointing UK retail sales data before they received a late boost from yet another upgrade to UK growth forecasts by the International Monetary Fund.

US stocks are similarly struggling to make much progress in light of some mixed data.

The FTSE 100 closed up 0.3% at 6,821.46, the FTSE 250 up 0.1% at 15,748.69, and the AIM All-Share fractionally higher at 773.24.

Within European majors, the French CAC 40 closed up 0.8%, and the German DAX up 0.4%.

After the European close, the DJIA continues to trade up 0.1%, while the S&P 500 is up 0.2%, and the Nasdaq Composite up 0.2%.

The Chinese HSBC manufacturing PMI, released long before the European market open, rose to an eighteen-month high of 52.0 in July from 50.7 in June, beating the consensus expectation for a rise to 51.0.

Strong PMI data continued into the European session, with the Markit eurozone composite PMI rising to a three-month high of 54.0 in July from 52.8 in June. The expansion was driven by the services sector, which at 54.4 reached its highest level in more than three years.

The German economy recorded predictably strong numbers, while even the service sector in the struggling French economy jumped into expansionary territory, with a reading of 50.4 in July, up from 48.2 previously, although the French manufacturing PMI remained subdued at 47.6. Analysts pointed to the recent warm weather and football World Cup as a seasonal boost for the European service sector.

"You can never ignore the impact that a World Cup and good weather can have on an economy," said Alpari analyst Craig Erlam. "Given Germany's success at the world cup, I would be surprised if we didn't see strong figures across the board (in Germany) for the month of July," Erlam said.

Meanwhile, UK stock indices spent most of the day underperforming their European counterparts, while the pound also fell in the wake of some disappointing UK retail sales data, before getting an end-of-day boost from another upgrade of the UK economy by the International Monetary Fund.

UK retail sales grew by just 0.1% in the month of June, less than the 0.3% that had been expected and only fractionally reversing the 0.5% drop in sales in May. Excluding fuel, sales continued to fall by 0.1% in June.

Recent communication from the Bank of England has made clear that weak wage growth is holding policy makers back from raising interest rates, even though other economic indicator suggest one is due. Given real incomes are still being squeezed, it would have been a surprise to see strong growth in retail sales, but a fall still came as a disappointment.

The pound fell steadily throughout the session from above USD1.7050 before the retail sales data to a one-month low of USD1.6962. Against the euro, sterling fell from EUR1.2674 to a weekly low of EUR1.2592.

Yet another upgrade from the IMF to its estimate of UK GDP growth ahead of the UK market close stemmed the decline in the pound, and provided a modest late boost to equities. The IMF now expects the UK economy to grow by 3.2% in 2014, up from its previous best guess of 2.8%. One year ago, the IMF forecast UK GDP to grew by 1.5% in 2014, but now expects more than double that growth as the UK continues to grow faster than any other major economy.

The global economy fared less well under the latest revisions, with the IMF lowering its estimate of 2014 GDP to 3.4% from 3.7%.

In a turnaround of recent fortunes, afternoon data from the US was notable less positive that that in Europe. The Market manufacturing PMI missed expectations to come in at 56.3 in July, down from 57.3 previously, while new home sales unexpectedly dropped by 8.1% month-on-month in June.

The disappointing US economic data was countered by a boost from social media giant Facebook. Facebook's numbers had been given extra focus by last week's comments from Federal Reserve Chair Janet Yellen, who warned that that stock valuations were looking stretched in the bio-technology and social media sectors. Facebook silenced its critics after the market close Wednesday by reporting that its net profits more than doubled in the second quarter from the same period in the previous year, coming in at USD791 million, sending the stock up about 7% to an all-time high.

Within the UK equity movers, Reed Elsevier ended at the top of the FTSE 100, up 3.0% after it maintained its outlook for the full year and raised its interim dividend by 5% to 7.0 pence. The professional information company posted a pretax profit, at constant currency and excluding acquisitions and disposals, of GBP791 million, up from GBP778 million, despite seeing revenue decline to GBP2.85 billion from GBP3.03 billion, as its operating margin improved to 30.2% from 28.8%.

Kingfisher ended as the biggest blue-chip faller, down 7.7%, despite recording a 0.8% rise in sales in the 10 weeks to July. The home improvement retailer said it saw a sharp deterioration in demand since June in its French and Polish operations. Jefferies said that it is virtually impossible to say at this stage whether the sales drop in June is a blip or a trend, but the investment bank cut its price target by 14% ahead of any further information.

easyJet closed down 5.0% after the company said its pretax profit for the 2014 full year is expected to be between GBP545 million and GBP570 million. It is the first guidance the airline has released for the current full year, and Liberum Capital said it is a little disappointing and expects to adjust forecasts downwards.

In the FTSE 250, Howden Joinery ended the day up a huge 17% after the kitchen products supplier posted pretax profit of GBP57.2 million for the six months ended June 14, up from GBP41.6 million a year earlier, as revenue rose to GBP435.4 million from GBP390.8 million a year earlier. Howden attributed its strong performance to a number of factors including improved market conditions and price increases implemented early in the year.

Lancashire Holdings closed up 4.9% after saying it made a USD41.5 million pretax profit in the quarter ended June 30, compared with a USD58.3 million pretax profit in the corresponding quarter last year. Numis securities has upgraded the stock to Buy on the back of the performance.

Drax Group closed down 4.2% after saying that the decision over whether it will receive a government subsidy to convert its coal-fired generating units to biomass will be taken to the Court of Appeal by the UK Department of Energy and Climate Change. Drax, which owns the UK's largest power station, said that the DECC has been forced to award the subsidy following a High Court ruling earlier this month, but the DECC now will take the dispute one step further.

While the geopolitical events that have weighed on stocks this week got fewer headlines Thursday, there were some developments toward the end of the day. The EU has reportedly now agreed on a list of further sanctions that target 15 people and 18 individuals in response to their part in the crisis in Ukraine. At the same time, Ukrainian Prime Minister Arseniy Yatsenyuk has resigned.

Meanwhile, the pressure on US Secretary of State John Kerry to find a solution in the Middle East continues to mount as reports say that a further 15 Palestinians have been killed Thursday in the bombing of a UN school in the Gaza strip.

In the UK corporate calendar Friday, full-year results fromBritish Sky Broadcasting provide the highlight, as investors await word of its intentions for Sky Italia and Sky Deutschland. Interim results are due from Anglo American, African Barrick Gold, Pearson, and Spectris. Vodafone Group is due to due to release a first quarter management statement.

Following Thursday's upgrade from the IMF, the domestic data focus Friday will be the release of second quarter UK GDP estimates. Economists expect the UK economy to have grown by 0.8% in the second quarter, which would match the first quarter and push annual GDP growth up to 3.1%. According to official numbers from the Office for National Statistics, that level of growth would put UK economic output above its early 2008 peak for the first time since the banking crisis and subsequent recession.

Still to come Thursday, CNBC has an interview with US President Barack Obama at 2200 BST, which is expected to focus on "inversion deals", such as AbbVie's recent purchase of Shire. There is a growing debate in Washington over making a change in the law to stop US corporations moving their tax domicile, with a change in the law potentially being retrospective to May and therefore affecting deals, such as the Shire deal, that are already in process.

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Source: Alliance News

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