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FTSE slides 1.5% as US data revive stagflation fears

MARKET BLOG: The early release of good data on the UK services sector could not lift the gloom after poor US manufacturing figures.

FTSE slides 1.5% as US data revive stagflation fears
  • US manufacturing continues to contract, worrying investors that intervention by the European Central Bank may not be enough to save the global economy 
  • The FTSE 100 falls 86 points weighed down by a downgrade of telecom giant Vodafone
  • Ashtead and DS Smith stand out with big share price gains after results and a trading statement 

17.00: Markets slid on both sides of the Atlantic after disappointing US economic data compounded unease over authorities' response to the eurozone financial crisis.

The FTSE 100 closed 86 points or 1.5% lower at 5,672 and the S&P 500 shed 7.5 points or 0.5% to trade at 1,399 after ISM data showed US manufacturing shrinking for a third month in a row. Other data showed the biggest fall in US construction spending for a year.

In Europe the Euronext 100 closed eight points or 1.2% lower at 650 despite comments by ECB president Mario Draghi that buying shorter-term government bonds was in the bank's remit. Although this indicates the central bank could be poised to take action to resolve the crisis, investors took the gloomy view that the ISM data heralded the prospect of stagflation – low economic growth with high inflation.

In the UK, the early publication of UK services PMI (purchasing managers index) data produced a better than expected reading, pushing the pound to $1.5884 against the dollar and up to €1.2563 against the euro. The index rose to 53.7 last month up from 51 in July, way ahead of economists' forecasts of 51.1.

Vicky Redwood of Capital Economics cautioned it could be a blip due to the Olympics. 'On the fact of it is good news but I wouldn't say that the economy is on its way back to a sustained recovery.' 

12.45: The futures markets are saying the US market will fall slightly at the open this afternoon. Investors are waiting to see what the August reading of the ISM manufacturing index and construction numbers from July say about the US economy.

Fears that European Central Bank president Mario Draghi (pictured above) may not announce the sort of bold bond buying programme that investors want to see on Thursday has seen the FTSE 100 weaken further, down nearly 1% or 56 points to 5,702.

Mark Holman of Twenty Four Asset Management is cautiously optimistic that Draghi will deliver but says timing is important to retain investors' confidence. He also says Draghi will only respond to a member state requesting aid. 'So we need both Draghi to deliver and Spain needs to ask'.

Who says recycled packaging is boring?

11.50: Recycled corrugaged packaging specialist DS Smith (SMDS.L) gained 5p or 3.2% to just over 167p after issuing its first trading statement since making its big acquisition of SCA Packaging in June.

The company, a favourite of Standard Life Investments UK Equity Unconstrained fund manager Ed Legget, has seen its share price rise 13% since the deal completed on 30 June (see chart). Today it further cheered investors by saying its integration of SCA Packaging was ahead of schedule and that it was enjoying particularly encouraging growth in continental Europe.'

Analysts at Oriel Securities were impressed by continued improvement in the operating margin. 'That is strongly positive given the volatility of paper prices,' they said, reiterating their 'buy' recommendation and 207p price target.

DS Smith is a member of Citywire Top Stocks, which tracks the top 10 holdings of five leading UK fund managers, including Legget. The company supplies packaging to many big retailers including Thorntons. It will give a full update of the SCA deal on 11 October.

Ashtead delivers 'stunning' first quarter

Ashtead (AHT.L) investors are also having a good day. Shares in the industrial equipment hire firm soared nearly 12% or 33p to 315.5p making it the top FTSE 250 riser, after its first quarter results smashed forecasts. Panmure said an 82% increase in profits on revenues 21% higher showed Ashtead 'is on a roll' and taking advantage of a fragmented market in the US. It upgraded its forecasts for next year and 2014 and repeated its 'buy' stance with the target price raised to 344p from 317p. Seymour Pierce aso praised the high margin growth story and retained its buy saying the shares traded on an 'undemanding' multiple of 10.7 times next year's earnings.

Vodafone downgrade and euro uncertainty hit FTSE

10.25: The FTSE 100 extends its fall as a downgrade of Vodafone (VOD.L) combines with continued nervousness over what the ECB will say on Thursday.

The FTSE 100 has fallen 43 points or 0.75% to 5,715, helped by Bernstein downgrading Vodafone to 'market perform' from 'outperform' and cutting its earnings forecasts. Vodafone, a long-standing Citywire Top Stock, fell nearly 2% to 179p. 

Although Bernstein said Vodafone had deserved a re-rating on the back of the special dividend from Verizon - the US telco in which it has a stake - it said Vodafone's share price had for a long time had a strong correlation to momentum in service revenues. 'We expect service revenues to turn negative for the first time since March 2010 since March 2010 in Q2 FY2013, and for the share price to follow,' it said in a note.

Broker downgrades also knocked Burberry (BRBY.L) and Next (NXT.L). Burberry, the luxury goods firm, fell 1.4% to £13.36 after Barclays cut the stock to 'equalweight' from 'overweight' on valuation grounds and reduced its target price to £16 from £19.50. Next slipped 1.6% to £35.85 after Societe Generale rated the fashion retailer and its Swedish counterpart H&M as 'sell' saying their high share prices left them vulnerable to disappontment.

