News Column

MARKET COMMENT: Markets Weakened By IMF Growth Downgrade

July 7, 2014

Jon Darby

LONDON (Alliance News) - Stocks indices are trading modestly lower across the UK and Europe Monday, with the mining stocks leading the fallers as precious metal prices continue to soften.

With little in the data calendar Monday to shift investor sentiment one way or the other, the market is continuing to react to last week's better-than-expected US economic data, while also digesting an the expectation of another downgrade to global growth forecasts by the International Monetary Fund.

By mid morning Monday, the FTSE 100 is down 0.2% at 6,854.14, the FTSE 250 is down 0.2% at 16,024.19, and the AIM All-share is down 0.1% at 789.50.

Within European majors, the French CAC 40 is down 0.3%, and the German DAX is down 0.1%.

Equity markets around the world rallied to recent highs last week, supported by the expectation of a rebound in US economic activity as the latest non-farm payroll report beat expectations to add 288,000 jobs in June. However, gains were made on thin volumes and a weekend warning from the IMF has left equity markets consolidating again Monday.

Speaking at the Cercle des Economists conference in France on Sunday, IMF Chief Christine Lagarde indicated a slight reduction to the institution's global growth outlook can be expected later this month as investment remains subdued.

"Growth warnings have given investors a reason to ease back on equity indices this morning, as the FTSE struggles to build on recent highs," said IG market analyst Chris Beauchamp.

The mining stocks are suffering the worst Monday, as precious metal prices fell from recent highs over the weekend in light of the improved picture being painted by US economic data. Gold has fallen from above USD1,326 per ounce before Thursday's non-farm payroll reading to a low Monday of USD1,312.10 per ounce. Silver has dropped almost 1.0% Monday alone to a low of USD20.85 per ounce.

"As the US economy continues to show signs of improving, gold will remain under pressure," said Spreadex trader Lee Mumford. Gold is seen as a safe haven during times of economic weakness.

The FTSE 350 mining sector is down 0.8%, with Vedanta Resources down 1.7%, African Barrick Gold down 1.6%, Polymetal International down 1.5%, and Fresnillo down 1.4%.

Equity markets have shown little positivity to an improvement in the Sentix eurozone investor confidence survey. The index, which tracks the economic outlook of institutional investors, rose to 10.1 in July from 8.5 in June, beating expectations for a fall to 7.5. Earlier in the session, German industrial production data showed a 1.8% drop in production in May, missing economists forecasts for a small rise in production.

The combined effect of the mixed European data has left the the euro marginally higher against the dollar over the session so far, currently trading at USD1.3595. The pound, meanwhile, trades fractionally lower against the dollar at USD1.7145.

The housebuilders are underperforming, with Taylor Wimpey down 1.8% and leading the sector falls despite releasing a broadly positive trading update. The FTSE 250 listed housebuilder echoed sector peers by citing improving profits on the back of a booming UK housing market.

However, the market is becoming increasingly used to this type of update from the housebuilders, with much of the UK housing recovery already priced in. "We really need expansion and margin-led upgrades rather than inflation to make any material change to ratings," said Shore Capital analyst Robin Hardy.

The other housebuilders are following lower, with Bellway down 1.3%, Berkeley down 1.1%, and Redrow down 0.9%.

With the growth in the housebuilders profits being driven by house price inflation, the market is also likely to become increasingly cautious on the sector in the run up to each Bank of England rate setting meeting, analysts say. No change is expected at this Thursday's meeting, but economists are beginning to predict the timing of the first dissenting vote from the panel, with Berenberg, in a morning note to clients Monday, saying it expects that first hawkish vote to come in August.

Weir Group is the top FTSE 100 gainer, up 2.4% after receiving an upgrade to Buy from analysts at Citigroup.

US investors will return to the market Monday following the long Independence Day weekend, but a relatively quiet start is expected, with little left in the data calendar Monday. Currently, futures trading indicates US stocks will follow those in Europe slightly lower, with the DJIA pointing down 0.2% and the S&P 500 pointing down 0.1%.

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Source: Alliance News

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