15th Jul 2014 16:47
LONDON (Alliance News) - Stocks in the UK and Europe ended lower Tuesday after struggling for direction for most of the day.
Trading was mixed in the European morning amid a surprise jump in UK inflation and another drop in German economic sentiment, but moved firmly into the red by the close after Federal Reserve Chair Janet Yellen expressed concern about the US economic outlook and stretched stock valuations.
The FTSE 100 closed down 0.5% at 6,710.45, the FTSE 250 down 0.9% at 15,440.48, and the AIM All-Share down 0.3% at 773.32.
Major European markets also unwound into the afternoon, with the French CAC 40 closing down 1.0%, and the German DAX ending 0.7% lower.
US stocks had been rallying up to new all-time highs on the back of some stronger-than-expected earnings from the big US banks, until Yellen said in her semi-annual testimony to Congress that the much anticipated second-quarter US growth rebound "bears close watching", which would appear to suggest that the Federal Reserve has concerns that the market may be disappointed by what is to come.
With the US equity markets making new highs on an almost daily basis, the Fed chair also expressed concern over the "stretched valuations", particularly in the technology and bio-technology sectors.
"The stocks in question clearly know who they are, with Facebook and Twitter both getting clobbered," said CMC Markets market analyst Jasper Lawler.
After the European market close US stocks are continuing lower, with the DJIA fractionally off at 17,040 points and the S&P 500 down 0.3% at 1,970.47, while the technology heavy Nasdaq Composite suffers the most, down 0.7% at 4,407.30.
US retail sales data also disappointed Tuesday, recording 0.2% month-on-month in May, slipping from 0.5% in April and missing economists forecasts for an acceleration to 0.6% growth.
The German ZEW economic sentiment survey slipped to its lowest level since December 2012 Tuesday, coming in at 27.1 in June, down from 29.8 in July. The measure of institutional investor sentiment has been on a steady decline since the end of last year, when the index was as high as 62.0. The combination of the unrest in Ukraine, the introduction of negative interest rates in the eurozone, and recent disappointing economic data has clearly taken its toll on investor confidence.
The foreign exchange market initially took Yellen's testimony as an indication to sell the dollar, allowing the already strong pound to make further ground and print a near-six year high of USD1.7191. The pound had jumped earlier in the session following a surprise rise in UK inflation and continued to tick higher into the afternoon. By the European market close, sterling trades slightly off its highs at USD1.7145, and EUR1.2633.
UK CPI rose by 1.9% year-on-year in July, jumping from 1.5% in May and exceeding the expected 1.6% rise. On a monthly basis, prices rose by 0.2%, reversing the 0.1% fall recorded in May and exceeding economists expectations for another 0.1% fall.
The DCLG house price index, released by the Office for National Statistics at the same time as the inflation data, showed UK house price inflation running at an annual rate of 10.5% in June. That's up from 9.9% in May, ahead of the expected 10.2% rise, and marking the first double-digit rise in the index for more than four-years. In London alone, the data shows prices rose at an annual rate of 20% in June.
The data gave more credence to the idea of an early UK interest rate rise and added to the arsenal of difficult questions that the Treasury Select Committee threw at Bank of England Governor Mark Carney as he sat to face an enquiry over the June 26 Financial Stability Report.
Carney reiterated that the BoE sees house price inflation as the biggest risk to the UK economic recover, and that the central bank is watching very carefully for signs of an asset bubble, although the BoE chief admitted there is nothing he can do about the effect of foreign cash buyers pushing up the price of property in central London.
All the talk of a potential problem in the UK housing market led the housebuilders to underperform Tuesday, with Barratt Developments and Persimmon ending amongst the biggest FTSE 100 fallers, down 2.2% and 1.5% respectively.
Sports Direct International was the worst single FTSE 100 faller, down 2.6%, retracing much of the strong gain it made on Monday on news that it is set to expand to the Australian market.
UK retailer shares as a whole were weak on Tuesday, after the British Retail Consortium said like-for-like sales in the UK were down 0.8% in June on the year before, compared to expectations for a 1.0% increase. Like house builders, retailers would be another sector to be hurt by an increase in UK interest rates.
As a sector, Tobacco was the worst performer Tuesday, following the confirmation that British American Tobacco will invest USD4.7 billion to maintain its existing 42% interest in the enlarged Reynolds American Inc group, following the acquisition of Lorillard Inc by Reynolds in a deal valued at USD27.4 billion.
In a separate statement statement Tuesday, London-based Imperial Tobacco said it has entered into a purchase agreement with Reynolds American to acquire a portfolio of US cigarette brands, office and productions facilities currently owned by Lorillard.
The news has been negatively received across the board, with British American Tobacco and Imperial Tobacco ending down 1.8% and 0.9%, respectively, in London, while the US names Reynolds and Lorillard continue to trade lower, down 4.8% and 8.0% respectively.
FTSE 250-listed Telecom Plus was a stand-out gainer, adding 7.6% after the multi-utilities company gave a bullish forecast for its first-half, expecting results "significantly ahead" of the previous year as it saw a strong performance in its first quarter to the end of June. The group said it had seen its customer numbers rise during the quarter to 547,378 from 474,404 in the previous year.
Wednesday promises to be another busy day in the markets, starting with a raft of Chinese data due for release overnight, before the attention returns to the UK domestic economy and the release of the latest UK unemployment and wage growth data at 0930 BST. In the afternoon the focus will once again turn to Washington as Janet Yellen continues her testimony to Congress.
Economists expect Chinese retail sales growth to moderate slightly to an annual rate of 12.4% in June from 12.5% in May, while annual industrial production is expected to expand to 9.0% in June from 8.8% in May. All eyes will be on whether the world's second-biggest economy can reach its stated annual GDP growth target of 7.5%, with the expectation being that it will fall slightly short and remain steady at the first-quarter rate of 7.4%. Any meaningful slip from there will likely spark speculation about further targeted stimulus measures from China.
The US second-quarter reporting season is now fully-underway and after the US closing bell Tuesday technology bellwether Yahoo! will report, while on Wednesday the world's biggest asset manager, Blackrock, is due to release its figures, along with another technology leader, eBay.
In the UK corporate calendar Wednesday, production reports are due from a number of the miners, including Rio Tinto, Fresnillo, and Hochschild Mining. Quarterly updates also are due from Evraz, Severn Trent, Fenner, London Stock Exchange Group, British Land, Oxford Instrument, and ICAP.
By Jon Darby; [email protected]; @jondarby100
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