European indices reverse gains on poor US GDP data

European indices saw positive gains largely reverse in the afternoon session on the back of an unrevised reading of US GDP for the first quarter, when a rise had been expected. The FTSE 100 saw gains reverse to trade flat whilst the DAX and CAC both saw falls of between 0.4% and 0.8% as traders reduced long positions on the back of the data.

US GDP shocks to the downside
Any disappointing reading of US GDP was always likely to negatively impact stocks but what today’s unrevised 1.8% reading does is heighten fears that growth in the US is starting to run out of steam just as the Fed is contemplating revising its accommodative monetary policy in the midst of inflationary pressures.  A contraction in after-tax corporate profits, the first for two years, also dampened sentiment for stocks going into the close.

GDP had been expected to slow from a growth of 3.1% in the final quarter of 2010 but investors had expected GDP to be upwardly revised from an initial reading of 1.8% for Q1 to 2.1% and investors sold out of stocks as a result.

One of the disappointing aspects from the breakdown of GDP was the fact that consumer spending fell from an original reading of 2.7% to 2.2% and whilst this may have more to do with the poor weather across the United States in Q1, it also reminds of the fragility and volatility of consumer spending. That said, the flip side to this reading is that whilst the drop in consumer spending is worrying given the huge role consumers will need to play in the US economic recovery, it could force the Fed’s hand to maintain a dovish policy stance to help encourage consumers to spend.

FTSE trades in a 40-point range for the day
The FTSE 100 otherwise had a pretty uneventful day with traders unwilling to add too much to buy positions that had helped the UK Index to trade into positive territory for two straight sessions. The FTSE had a trading range of just 40 points for much of the day and this reminds us that investor sentiment remains fairly poor, with the buying trades we have seen lacking much vigour.

The miners were the key sector behind keeping the FTSE 100 Index afloat today. However, early buying in the banking sector fell by the way side going into the close, with the sector closing into negative territory, weighed down by the contraction in corporate profits seen in the US GDP reading.