Markets Slump Based on Weak US Data

TUESDAY MARKET UPDATE: FTSE 100 shares were under pressure after data showed US construction spending dropped in July

Alanna Petroff 4 September, 2012 | 6:54PM Kevin O'Shaughnessy
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The markets in London experienced a steep drop on Tuesday, with nearly every company on the FTSE 100 falling into the red by the end of the day.

“Shares in London have been under pressure for all of today’s session and weak economic data out of the US this afternoon has pushed the FTSE to its lowest levels for a month,” explained David Jones, chief market strategist at IG Index.

The US Commerce Department reported a 0.9% drop in July construction spending from June's reading. It was the sharpest decline in a year, as residential, non-residential, and governmental construction spending all fell. Economists had forecast a 0.5% increase for the month, though overall spending was 9.3% higher compared with the same time last year. 

Meanwhile, the Institute for Supply Management's purchasing managers' index also missed expectations, coming in at 49.6 for August, the lowest reading in more than three years, compared with the expected 49.9. The reading was also lower than July's 49.8. This August reading marks the third straight month that the ISM PMI showed a contraction in activity. 

This data contributed to pessimistic investor sentiment, leading the FTSE 100 index to lose 86 points, or 1.5%, to close at 5,672. The FTSE 250 index gave up 74 points, or 0.7%, to close at 11,429.

“After spending the majority of recent weeks focusing on promises from politicians and expecting action from the central banks, this sort of [US] data forces traders to focus back on the real economy – and the signs are still not encouraging,” said Jones. “The moves today could well be the sign of the market returning to its more volatile and slightly nervous pre-summer state.”

Meanwhile, there was some better-than-expected economic data coming out of the UK. The latest August figures show the UK services sector grew last month. The purchasing managers’ index (PMI) survey showed the UK's services sector rose to 53.7 in August, beating forecasts for a rise to 51.1. Any reading above 50 shows expansion, while a reading below 50 shows contraction. Despite the strong showing, the data simply did not lift the overall market mood.

It’s worth noting the UK data was not expected to be released on Tuesday, but it was released a day early because it was accidentally published by Reuters.

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Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.

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