24th Jan 2014 17:37
LONDON (Alliance News) - London's main stock indices suffered further heavy losses Friday amid a continuing global equities sell-off, as concerns about a slowdown in China spread to emerging markets as a whole.
The pound, meanwhile, gave up some of its recent gains against the dollar after Bank of England Governor Mark Carney signaled that monetary policy won't be tightened any time soon and the central bank will change its Forward Guidance policy at its next meeting in February.
The FTSE 100 closed down 1.6% at 6,663.74, the biggest daily loss since June 20 last year when outgoing Federal reserve Chairman Ben Bernanke first hinted that the US quantitative easing program was coming to an end. It meant the blue-chip index is now below the level it started 2014.
The FTSE 250, heavy on mining stocks with emerging market exposure, fared even worse, closing down 1.7% at 15,703.44. That meant it has suffered its worst week since May 2012, losing about 3% from Monday's open.
The AIM All-Share has also suffered a 3% decline over the week, closing 1.0% lower on Friday alone, at 861.72.
In Europe, the French CAC40 closed down 2.9% and the German DAX ended down 2.6%. The main US indices were all down about 1.5% when the European markets closed.
"Following an uninspiring start to the year, equities have come under strong selling pressure this week. Disappointing global macroeconomic data and tepid fourth quarter earnings results have been part of the reason behind this risk-off trade," said Forex.com analyst Fawad Razaqzada.
The sell-off started Thursday when data signaled a contraction in China's manufacturing sector. The country's headline Purchasing Managers Index fell to 49.6 in January, a six-month low and significantly below the 50.5 recorded in December. Economists had expected a figure of 50.6. A figure below 50.0 indicates a contraction in business activity.
There was little on the data calendar Friday to reverse the negative sentiment that the Chinese data caused, and the concerns widened to all emerging markets. Emerging markets currencies were hit hard, while stocks with emerging market exposure led the falls on the equity markets.
Aberdeen Asset Management was the worst performer on the FTSE 100, closing down 5.7%, with shares in the emerging market specialist now down about 20% on the year. Brewer SAB Miller, which also has a big emerging market presence, closed down 3.0%.
The FTSE 350 Industrial Metals index was the worst performing sector index, dropping 4%.
Gold prices, meanwhile, held close to a two-month high. The yellow metal, seen as a safe haven for investors in times of high volatility in other markets, was trading at USD1,262.30 an ounce.
"The rare combination of plunging stocks and US dollar continued today, leading to some safe haven follows into gold and silver," said analyst Razaqzada.
The Argentinian Peso was the worst performing currency Friday as the emerging market rout took hold in currency markets. The peso lost 12% against the US dollar as the government lifted its ban on buying US dollars in the country.
The dollar also came under pressure against other major currencies, dropping to a three-week low against the euro, and adding to Thursday's losses against the yen.
However, the pound fell against the dollar, giving up some of the gains made earlier in the week after Carney spoke at the World Economic Forum in Davos.
Carney signaled that rising productivity will now be the key factor that decides when the central bank will start to tighten monetary policy, and any tightening will be a slow, gradual process.
The governor effectively confirmed that the Forward Guidance the bank had previously given is no longer relevant after unemployment fell far faster than the central bank anticipated when the policy was introduced in August. He signaled that interest rate rises were still some way off because the rise in numbers in work wasn't being matched by increased productivity.
"It now seems likely that the rate of unemployment consistent with stable inflation in the medium term is somewhat lower than the (monetary policy committee) assessed back in August," Carney said.
"Even though unemployment is falling faster than expected, the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy," Carney added.
The Bank of England policy setters will adapt its Forward Guidance to "changing circumstances" in its February Inflation Report, he said.
Reassured that interest rates are staying low for a little longer yet, the pound gave back a lot of the gains made since the last unemployment rate was published. The pound peaked against the dollar in early trade at USD1.6668, a 32-month high, but is now trading more than 1.5 cents lower, at just under USD1.6500. Against the euro, the pound was trading at GBP1.2055.
"The pound is likely to have the upper hand for as long as the market expects the BoE to hike rates before the Fed. Right now the market expects the BoE to hike 5 months before the Fed", Forex.com Research Director Kathleen Brookes said.
Next week, Janet Yellen will chair her first Federal Reserve policy decision on Wednesday. In the UK, fourth-quarter UK GDP data is scheduled for Tuesday.
The UK corporate earnings season accelerates next week, with half-year results from BSkyB and Diageo and full-year results from Royal Dutch Shell Thursday, followed by third-quarter results from BT and Vedanta on Friday.
By Jon Darby; [email protected]; @jondarby100
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