Lloyds' surge and pleasing data fail to fuel FTSE
Banks and real estate were propelled higher on Wednesday by Lloyds and upbeat economic data but resource stocks weighed
The FTSE 100 index slipped 0.6%, shedding 26.7 points to 4,644.7, while the FTSE 250 index extended Tuesday’s gain with an additional rise of 0.3% or 23.7 points to 8,266.2.
UK markets had started the session tentatively, but picked up momentum following a raft of upbeat data that implied the UK economy should return to growth in the third quarter of the year.
Official figures this morning revealed a higher-than-expected level of total production in June—0.5% versus a 0.6% contraction in May, fuelled by manufacturing sector output also rising 0.5%. Separate figures showed service sector activity rose to its highest level in 17 months; the Purchasing Managers’ Index ticked up to a better-than-expected 53.2 in July from 51.6 in June. And housing market data also offered a reason to be upbeat as Halifax reported a 1.1% month-on-month rise in house prices last month following a 0.4% fall the previous month.
“Overall, today’s data is in line with our view that the United Kingdom will pull out of recession in the third quarter of 2009 as the effect of monetary policy stimulus feeds through and the inventory cycle turns,” Charles Davis, economist for the Centre for Economics and Business Research said. “The pace of contraction in the real economy eased through the second quarter of the year and the latest data shows tentative signs of growth.”
A report from the National Institute of Economic and Social Research confirmed this view, calculating the British economy shrunk by 0.4% in the three months to July but is now stabilising.
Despite this data, however, UK indices pared gains and the FTSE 100 index fell back into the red in afternoon deals as Wall Street got off to a weak start on the back of a faster-than-forecast contraction in the US services sector and a private sector jobs report.
Still, a number of strong stock performances managed to minimise FTSE losses in London—Lloyds being the clear stand-out among them.
At first glance the banking group’s first-half numbers looked pretty grim but on closer inspection a number of reassuring comments brought investors rushing to pick up the stock—and those of its peers. Lloyds' pro forma loss of £4 billion was not as bad as feared and the group’s comment that impairments appear to have peaked pushed the shares 10.6% higher. Click here for more on Lloyds’ numbers.
Nic Clarke, analyst with Charles Stanley, said he remains concerned that the group is being a bit too optimistic about its prospects, particularly when it comes to its view on impairments. Noting Lloyds’s claim that “impairments on retail and corporate assets would normally be expected to peak between one to two years after the trough in the recession,” Clarke pointed out that the debate about whether the UK economy has actually troughed continues, let alone whether it troughed two years ago.
The fact that banks pared their gains towards the end of the day suggests investors believe today’s performance was something of a one off and confidence in the rally being sustained is limited. Still, Royal Bank of Scotland, which will report its interims on Friday, added 4.4%, Standard Chartered took on 3.2% and Barclays closed up 2.4%. HSBC had also followed suit for much of the session but succumbed to profit-taking in late deals to settle 0.3% lower.
Real estate was another strong performer as industry players took reassurance from the increase in UK house prices. Land Securities, Hammerson, Liberty International and British Land gained 3.7%-6.9% each.
British Airways was thrust upwards by July passenger figures, which revealed the airline’s load factor—the proportion of seats filled—rose 3.1% to 84.6% last month.
Countering this, however, were the resources stocks. Oil & gas and mining issues combined to drag the blue-chip index lower as commodity prices eased. Randgold Resources was the main index casualty, down 4.3%, while heavyweight Royal Dutch Shell came in second place, off 3.6%.
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