29th Jan 2014 17:13
LONDON (Alliance News) - UK stock indices slipped Wednesday as Turkish and South African central bank action failed to stop the emerging market currency route, and amid a global equity sell-off ahead of the US Federal Reserve policy announcement still to come Wednesday. In the UK, mining stocks were the top equity gainers following a number of positive production updates.
Stock markets have been sliding across the globe in recent sessions on renewed fears over the slowdown of emerging market growth. European markets woke up Wednesday to the news that the Turkish central bank raised its overnight lending rate to 12% from 7.75% and the 1-week repo rate to 10% from 4.5%, a move that Societe Generale senior strategist Kit Jukes calls, "a far, far more aggressive policy tightening than expected."
The move was followed later Wednesday by the Reserve Bank of South Africa, which raised its interest rate to 5.5% from 5.0% in an attempt to stop its own currency route.
The central bank actions did provide a brief improvement in global risk sentiment, with the FTSE 100 moving higher in early trade. However, with this evenings FOMC decision edging closer, and a negative open on Wall Street bringing concern back to the market, both stocks and emerging market currencies slid once again.
The FTSE 100 closed down 0.4% at 6,544.28, the FTSE 250 closed down 0.2% at 15,668.31 and the AIM All-Share closed down 0.2% at 857.83,
In Europe, the French CAC40 closed down 0.7% and the DAX closed down 0.8%
After rallying 10% overnight from a record low before the rate hike, the Turkish lira dropped again Wednesday and is now close to the pre-rate hike levels, currently at USD2.25. Similarly, the South African rand, despite a small gain when the rate rise was announced is now even weaker than it was this morning, currently trading at USD11.20.
The net effect of the fiscal policy changes of the emerging market central banks was, "the equivalent of standing in front of a runaway truck", said CMC Markets Chief Market Analyst Michael Hewson.
With little in the data calendar Wednesday, investors were focused on corporate releases. Mining stocks led to the few gains in the UK market, with the sector up 1.3%. Antofagasta was the top blue-chip gainers, up 6.0% after saying it has achieved record copper production in the full-year 2013, to 721,000 tonnes from 709,600 tonnes the previous year. Anglo American was close behind, up 5.6%. The major mining group said it has increased production in its fourth quarter for all of its major metals. Fresnillo and Randgold Resources were also big gainers, up 3.9% and 3.0%, respectively.
Sainsbury CEO Justin King announced he will step down in July. King, who has been at the helm for 10 years, will be succeeded by the current commercial director Mike Coupe. The shock announcement sent the stock down 2.5% Wednesday, one of the biggest blue chip fallers.
AIM-listed Mulberry lost a huge 22% Wednesday, after a shock profit warning prompted by heavy Christmas discounting and weaker demand from Korea.
Gold has seen gains, providing an extra boost to the miners. The yellow metal currently trades at USD1,264.40. Gold prices have edged back up again as uncertainty in some emerging markets helps to underpin prices," says CMC's Hewson.
With emerging market concern back in the spotlight, all eyes are on the upcoming policy decision by the Federal Reserve. The base case for most economists, given the perceived need for clarity in policy making and the fact that tapering has already begun, is for the Fed to continue to run down its quantitative easing program in a linear fashion. This means reducing asset purchases by a further USD10 billion at this meting, and another USD10 billion at every meeting until it is left with just USD5 billion to cut, which, going by the meeting schedule, would be in December this year - totally clearing the decks before the start of 2015.
Ben Bernanke suggested that the continued cut is likely as long as the economy continues to improve as forecast. The likelihood of that next cut therefore dipped when January's non-farm payroll report, one of the US' most important economic indicators, showed private sector jobs growing far slower than expected, with just 74,000 jobs added in December, against 196,000 expected. The expectation of the next Fed action has become even more of a grey area given the recent emerging market currency rout.
Although it will still be a surprise to most if another USD10 billion taper is not announced, particular attention will be paid to any adjustment to forward guidance with reference to the emerging market trouble. All eyes will be on the Fed announcement at 1900 GMT.
A busy day in the corporate calendar Thursday brings full-year results from Royal Dutch Shell, along with half-year results from Diageo and BSkyB. Interim management statements are also expected from National Grid, Mitchells & Butlers, United Utilities and 888 Holdings, amongst others.
In the economic calendar, German unemployment numbers are due at 0855 GMT, followed by UK mortgage approvals at 0930 GMT and EUR Economic Sentiment at 1000 GMT. In the afternoon, the US will be back in focus, with the release of fourth-quarter GDP at 1330 GMT.
By Jon Darby; [email protected]; @jondarby100
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