News Column

MARKET COMMENT: UK Stocks Fall As US GDP Surge Turns Attention To Fed

July 30, 2014

Jon Darby

LONDON (Alliance News) - UK stocks had a choppy trading session Wednesday and ultimately closed lower, while the dollar gained against other major currencies, as some heavily anticipated US GDP data showed the world's biggest economy more than reversed its first quarter slump.

The surprisingly strong US economy shifted the market focus squarely onto the Federal Reserve policy announcement still to come Wednesday.

The US economy grew at an annualised rate of 4.0% in the second quarter, more than reversing the 2.1% contraction in the first quarter, which was also revised up from the original 2.9% drop.

The data has been a long time coming for a market hoping for a sharp reversal in US economic growth following the first-quarter contraction, which was broadly blamed on particularly harsh winter weather. However, despite the reading causing an initial surge in global equity markets to session highs, investors have since reverted to caution ahead of a potential change of tone from the Federal Open Market Committee announcement at 1900 BST.

Concern over the potential economic impact of new sanctions from the EU and the US against Russia also have continued to weigh on general sentiment, and particularly the energy sector.

The FTSE 100 closed down 0.5% at 6,773.44 and the FTSE 250 down 0.4% at 15,629.84, while the AIM All-Share outperformed, closing up 0.1% at 772.25.

Within major European markets, the German DAX 30 ended down 0.6% and the French CAC 40 down 1.2%

After the European close, US markets continue to trade mixed, with the DJIA down 0.4%, the S&P 500 down 0.2%, and the Nasdaq Composite up 0.2%.

"The (US) data lends more credence to arguments that the Federal Reserve is nearing its mandates and this may bring forward speculation of when the Fed delivers its first rate hike," said Brown Brothers Harriman's Global Head of Currency Strategy Marc Chandler.

The dollar was the best performing currency in the wake of the bumper US GDP reading. The pound fell to the lowest level in six weeks, bottoming at USD1.6885, while the euro fell to its lowest level in more than eight months, bottoming at USD1.3364.

The UK banking sector provided the main downside support to the FTSE 100 after Barclays followed in Royal Bank of Scotland's recent footsteps by releasing first-half results ahead of analyst expectations.

Barclays said it made a GBP3.35 billion adjusted pretax profit in the first six months of 2014, down from a GBP3.59 billion profit in the year before but ahead of the GBP2.96 billion consensus forecast. Barclays also updated as to its progress on capital ratios, with the CET1 ratio increasing to 9.9% and the PRA leverage ratio increasing to 3.4% in the first half.

"The shares have been terrible performers of late so the profit beat and good progress on capital should come as a welcome relief to the market," said Shore Capital analyst Gary Greenwood.

Barclays ended as the top FTSE 100 gainer, up 4.5%, while RBS closed up 2.8%, and Lloyds, which reports its own results on Thursday, closed up 1.0%.

The bank shares envinced little concern over new Bank of England proposals, unveiled Wednesday, to increase individual responsibility and accountability in the banking sector, with changes including a new approval regime for the most senior bankers and new rules on bonuses.

Travis Perkins gained 2.7% after reporting a rise in pretax profit to GBP153.7 million in the first half, up 14% from the previous year, with the company citing improving market conditions and increased customer confidence. The group's consumer division, which incorporates DIY chain Wickes, saw revenue rise 8.8%.

Pets at Home was the top FTSE 250 gainer, closing up 7.1% after saying like-for-like sales were up 4.1% in the second quarter, boosted by a return to TV advertising and its VIP loyalty scheme. Despite the positive update, which boosted the Pets at Home to 182 pence Wednesday, the stock remains well below its March IPO price of 245p.

Mining stocks weighed on the other end of the market, led lower by Antofagasta, which closed down 4.6% at the bottom of the FTSE 100 after reporting production rates in line with expectations, but also a 16% rise in its net cash costs. Antofagasta has generally underperformed the other copper miners so far this year, which analysts attribute to its significant cost inflation.

Although the new sanctions from the EU and the US on Russia over its hand in the crisis in Ukraine are still short on details, the knowledge that they are on the way kept the energy sector in the red, withRoyal Dutch Shell, BG Group, andBP down 1.8%, 1.8%, and 0.5%, respectively.

Given Fed Chair Janet Yellen's insistence that future monetary policy is not on a pre-set course and instead is data-dependent, it would not be unreasonable to expect a shift in the tone of the statement given the bumper US GDP reading just released.

While the statement, which follows the FOMC's two-day meeting, will be closely watched for such a change, it is highly unlikely that the central bank will deviate from the path of tapering asset purchases, and another USD10 billion cut is widely expected, which would leave the Fed on course to finish its quantitative easing programme in October.

Given Yellen's recent comment that US social media stocks are looking stretched, she and her colleagues at the FOMC will no doubt have watched with interest as Twitter jumped another 25% at the opening bell Wednesday, after announcing a huge extension of its user base, which grew by 16 million in the second quarter, adding huge future advertising potential.

Looking towards Thursday, while any unexpected commentary from the Federal Reserve has the potential to provide an early driver for markets, European data will be in focus, with unemployment numbers from across the region due throughout the morning and July eurozone CPI released at 1000 BST.

Another busy day in the UK corporate calendar Thursday brings interim results from Lloyds Banking Group, as well as its recently spun-off retail arm TSB Group. While it's the first update from TSB since its late June flotation, the expectations for Lloyds has been raised by the strong results reported Wednesday and last Friday by peers Barclays and Royal Bank of Scotland.

Drinks giant Diageo is scheduled released full-year results Thursday, while other names with interim results slated include BG Group, Centrica, AstraZeneca, BAE Systems, Rolls-Royce, Weir Group, Countrywide, and Intu Properties.

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Source: Alliance News

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