LONDON MARKET CLOSE: Stocks Sink Amid Recession And Trade War Fears

(Alliance News) - Stocks in London ended firmly in the red on Wednesday as a US yield curve ...

Alliance News 14 August, 2019 | 4:57PM
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(Alliance News) - Stocks in London ended firmly in the red on Wednesday as a US yield curve inversion and weak economic data from Germany and China stoked fears of a recession.

The FTSE 100 index closed down 103.02 points, or 1.4%, at 7,147.88.

The FTSE 250 index ended down 277.13 points, or 1.5%, at 18,731.05, and the AIM All-Share index finished 11.48 points, or 1.3% lower at 865.51.

The Cboe UK 100 closed down 1.8% at 12,081.91, the Cboe UK 250 down 1.3% at 16,678.96, and the Cboe UK Small Companies down 0.6% at 10,678.96.

"The FTSE fell sharply lower shortly after the opening bell and has remained in the red ever since. Doom and gloom dominated after data showed that Chinese industrial output grew at the slowest pace in 17 years, whilst the German economy contracted. Recession warning bells rang out across the markets as President Donald Trump's delaying of tariffs on some Chinese imports is a case of too little too late - the damage to economies has already been done," said City Index analyst Fiona Cincotta.

In Paris the CAC 40 ended down 2.1%, while the DAX 30 in Frankfurt ended down 2.2%.

Stocks in New York were sharply lower at the London equities close, with the DJIA down 1.5%, the S&P 500 index down 1.6% and the Nasdaq Composite down 1.7%.

The yield on the 10-year US Treasury bond, meanwhile, briefly slid below the yield on two-year debt Wednesday, a rare phenomenon that has often been a harbinger of recession. The inverted yield curve preceded all nine of the US recessions since the mid-1950s.

Analysts at ING explained: "In normal times investors want to be compensated for the risk of lending for longer periods of time - you do not know what may happen over the next ten years (will inflation spike, will a country get into debt problems etc) - and they feel more comfortable lending over a shorter period of time. Hence why interest rates on 2-year debt are normally lower than 10-year borrowing costs.

"However, the fact that this has flipped suggests that investors are seriously worried about a downturn, which will keep inflation low. The market is also hinting that it thinks the Federal Reserve is 'behind the curve' and that it may not cut short-term interest rates quickly enough to head off a recession."

Moreover, weak macroeconomic data and US-China trade war fears have amplified concerns.

Germany's gross domestic product slowed at its fastest pace in more than six years, sinking by 0.1% in the April-June period and down sharply from the 0.4% growth in the first three months of the year, the Federal Statistics Office said.

"The GDP report definitely marks the end of a golden decade for the German economy," said ING Bank chief German economist Carsten Brzeski as a bitter US-China trade war along with the threat of Britain crashing out of the EU have hit Europe's economic powerhouse.

In addition, China's economy showed further signs of strain in July with output at its factories falling to its lowest level in 17 years, while investment and retail sales also slowed, official data showed Wednesday.

The figures are the latest to show how the world's second-largest economy is being damaged by the escalating trade war with the US and weak global demand.

Industrial output increased 4.8% on-year in July, down from 6.3% in June and marking the weakest pace since 2002.

"What is causing the market's fear of recession is, of course, a combination of the weaker global environment - another set of woeful German numbers haven't helped sentiment - and concerns that the protracted nature of the 'trade war' with China is sapping business confidence, putting up costs and hurting profits. The result may be weaker hiring and investment in the US that could lead to a broader economic downturn," ING analysts added.

In the FTSE 100, Admiral ended the best performer, up 4.0% after the insurer reported "modest" profit growth in the first half as the insurer's main Motor business saw a slight rise in premiums and customers.

In the six months to June 30, the insurer's pretax profit increased 3.6% to GBP218.2 million from GBP210.7 million the year before. Admiral's turnover grew 6.0% to GBP1.77 billion from GBP1.66 billion the year before. Admiral describes its turnover as total written premiums and other revenue & income from Admiral Loans.

Admiral upped its payout by 5.0% to 63.0 pence - comprising an interim dividend of 41.8p and a special dividend of 21.2p. The insurer distributed 60.0p in the first half last year.

Peer Direct Line closed up 1.0%.

Mexican gold miner Fresnillo closed up 0.3% tracking spot gold prices higher, quoted at USD1,516.12 an ounce at the London equities close, up from USD1,502.50 late Tuesday, as demand for safe haven assets increased.

At the other end of the large cap index, Prudential closed down 4.8%, despite the life insurance and financial services firm reporting strong growth in operating profit.

In the six months to June 30, pretax profit attributable to shareholders slipped 44% to GBP896 million from GBP1.60 billion the year before. Prudential's operating profit from continuing operations, excluding soon-to-be-demerged M&G Prudential, registered 19% growth to GBP2.41 billion from GBP2.02 billion. The key Asian unit recorded 18% operating profit growth to GBP1.20 billion.

