LONDON (Alliance News) - UK equities moved away from their intra-day lows late on Tuesday following the release of some stronger-than-expected US data, but still ended the day in the red after another disappointing release from Europe's largest economy.
Meanwhile, the pound fell below the key psychological barrier of USD1.70 Tuesday, after Bank of England Governor Mark Carney played down expectations of an early interest rate rise.
Soft European data was once again the major driver of UK stock markets Tuesday, after a disappointing round of eurozone purchasing managers' index data sent equities lower on Monday.
"Yesterday?s disappointing (German) PMI release saw the manufacturing sector growth come under some pressure and today was an opportunity to gain a swift redemption with the release of the IFO business survey results," said Joshua Mahony, a research analyst at Alpari. "However, yet again the story wasn?t rosy for the eurozone?s biggest economy, with current and future expectations of business conditions falling sharply," he said.
German business confidence dropped to its lowest level of the year, according to the IFO survey of current conditions. The survey reading fell to 109.7 in June from 110.4 in May, missing economists expectations for a more modest decline to 110.2. The current situation index remained unchanged at 114.8 in June, while it was expected to rise to 115.
Meanwhile, the expectations index dropped to 104.8 in June from 106.2 a month ago. The reading was also below the expected level of 105.9.
"This points to increased anxiety regarding Russian ties coupled with weaknesses in major export sectors such as China. Add to this the effects of a historically strong euro and it is clear that businesses and exporters in particular feel unsure of future economic conditions," Mahony said.
UK equities did stage a mini-rally late in the day, with the FTSE 100 briefly moving into positive territory, in the immediate aftermath of some better-than-expected US data, but this did not last long.
The US Conference Board showed that the consumer confidence index jumped to 85.2 in June from a revised 82.2 in May, reaching its highest level since January of 2008. Economists had expected the index to edge up to 83.5 from the 83.0 originally reported for the previous month.
Meanwhile, US new home sales soared 18.6% to a seasonally adjusted annual rate of 504,000 in May from the revised April rate of 425,000, the Commerce Department said. Economists had expected sales to climb to a rate of 440,000 from the 433,000 originally reported for the previous month.
Eventually, the FTSE 100 closed down 0.2% at 6,787.07, while the FTSE 250 closed down 0.8% at 15,547.21, and the AIM All-Share index closed down 0.4% at 782.68.
Major European bourses moved higher following the stronger-than-expected US data. The CAC 40 in Paris has closed up 0.1%, while the DAX 30 has closed up 0.2%.
On Wall Street, "after stumbling at the open, US stocks moved back into the green on a huge jump in consumer confidence pointing to the potential for higher spending in June," said Jasper Lawler, a market analyst at CMC Markets.
At the UK equity market close, the DJIA is up 0.2%, the S&P 500 is up 0.1%, and the NASDAQ Composite is up 0.7%.
At the individual UK equity level, BG Group, closing up 1.9%, was one of the biggest risers in the FTSE 100 Tuesday. Shares in the oil and gas company moved higher after its QGC subsidiary said it had started operating a network of natural gas processing facilities in Queensland, a key step towards BG Group's goal of producing liquefied natural gas from its Curtis Island plant in the fourth quarter of 2014.
QGC is working to establishing the world's first project, known as Queensland Curtis LNG, that will convert gas from coal seams into liquefied natural gas.
BG Group has a USD20.4 billion budget for the construction and commissioning phases at the site, where it already has LNG sales agreements for almost 10 million tonnes a year with the China National Offshore Oil Corporation, Tokyo Gas, GNL Chile, Chubu Electric, and the Energy Market Authority of Singapore.
Shire, closing up 2.4%, continued its recent volatile trading, with its shares among the leading risers in the blue-chip index. The stock has regularly been one of the biggest risers or fallers in the index in recent weeks amid merger and acquisition speculation within the pharmaceutical and health care sectors.
UBS has increased its price target on Shire to 4,500 pence, from 3,450p, to reflect a 30% M&A premium after it was revealed last week that the company had rejected three indicative takeover approaches from US pharmaceutical research and development company AbbVie Inc. However, it retained its Neutral recommendation on the stock, saying that while AbbVie could come back with a higher offer, the downside risk of a higher offer not materialising offsets the upside.
At the other end of the spectrum, Capita and G4S, both closing down 1.2%, were notable blue-chip fallers Tuesday.
Shares in the companies fell after the Financial Times reported that the UK's Labour party will mount an assault on big outsourcing companies if it wins the election, reducing their role in delivering the government?s back-to-work programme and exploring a plan to force them to pay all workers above the minimum wage in exchange for Whitehall contracts, citing an interview with Rachel Reeves, Labour?s shadow work and pensions secretary.
