News Column

MARKET COMMENT: Stocks Reverse Post-Payroll Gains After IMF Warning

July 7, 2014

Jon Darby

LONDON (Alliance News) - UK stocks closed lower Monday as a warning from the International Monetary Fund, that it is likely to downgrade its global growth forecast once again later this month, weighed on investor sentiment.

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 in virtually all countries remains subdued.

The IMF chief did also say that global activity is expected to gain momentum in the second-half of the year and to accelerate further in 2015 after an unexpectedly weak start to 2014, but amid thin trading volumes, and with very few data drivers Monday to shift sentiment, investors took the comments as a sell signal and equity markets around the world reversed much of the gains made at the end of last week after Thursday's strong US jobs report.

The FTSE 100 closed down 0.6% at 6,823.51, while the FTSE 250 closed down 1.0% at 15,892.30, and the AIM All-share closed down 0.3% at 788.15.

Within European majors, the French CAC 40 closed down 1.4% at 4,405.76, and the German DAX closed down 1.0% at 9,906.07.

The underperformance of the European markets came amid some disappointing German economic data, which showed industrial production fell by 1.8% month-on-month in May, accelerating the decline from a drop of 0.3% in April and missing expectations for a 0.3% rise in production.

In the US, the DJIA dipped below the 17,000 level in early trade, having historically breached that level ahead of the Independence Day holiday last week on the back of the strong payroll data. At the time of the European equity market close the DJIA is holding just above 17,000, meaning it is down 0.4% from the open at, while the S&P 500 is also down 0.4%, and the Nasdaq Composite is down 0.6%.

Another key reason for the current investor caution is the start of the US second-quarter earnings season, which kicks-off in earnest on Tuesday with the release of numbers from metal giant Alcoa. Furthermore, the minutes of the June Federal Reserve policy meeting are due for release on Wednesday.

In London Monday, the mining stocks provided a drag, as precious metal prices fell amid lower demand and a stronger dollar after last week's better-than-expected US jobs report that indicated the US economy may be experiencing a strong rebound from its winter slump. Gold is seen as a safe haven during times of economic weakness.

The price of gold fell from a pre-payroll-high last week above USD1,330 per ounce to a low Monday of USD1,311.10 per ounce, while the price of silver has also come down from above USD21.20 per ounce last week to a low of USD20.787 per ounce Monday.

"The metals are again held back by a slightly stronger dollar, which has been in demand after the June employment report was much better than anticipated on Thursday," said analyst Fawad Razaqzada.

The FTSE 350 mining sector ended down 0.6%, with Polymetal International closing down 1.2%, African Barrick Gold down 2.0%, BHP Billiton down 0.8%, and Vedanta Resources down 1.3%.

The housebuilders also underperformed Monday, despite a relatively neutral update from Taylor Wimpey. The FTSE 250-listed housebuilder echoed sector peers by citing higher selling prices as the main reason for improved profits, with sales and pricing at the end of the first-half expected to be at the upper end of guidance.

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.

Furthermore, although no change is expected at this Thursday's Bank of England meeting, the increasing likelihood of a UK interest rate rise, and the ramping up of macro-prudential measures by the BoE could make times harder for the housebuilders. "The implementation of new stricter mortgage guidelines in April does appear to have prompted a broader sell-off in the house building sector since the peaks in March," said CMC Markets chief market analyst Michael Hewson.

Taylor Wimpey ended down 2.4%, while Bellway ended down 3.7%, Bovis Homes down 2.8%, and FTSE 100-listedBarratt Developments down 2.5%.

Of the few FTSE 100 gainers Monday, Weir Group ended at the top, up 1.3% after receiving an upgrade to Buy from analysts at Citigroup. The pharmaceutical sector also provided a little support, with AstraZeneca up 0.8% and Shire up 0.4%, as speculation of merger activity in the sector continues.

On Tuesday, Bovis Homes will be the latest UK housebuilder to provide an update, while trading statements are also due from Dunelm Group, Marks & Spencer, Young & Co's Brewery, Connect Group, and Synety Group.

UK industrial and manufacturing production data for May will be the morning data focus. Due at 0930 BST, industrial production is expected to be growing at 0.3% month-on-month, slowing from 0.4% recorded in April, while manufacturing production is expected to have accelerated to 0.5% from 0.4% previously.

Later in the session, the National Institute of Economic and Social research is due to release its estimate of UK GDP in the three months to June. In the three months to may the NIESR estimate the UK economy to have grown by 0.9%.

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Source: Alliance News

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