LONDON (Alliance News) - UK equity markets have closed mixed Friday, with indices failing to find any real momentum, caught between more hawkish tones from the US and poor eurozone data over the week leading to fears of a rate cut from the ECB.
The FTSE 100 has closed marginally higher Friday at 6,734.74. Over the week the leading UK index finished just 13 points or 0.2% higher, although that marks the fourth consecutive weekly rise. The AIM All-Share has also recorded a fourth consecutive weekly rise, closing Friday up 0.3% at 811.04. The FTSE 250 has closed down 0.2% at 15,455.69.
Buoyed by months of cheap money from central banks, the DJIA, S&P500 in the US and the DAX in Germany all made new all time highs earlier in the week, with the FTSE 100 coming close. However, since the more hawkish comments on the state of the US economy that came from the Federal Reserve on Wednesday, along with the the announcement that it would maintain its asset purchase program at USD85 billion per month, global stock markets have been consolidating on the expectation that tapering may begin sooner that previously thought.
Across the pond, lower than expected inflation numbers from European countries has led to fears over economic growth. The consumer price index for the whole Eurozone came in on Thursday at 0.7%, down 0.9% in September and missing forecasts of 1.1%. With acknowledgements from ECB president Mario Draghi that a rate cut has been discussed at the last two ECB meetings, the latest poor data has led to expectations that a 0.25% cut will now be more seriously considered. Economic analysts at Berenberg Bank say the probability of a cut is now 60%, although it is most likely to happen at the December meeting when the Central Bank publishes its new Economic forecasts.
Thursdays inflation release has, "refueled speculation that the ECB may play the last card from its conventional policy measures: a 25 basis point cut, says Rabobank analyst Elwin de Groot. The effectiveness of the potential move remains in doubt however. Societe Generale strategist Kit Juckes notes that according to the Taylor Rule, which looks at how central bank interest rates should be adjusted for inflation, output, or other economic conditions, the ECB's base rate should currently be negative 2%, and therefore a 0.25% cut at the next meeting would be like "sticking a bandaid on a shotgun wound."
On the back of this and other poor eurozone economic indicators during the week, including record unemployment of 12.2% and declining retail sales, and on the back of a more bullish dollar, the euro has slipped below to a low against the dollar of USD1.3479, down more than 2% from above USD1.38 earlier in the week. The pound has also gained against the euro, making a high of GBP0.8441, from euro highs of GBP0.8570 on Thursday.
British manufacturing activity eased slightly in October, though remained steady. The UK PMI fell to 56.0 in October from a downwardly revised reading of 56.3 in September. A PMI reading above 50, however, indicates expansion of the sector.
In a day of very heavy newsflow about the banking sector, RBS Friday moved to create its own internal "bad bank" to run down GBP38 billion of high-risk assets over the next three years, a move it claims will be better for taxpayers than if the government moves to tear those assets out of the bank altogether in a good-bank bad-bank split. The bank also set aside a further GBP250 million provision for payment protection insurance miss-selling. It total for the PPI scandal is now GBP2.6 billion of which GBP1.9 billion has been paid out.
RBS is also one of nine banks being sued by US mortgage giant Fannie Mae over losses relating to the Libor scandal, the BBC reported Friday. The mortgage financier is seeking more than USD800 million in damages from Barclays, RBS, Rabobank, UBS, Bank of America, Citigroup, Credit Suisse, Deutsche Bank and JP Morgan Chase. "Fannie Mae filed this action to recover losses it suffered as a result of the defendants' manipulation of Libor," a spokesman told the BBC.
On top of this, with the accelerating probe into forex trading, the Financial Times reports that RBS has suspended two traders in its foreign exchange division, the first RBS employees to be suspended in the widening probe into the global foreign exchange market. Reports from the BBC later in the day also say that a number of foreign exchange traders have been suspended from Barclays while the probe goes on. RBS and Barclays are two of the biggest blue chip fallers on the blue chip index Friday, down 7.1% and 2.8%, respectively.
No amount of bad news in the banking sector could push stocks lower than those of Meggitt. The aerospace and defence company closed down more than 11% after lowering its full-year revenue guidance and warning that its has recently identified a raw material supply issue relating to one product type dating back to 2012, and has set aside GBP20 million to cover potential financial losses for fixing the problem. Meggitt, the largest provider of wheels and brakes for military aircraft, generated 24% of first half group sales from the US defense budget. Those budgets are coming under increasing pressure, with the ongoing sequestration of US government spending effective from January 15. There is "increasing concern that the military draw down could be worse than even the (sequestration) caps imply," says Liberum analyst Ben Bourne.
Vodafone shares have closed up 2.8% as AT&T is reportedly laying the groundwork internally for a potential takeover of Vodafone Group next year, though the companies haven't entered formal negotiations, according to a Bloomberg report citing people familiar with the matter. The US phone company is intensifying work on which Vodafone assets it would retain after a deal and who could buy others, the report said. AT&T reportedly remains interested in UK carrier EE as an alternative target.
Another busy week in the corporate earnings calendar kicks off with the last of the big UK banks on Monday, with third quarter interims due from HSBC. Hiscox and Weir Group are also releasing statements.
Chinese non-manufacturing PMI is due out before the market open on Monday. At 0800 GMT the latest UK house price data will come in from the Halifax, with a raft of European Markit manufacturing PMI data throughout the morning and UK construction PMI at 0930 GMT.
By Jon Darby; jondarby@alliancenews.com; @jondarby100
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Barclays (BARC)
Vodafone (VOD)