Reeves told the newspaper that the Labour party would do away with the current system of big centrally commissioned contracts when the current tranche expired in 2015-2016. Instead services would be bought at a more local level, perhaps by local authorities or local enterprise partnerships, she said.
Domino Printing Sciences and Croda International provided a drag for the UK's FTSE 250 Tuesday.
Domino Printing Sciences ended the day as the mid-cap index's biggest loser, closing down 17%, after saying that, although it is on track to meet its full-year expectations for this year, next year's results are unlikely to be any better, due to a requirement for additional investment in research and development.
The printing equipment company said it swung to a pretax profit of GBP25.9 million in the recent half, compared with a pretax loss of GBP3.8 million a year earlier, as revenue rose GBP173.8 million from GBP161.9 million, and exceptional costs fell. In the previous year the company posted exceptional costs of GBP27.1 million, as a result of writing down its investment in TEN Media.
Croda, closing down 9.1%, was the mid-cap index's second heaviest faller. The speciality chemicals company's shares fell steeply after it warned that it now expects to report lower pretax profit than previously hoped in both its second quarter and in 2014 as a whole, due to the strength of the pound and weakness in its industrial chemicals business.
In April, the company had said it expected its performance in the second quarter to end-June to be similar to that of the first quarter when it reported a pretax profit of GBP65.2 million. However, it now expects the second quarter figure to be about 8% below that.
Heading the other way, Imagination Technologies Group closed up 7.7%, making it the biggest riser in the FTSE 250. The technology company's shares jumped after it expressed confidence that it is on track to deliver progress, even after it swung to a pretax loss for the year to end-April due to higher costs following its acquisition of MIPS Technology Inc in February 2013.
The company swung to a pretax loss of GBP314,000, from a pretax profit of GBP12.2 million a year earlier, even though revenue rose to GBP170.8 million, from GBP151.5 million. Research and development costs and sales and administrative expenses both rose following the company's acquisition of MIPS.
Still, Jefferies analyst Lee Simpson said the company was heading in the right direction again after struggling in the previous year when it was hit by both weak licensing revenue and dropping royalty rates. Last year's full-year licensing revenue of GBP38.3 million was at the upper end of the guidance range of GBP35 to GBP40 million, he said, and the company's adjusted operating profit also beat expectations.
Imagination Tech's shares trade at a price-to-earnings ratio of 20 times forecast 2016 earnings, which Jefferies said "misrepresents the strength of the underlying fundamentals." The investment bank thinks the stock should be trading on a multiple of 25 to 30 times earnings.
In the forex market, the pound fell below USD1.70 Tuesday after BoE Governor Mark Carney appeared to backtrack somewhat from recent comments made at his Mansion House Speech, and even from inference on the latest Monetary Policy Committee meeting minutes, which recorded "surprise" amongst members at the relatively low probability attached by the markets to the possibility of a rate rise before the end of the year.
"This was expected to be a somewhat hawkish affair given the recent statements from Carney," said Alpari's Mahony. "However, he took a surprisingly dovish stance, following on from his outlook last month when he likened the UK to a team in the qualifying stages of the World Cup," he added.
Carney watered down expectations for an early interest rate rise, telling the Treasury Select Committee that there is still more spare capacity in the labour market and the economy should absorb the wasteful slack before raising interest rates. "Taken in isolation, the developments on the wage front suggest to me that there has been more spare capacity in the labour market than we previously had thought," he said.
The shift back to a dovish stance after more hawkish recent comments prompted MP Pat McFadden to say that the central bank was acting like an "unreliable boyfriend." The MP said that the message from the BoE has been "one day hot, one day cold," leaving businesses and consumers not really knowing were they stand.
The pound has managed to pare some of its losses, but still trades firmly lower. At the UK equity market close, sterling is quoted at USD1.6969, EUR1.2486, CHF1.5195, and JPY173.300.
Despite the drop below psychological level of USD1.70, Forex.com's technical analyst Fawad Razaqzada expects the pound to post material gains against the dollar over the coming weeks, with the BoE likely to increase interest rates ahead of the US Federal Reserve.
In the data calendar Wednesday, German GfK consumer confidence information is released at 0700 BST, with French business climate data released at 0745 BST. Italian retail sales and consumer confidence data are released at 0900 BST and 1000 BST, respectively.
In the US, the Mortgage Bankers Association releases its MBA mortgage applications data at 1200 BST. Durable goods, gross domestic product, and personal consumption data are released soon after at 1330 BST, with the preliminary reading of June's US Markit services and composite purchasing managers' index published at 1445 BST.
In the corporate calendar, FTSE 250-constituents Stagecoach Group and Northgate are scheduled to release full-year results.
By James Kemp; jameskemp@alliancenews.com; @jamespkemp
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