EU Debt Woes and Chinese Data Drag FTSE Lower

Below-expectations reading of the Chinese balance of trade and various indications that Portugal might be forced to join to club of bailed out EU members put downward pressure on UK markets on Monday.

Morningstar.co.uk Editors 10 January, 2011 | 7:18PM
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UK equities extended losses from the latter half of last week on Monday ahead of a week heavy on economic data. Eurozone worries, disappointing Chinese trade data and signs of potential monetary tightening in Beijing weighed on risk appetite today.

Markets in Beijing and Hong King fell this morning, with the Shanghai Composite losing 1.7% and the Hang Seng shedding 0.9% after China recorded a below-expectation trade surplus of $13.1 billion – the lowest reading of the indicator in nine months. Meanwhile, Liu Yuhui, a researcher at the Chinese Academy of Social Science, wrote in the China Securities Journal that the country needs to embark on a series of 50bps rate hikes to address inflation if inflation does not ease in the first half of 2011.

In London, a sell-off in miners and financials pushed the FTSE 100 index down 0.5% or 28 points to 5,956. The FTSE 250 index fell 0.9% or 99 points to 11,575.

Sustained debt worries dragged financials lower and are likely to remain in the spotlight this week as Portugal, Spain and Italy plan to approach the debt markets on Wednesday and Thursday. In the mean time, there have been rumours that France and Germany are pressuring Portugal to use the eurozone bailout facility. The allegations have been thus far denied by the German Finance Department. “If this week’s auction is bad for Lisbon and borrowing costs rise (which they are more than likely to do) this could be the last straw before Portugal has to apply for bailout funds,” commented Kathleen Brooks, Research Director at FOREX.com.

On the data front today, Halifax house price data disappointed. House prices fell 1.3% between November and December 2010. “Looking forward, we expect limited movement in house prices during 2011 but with the risks on the downside,” said the authors of the survey.

Taking direction from European markets, Wall Street indices were down at the time of writing ahead of Alcoa (AA) reporting quarterly results after US markets close.

Among individual market movers in London, Smith & Nephew (SN.) rallied 9.5% to the top of the blue-chip leaderboard after the medical equipment firm confirmed that it had received and rejected a £7 billion bid offer from Johnson and Johnson (JNJ) before Christmas. Smith and Nephew was subsequently subject to an upgrade by S&P Equity Research.

The second highest riser today, Intertek Group (ITRK), gained 5.6% after Credit Swiss increased its price target and repeated its overweight stance on the stock.

In the energy sector, AMEC (AMEC) gained 2.5%. "AMEC’s interims and IMS confirm that the company should exceed its margin objective for the fiscal year 2010, achieving around 9% adjusted EBITA," was Evolution Securities’ take on the equity as it was identified as a top sector pick.

Tullow Oil (TLW) was up 1.4% after it reported successfully encountering gas in his offshore Ghana project, while its Cormoran-1 well in Mauritania has been abandoned as a gas discovery.

Royal Dutch Shell (RDSB) gained 0.9% after a broker upgrade from ING. Over the weekend, the Sunday Times reported that Shell plans to sell some of its Nigerian onshore fields and 18 consortiums, among Petrofac (PFC) up 1.6%, have been sited as potential bidders. The Nigerian government told Reuters on Monday it was not aware of such plans.

Further down on the gainers list, Morrison Supermarkets (MRW) gained 0.4% after it kicked off a series of retailers’ Christmas trading statements due this week by announcing a 1% growth in like-for-like sales excluding fuel and VAT, for the six weeks to 2 January and maintaining annual profit targets, but equity strategists took mixed views on the stock.

On the flipside, miners spent the day at the bottom of the performance list once again amid risk aversion and lower commodity prices. The biggest fallers in the sector were Vedanta Resources (VED) down 3.8%, Eurasian Natural Resources Corporation (ENRC) down 2.5%, and Kazakhmys (KAZ) down 2.5%.

Financials also took a hit from the debt worries in the eurozone, with Lloyds (LLOY) and Royal Bank of Scotland (RBS) falling 1.8% and 1.5% respectively.

Among individual fallers, National Grid (NG.) shed 2.0% after a broker downgrade, while BP (BP.) fell 1.3% after it was forced to shut down some 600,000 barrels a day of output on Alaska's North Slope, following a leak that closed the Trans Alaska pipeline.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Morningstar.co.uk Editors  analyse and report on shares, funds, market developments and good investing practice for individual investors and their advisers in the UK.