UK Equity falls curtailed by stronger US ISM data

<p>European investors started the new quarter on much the same fashion as the previous, on the back foot and selling out of stocks, though losses […]</p>

European investors started the new quarter on much the same fashion as the previous, on the back foot and selling out of stocks, though losses were curtailed by a surprisingly faster pace of growth in US factory activity than expected last month.

The FTSE 100 had started the day with losses of more than 2% as investors continued to shy away from risky asset classes such as banking and mining stocks on continued uncertainty over a potential Greek default.

However, it was a better than expected growth in US ISM data that prompted an afternoon recovery in stock prices, with the FTSE 100 rallying 1% as soon as the data was released at 3pm. US factory activity grew to 51.6 in September from 50.6, when it was expected to remain unchanged month on month. Part of the positive stock price reaction was speculation and murmurs earlier in the day that the ISM figure could badly disappoint, and so certainly there was a degree of relief that it outperformed, helping to entice bargain hunting in some stocks.

The news over the weekend that Greece’s draft budgetary figures showed that the indebted country will miss the deficit targets of 7.6% this year and 6.5% next year is not really too much of a surprise, though it will undoubtedly test the patience of the Troika yet again, considering that these are the targets that Greece agreed to meet in order to receive bailout funds.

The Troika are set to visit the General Account Office again over the next few days to double check some fact and figures before submitting their final report.

Two imminent concerns for Greece
There are two immediate concerns of investors regarding Greece. Firstly, will they receive the next $8 billion tranche of loans and avoid an immediate default? Secondly, will the Troika report recommend that banks need to take a bigger haircut on Greek debt exposures than the initial 21% agreed? It is these uncertainties that are driving down share prices.

Traders’ eyes and ears remain open also to any confirmation of a leveraged top up to the EFSF from european finance ministers, who met today. There is a wide consensus that the existing size of the EFSF at €440 billion lacks the power to prevent a deep contagion of sovereign debt. With both the ECB’s Noyer and EU’s Rehn making it clear that an increase in size of the EFSF was unrealistic but that a leveraged top up through the ECB was an option on the table, investors are waiting for a confirmation of whether this can be used to increase the power of the EFSF to a more credible financial field.

Banks take the brunt of the selling
Banking stocks have taken the brunt of today’s selling, with those banks highly exposed to Greek debt particularly weak in early trading. French banks Societe Generale and BNP Paribas fell 5% whilst falls of 4% were seen in Barclays and RBS shares.

Mining shares also lost around 4% as investors reduced exposures in risky asset classes whilst prices also tracked weaker copper prices, which fell over 3%. Vedanta Resources suffered in particularly, with shares losing 8% on the day to make it the worst performing large cap stock on the FTSE 100 Index. Crude oil prices fell 1.5%, weighing on oil firms BP and Royal Dutch Shell.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.