News Column

MARKET COMMENT: FTSE Gains, Pound Rallies As UK Services PMI Jumps

August 5, 2014

Jon Darby

LONDON (Alliance News) - Major stocks indices are trading higher across the UK and Europe Tuesday amid some reasonable July Services PMI data across Europe, while a particularly strong UK print of the PMI data, which also indicated domestic wage growth, has sent the pound to a high for the week against the dollar and the euro.

By mid-morning Tuesday the FTSE 100 is up 0.4% at 6,706.86 and the FTSE 250 up 0.2% at 15,398.47, while the AIM All-Share is fractionally lower at 755.37.

Within European majors, the French CAC 40 is up 0.7%, and the German DAX is up 0.6%.

UK service sector activity rose to its highest level in eight months in July, according to the Markit PMI report released Tuesday. The reading rose to 59.1 in July from 57.7 in June, far exceeding expectations for a print of 57.9 and reaching the highest level since November last year.

The reading follows Monday's strong UK construction PMI and has boosted the pound to a high of USD1.6888 and EUR1.2604.

The Markit report said that "there were reports from companies that a key driver of higher operating costs was an increase in wages." Given that the Bank of England is known to be focusing on wage growth as a key indicator before raising interest rates, indicators like this are key to the market going forward.

"With backlogs rising, service providers have taken up the capacity challenge, investing in new roles and even starting to increase wages this month," said David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply.

The July services sector PMI's across the eurozone were a little more mixed, with German expanding a little faster than expected at 56.7, while Italy expanded, but by less than expected, at 52.8, and France edged into expansion at 50.4, up from 48.2 previously. Spain recorded particularly strong expansion of 56.2 in June, which follows a recent small improvement in unemployment in the economy that has struggles for so many years.

The overall effect was for the eurozone services PMI to print 54.2, up from 52.8 in June but slightly missing the expectation for 54.4. The eurozone composite PMI also rose but missed expectations, coming in at 53.8.

Meggitt is the stand out FTSE 100 mover Tuesday, falling more than 7% in early trade. The aerospace, defence and energy sector engineer reported a drop in pretax profit to GBP98.2 million for the first half, from GBP122.4 million a year earlier, as revenue fell to GBP718.9 million, from GBP810.1 million, missing the consensus expectation of GBP747 million.

Meggitt has continued to suffer as a result of cuts to the US military spending budget and is the latest of a long line of UK companies to say the strength of the pound has negatively affected its earnings from overseas business. The company has indicated that it expects a strong second half weighting, and indeed its first half orders rose by 9%, but analysts indicate that an 8% downgrade to full-year earnings per share expectations is likely.

Intercontinental Hotels Group is down more than 3% after reporting a drop in pretax profit to USD377 million in the first half from GBP462 million a year earlier. Deutsche Bank says that trading is improving at the hotel group, and it should reach double digit earnings per share growth by next year, but it's not surprised that the shares are drifting Tuesday following the lacklustre results.

Intertek Group leads the FTSE 100 gainers for the second consecutive day, currently up 3.9%, having received a number of broker upgrades Tuesday after its first half results were well received on Monday.

Aggreko, the FTSE 100 listed temporary power supplier, is up 3.0% after announcing first half profits ahead of analyst expectations. The company said its pretax profit fell 9% to GBP132 million for the first half from GBP146 million the previous year, but that was about 5% ahead of analyst expectations, and underlying revenue showing improvements.

Still to come Tuesday, the US Markit services and composite PMI's for July at 1445 BST, followed by US monthly factory orders and the ISM non-manufacturing PMI at 1500 BST.

Economists are expecting factor orders to show growth of 0.6% in June after dipping by 0.5% in May, while the ISM PMI is expected to expand to 56.3 in July from 56.0 in June.

Well before European markets opened Tuesday, the HSBC China service sector PMI showed that expansion in the world's second largest economy stagnated in July, with a reading of 50.0, down from 53.1 in June, which appears to be weighing on US investor sentiment ahead of the open there.

"US markets look set to open tentatively lower today after disappointing China service sector data released overnight put a dampener on global growth prospects," said CMC Markets market analyst Jasper Lawler.

US futures currently indicate that the DJIA, the S&P 500, and the Nasdaq Composite will all open between 0.1% to 0.2% lower Tuesday.

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Source: Alliance News

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