News Column

MARKET COMMENT: Late Rally In London Offsets Losses On Terror Threat

August 29, 2014

LONDON (Alliance News) - The FTSE 100 ended a fairly volatile day higher Friday, following a late recovery after the news that Britain has raised its terrorist threat level to "severe" from "substantial" in response to the risk posed by radical jihadists in Iraq and Syria.

At the end of trading Friday the FTSE 100 closed up 0.2% at 6,819.75, and the AIM All-Share made gains of 0.2% to 780.5, while the FTSE 250 finished down 0.2% at 15,885.72.

European stock markets managed to rally late on causing the CAC 40 to finish up 0.3% and the DAX end up 0.1%.

US stocks at the close of trading in Europe were positive with the DJIA up 0.1%, the S&P 500 trading up 0.3%, once again above 2,000, and the NASDAQ Composite up 0.5%. US markets will not be trading on Monday due to the US Labour Day holiday.

UK indices began the week strongly after the bank holiday as markets reacted to European Central Bank President Mario Draghi's doveish speech at the Jackson Hole symposium on August 22. However, as the week wore on, optimism for ECB action lowered as comments from German Finance Minister Wolfgang Schaeuble said that Draghi has been "over-interpreted" for his hints about possible quantitative easing. The ECB will meet next week for its monthly interest rate meeting.

"We think Draghi will confine himself to discussing the ECB's options, which may include further hints of QE. The likely downgrade of the ECB's economic forecasts may add to expectations of future action," says senior economist at Lloyds Bank Rhys Herbert.

Eurozone consumer inflation slowed, growing only 0.3% in August, compared to from 0.4% in July. However this met economists' expectations, who anticipated that falling energy prices had dragged inflation down. The core inflation figure - which excludes food, energy, alcohol and tobacco - marginally surpassed expectations growing 0.9% year-on-year, up from the July figure and consensus of 0.8%.

On the geopolitical front, the UK raised its terrorist threat level Friday afternoon. Home Secretary Theresa May said that the new level means the UK government believes that a terrorist attack is "highly likely."

"The increase in the threat level is related to developments in Syria and Iraq, where terrorist groups are planning attacks against the West," May said in a statement. "Some of those plots are likely to involve foreign fighters who have travelled there from the UK and Europe to take part in those conflicts."

The FTSE 100 fell sharply following the news but recovered during late trading.

Furthermore, tension between Ukraine and Russia intensified this week. On Thursday, Ukrainian President Petro Poroshenko accused Russia of a military invasion in the east. The Ukraine military said it had lost control of border cities in the south-east in what would be a "second front" in the conflict. There was also a NATO report that estimated that more than 1,000 Russian solders were fighting among pro-Russian separatists, while insurgents conceded the number to be up to 4,000.

The Russians have since said that its troops are not fighting along side pro-Russian separatists in eastern Ukraine. "Our reaction can only be full disagreement. We have already denied these reports many times," President Vladimir Putin's spokesman, Dmitry Peskov, said in a radio interview.

In individual stock news, Tesco led the FTSE 100 fallers for much of the day as it said it has brought forward the start date for its new chief executive, David Lewis, and has tasked him with conducting a review of the whole group, after it slashed its interim dividend, cut its capital expenditure plans, and said it expects trading profit to be significantly lower than last year.

The company said trading conditions remain challenging and its ongoing investments in its customer offer - which includes big price cuts - have weighed on its expected performance. It said it was uncertain about how fast the benefits of the investments it is making would flow through in the second-half of its financial year.

It said it now expects its trading profit in the current financial year that ends in February 2015 to be between GBP2.4 billion and GBP2.5 billion, and trading profit for the first half ending August 23 to be about GBP1.1 billion. Furthermore, it said it expects to set an interim dividend of 1.16 pence, 75% below last year's interim dividend.

Despite ending the day down 8.3%, some analysts think that this will be a good time for Tesco to start afresh.

"The company [Tesco] has taken the right step, and some investors have only themselves to blame if they thought their dividends were somehow sacrosanct. A new era starts on Monday, and the new CEO will hope that his honeymoon gives him time to put the necessary rescue plans in place," says IG analyst Chris Beauchamp.

The news had caused the other UK grocers to record losses in share prices as well. Wm Morrisons ended the day down 5%,J Sainsbury ended down 4.4% and Marks & Spencer Group finished down 1.9%.

In the FTSE 250, Digital Entertainment ended the week as the biggest riser after the company said it would simplify its structure to cut even more costs out of the business and drive revenue growth, after it reported a wider pretax loss and lower revenue for the first half of the year as solid sports betting was offset by declining poker and casino revenue and it suffered from the loss of its Greek market. The stock closed 13% higher.

By Neil Thakrar;

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Source: Alliance News

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