Markets flounder amid Europe hopes and growth fears

08.46: Global markets are searching for direction as investors' hopes for progress in the eurozone come up against their fears about growth.

Expectations of further policy easing by central banks helped spur European markets higher in early trade, but grim economic data weighed on sentiment.

China’s purchasing managers index (PMI) fell alongside eurozone PMI, playing into the hands of those talking up concerns about global demand. Moreover, loan rates for businesses in weaker parts of the single currency zone have surged, showing the bloc’s fragility as the European Central Bank (ECB) is losing its grip on borrowing costs across the region.

With the US closed yesterday for the Labor Day holiday, investors were offered little direction from overnight trade.  The FTSE Eurofirst 300 opened up 0.1%, while 30 minutes into the UK's session the FTSE 100 traded at 5,737, down 0.40%.

Pressures building

Simon Furlong, a trader at Spreadex, said the pressures building in Europe over lending could be detrimental, particularly when set against policy makers' existing difficulties and expectations about this Thursday's ECB meeting, when president Mario Draghi (pictured) is tipped to unveil details of a bond-buying scheme aimed at bringing borrowing costs down.

'This division in interest rates in which eurozone companies can borrow could prove very damaging, adding to the pressure the ECB is under,' he said.

Furlong also pointed to ISM manufacturing PMI data due out in the US later today. 'This will be keenly watched, along with construction PMI in the UK,' Furlong added.

RBS dips as MPs blast IT failures

Royal Bank of Scotland shares (RBS.L) shed 1.44%, taking them to 223.23p just before 9am, after MPs on the Treasury Committee blasted it over its IT glitch earlier this summer.

A computer failing at the bank left millions of customers in the UK and Ireland unable to access their accounts, and forced the bank to set aside £125 million for client compensation. MPs said the failure could have threatened Britain’s entire banking system, and urged financial institutions more generally to look at the IT controls they have in place.

But the criticism of RBS did not stop here – analysts at investment bank Investec said the bank’s investors have had ‘too many false dawns’, and downgraded the stock to ‘hold’.

9 comments so far. Why not have your say?

joe stalin

Sep 04, 2012 at 16:29

FTSE fall not backed up by rise in bond rates given the low volumes this is little more than tree-shaking. We will be up tomorrow

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Sep 04, 2012 at 17:01

Draghi is all talk. He simply cannot deliver - even if the Germans let him, which I doubt. Unless Greece and some other countries tackle their structural deficits, there isn't enough money in the ECB to support them indefinitely. In the short term, the market maybe conned into thinking all is going to be OK but at some point it has to fall apart.

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Anonymous 1 needed this 'off the record'

Sep 04, 2012 at 18:36

and they think further deficit funded 'growth' is the answer, if it was the Central Banks could keep printing money and we would all be rich......

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William Bishop

Sep 04, 2012 at 19:04

Everyone insists on assuming that an ISM reading below 50 represents contraction, yet I had previously understood that a figure in the high 40s stilll represented some modest growth in activity.

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Geoff Downs

Sep 04, 2012 at 23:06

It looks increasingly likely that the Federal Reserve is going to keep stock markets elevated by promising to print more money. At the moment they don't even have to do it, suggesting they will makes the markets rise. How daft is that? The problem though remains the same, at some point the markets will figure out this money printing is not working and then they will tank. As usual it will be retail investors who will get hit hardest because knowing how to time the market is always impossible to get right.

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joe stalin

Sep 05, 2012 at 08:16

Geoff probably but remember that the markets can remain irrational for longer than yiou can remain solvent. I think ait takes a brave man to bet against the Fedor for that matter the dollar. i am happy with my long term view and the belief that we will do what is right in the end -long house builders, banks and financials short cash. it has worked for me this year. :)

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Geoff Downs

Sep 05, 2012 at 08:36

Fair enough, there will always be times when individual investors call it right, especially when the markets are being manipulated in their favour. The point I am making is that these are much more dangerous times than MOST of us have ever lived in. The real problem i.e. debt, is not being tackled. Many people since the 1980's have become well off thanks to equities, property and commodities. Most believe it can continue. I don't.

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joe stalin

Sep 06, 2012 at 11:05

Geoff fair points of course. Perhaps what we will see today is the ECB dealing with the problem in a decisive way. If it comes in to buy bonds in unlimited capacity then the so called "bond vigilantes "will have to run for cover which will see periferal debt rates tumble. Couple this with genuine efforts to reduce sovreign debt and and bring budgets back into line then indeed we will embark on a road to recovery as lower interest rates will allow economies to come out of the straight jacket imposed by these so called vigilantes. The risk is is that the ECB's measures fall short of what the market now believes them to be. Furthemore the market will want to see the stick as well as the carrot

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Geoff Downs

Sep 06, 2012 at 11:17

You have to remember that it is policies adopted by Bankers and Politicians that have caused the debt problem in the first place. The idea that these same people have now got the solutions and know what levers to pull is a widely held belief, which judging by your comments you share. I think you will find they have not found the answers and you may get a short wave of optimism followed by a severe dose of reality.

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