Prudential hiked its interim dividend by 5% to 16.45 pence, which it said is in line with its dividend policy.

The company also confirmed its demerger of M&G Prudential will be complete in the fourth quarter. M&G Prudential will be listed separately in London, also expected in the fourth quarter, and will change its name to M&G PLC. M&G PLC will operate under two brands: Prudential and M&G Investments.

In the FTSE 250, Balfour Beatty ended the best performer, up 9.3% after the construction company increased its annual cash forecast and hiked its interim dividend by almost a third, amid positive interim earnings.

Revenue, which includes its income from joint ventures, rose by 1% to GBP3.88 billion in the six months to June 28 from GBP3.84 billion a year before. Pretax profit jumped by 26% to GBP63.0 million from GBP50.0 million and on an underlying basis by 14% to GBP64.0 million from GBP56.0 million. For 2019, Balfour said it now expects to deliver average net cash in a range of GBP280 to GBP300 million, versus the previous range of GBP220 to GBP260 million.

Balfour raised its interim dividend by 31% to 2.1p.

The UK government is a major customer of Balfour Beatty's construction unit and the company also has interests in the transport sector.

At the other end of the midcaps, Sports Direct ended the worst performer, down 10% after the sportswear retailer said auditor Grant Thornton UK decided against seeking reappointment after a review of its client portfolio for profitability purposes.

The retailer also said that it was are comfortable with its accounts for the year ended April 28 and believed a fully robust audit was carried out of its financial statements.

The pound was quoted at USD1.2063 at the London equities close, flat compared to USD1.2062 at the close Tuesday, following the release of UK inflation data.

UK inflation rose above the Bank of England's 2.0% target in July, the Office for National Statistics showed. The consumer price index rose 2.1% in July on a year before, accelerating from the 2.0% annual increase seen in June. This surpassed consensus, as cited by FXStreet, for consumer price growth to ease to 1.9%. The last time inflation came in above 2.0% was in April, when it stood at 2.1%.

Thomas Wells, manager of the Smith & Williamson Global-Inflation Linked Bond Fund said: "The market seems to be waking up to the risk of a no-deal Brexit, as the front end of the UK yield curve is now inverted, with 5-year gilts offering lower yields than 2-year gilts.

"An inverted yield curve is by no means a perfect indicator of a recession, but in our opinion the risks to growth are now firmly tilted to the downside and this has been reflected by the recent price action in bond and equity markets. Even without Brexit, it is clear that global growth is slowing, so the timing of a potential no-deal scenario in October could hardly be worse."

The euro stood at USD1.1148 at the European equities close, down from USD1.1190 late Tuesday, after data showed eurozone gross domestic product growth slowed in the second quarter, according to figures from Eurostat.

The eurozone economy grew 0.2% in the three months to June, with the wider EU28 also registering a 0.2% rise quarter-on-quarter. In the first three months of the year, the eurozone economy had grown 0.4% and the EU28 by 0.5% from the fourth quarter of 2018.

Quarter-on-quarter, gross domestic product slipped 0.1%, figures from Destatis showed. This was in line with consensus, as cited by FXStreet, for a 0.1% decline and reversed the 0.4% growth posted for the first three months of the year.

Brent oil was quoted at USD58.70 a barrel at the equities close, down sharply from USD60.84 at the same time the prior day.

Commenting on the fall in oil, FxPro analyst Alexander Kuptsikevich said: "Investors remain uncertain that a new round of [trade] negotiations will be more useful than many previous ones, because trade news fluctuates between new tariff threats and deferrals of these measures, while actual terms of trade and economic growth rates are worsening.

"Today, data from China noted a decline in production growth to 17-year lows. Meanwhile, Germany reported a decline in GDP, adding to Britain's GDP slump last week. This all shows us how the uncertainty in trade policy is decaying economic growth, which in turn pulls oil quotes down on speculation over reducing the demand for it."

The economic events calendar on Thursday has UK retail sales numbers at 0930 BST and US retail sales at 1330 BST.

The UK corporate calendar on Thursday has interim results from gambling company GVC Holdings, paving stones maker Marshalls and miner KAZ Minerals.

By Arvind Bhunjun; arvindbhunjun@alliancenews.com

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Securities Mentioned in Article
Security Name Price Change (%) Morningstar Rating
Sports Direct International PLC 229.80 GBX 4.08 -
Fresnillo PLC 663.60 GBX -1.13 -
Balfour Beatty PLC 219.40 GBX 3.39 -
Prudential PLC 1,415.50 GBX -1.01
Admiral Group PLC 2,150.00 GBX 1.65
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