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FTSE tumbles as markets turn south on eurozone downgrade
17.00: Markets soured throughout Wednesday's trade as eurozone growth expectations were slashed by the European Commission and investors focused on the fiscal cliff in the US.
Growth forecasts for the eurozone were downgraded – the Commission now believes the region will narrowly avoid a recession next year, and unemployment will rise. Gross domestic product (GDP) is now expected to contract by 0.4% in the eurozone in 2013, with overall GDP growth at 0.1%.
The FTSE 100 shed 1.6%, or 94 points, to 5,791 and the Mid-250 index gave up 1.6%, or 122 points, to 11,959.
In the US investors began to focus on the fiscal cliff, which will be one of the first problems the new administration will have to deal with.
However, congress is split once again as the Republicans retain control of the House of Representatives and the Democrats keep their majority in the Senate after the elections, making it difficult to negotiate how to deal with the looming tax increases and spending cuts.
On Wall Street the Dow Jones Industrial Average lost 2.5% to 12,919, the Standard & Poor's 500 index reversed 2.5% to 1,393, and the Nasdaq Composite index fell 2.5% to 2,934.
In London only eight FTSE 100 stocks remained in positive territory, led by Associated British Foods (ABF.L), which closed 9p up at £13.78.
The market retreat deepened Randgold Resources' (RRS.L) slide, closing 6.4% down at £69.50 after the African miner's production update. The U-turn in share prices saw early FTSE leader Burberry (BRBY.L) fall 53p or 4.3% to £12.50 despite its better-than-expected first half profits.
Dollar falls, FTSE rises as Obama win triggers QE rally
10.05: Share prices rose and the dollar fell as markets responded to the surprisingly strong victory by President Obama in the US election.
The FTSE 100 rose 30 points or 0.5% to 5,915 following gains in the US overnight, although there was a more muted response in Asia. European markets edged ahead with the Euronext 100 gaining four points or 0.6% to 665.
The gains defy forecasts that an Obama win would trigger a stock market correction. The scale of the Democrat president's victory, clinching 300 seats in the Electoral College ahead of his Republican challenger Mitt Romney’s 206, restores his authority. However, his administration faces huge financial challenges, most notably how to avoid tipping the US economy back into recession with self-inflicted injuries from $600 billion of tax rises and spending cuts in the so-called 'fiscal cliff', which is due to hit in the new year.
Speaking to supporters in Chicago, Obama promised to work with Democratic and Republican politicians to cut the federal deficit, simplify US tax rules, reform immigration and cut the country's reliance on foreign oil. 'The recognition that we have common hopes and dreams won't end all the gridlock or solve all our problems or substitute for the painstaking work of building consensus,' he said.
The dollar tumbled on currency markets as Obama’s gaining of a second term meant a resumption of quantitative easing – or ‘money printing’ to boost the fragile US economic recovery – is likely to continue. Romney had pledged to replace Federal Reserve chairman Ben Bernanke.
The pound rose 0.19% to $1.6026 against the dollar with the euro surging 0.35% to $1.2858 against the greenback.
Dollar-priced commodities rose as the currency’s weakness made them cheaper to buy. Gold advanced 0.54% to $1,725 an ounce while oil prices steadied with Brent futures trading at around $111 per barrel.
Lee McDarby of Investec Corporate Treasury said: 'So far the market reaction to Barack Obama’s victory has been relatively muted, although USD has softened against both GBP and EUR. Better news out of Greece also seems to be keeping the single currency supported right now. The next critical focus point in the US will be how quickly Obama can negotiate the rocky road that is the impeding "fiscal cliff".'
The election maintains the status quo with the Republicans retaining control of the House of Representatives and the Democrats in charge of the Senate.
Richard Lewis, head of global equities at Fidelity Worldwide Investment, urged US politicians to settle their differences over cutting the budget deficit.
He said: 'The budget issue is very important as we have already seen a very significant slowdown in corporate spending while chief executives wait for a resolution to this issue. Q4 activity levels will be low as a result and this will be exacerbated by the impact of Hurricane Sandy. On the basis that there will be a resolution before 1 January, we can expect a decent bounce-back in both economic activity and confidence early in the new year.'
Burberry rises on half-year profits
Randgold Resources (RRS.L) bucked the trend, however, sliding 4.3% to £70.75 after the African gold miner released its third-quarter production figures.
Burberry (BRBY.L) was initially the FTSE 100’s biggest riser, up 1.6% or 20p to £12.72, after a 6% rise in first-half profits beat forecasts and allayed fears about the impact of the global slowdown on the luxury goods retailer.
Burberry was rocked by a slow down in sales in September although Kate Calvert, head of retail research at Seymour Pierce, said the figures confirmed it was back on track. 'On our current numbers, the shares are trading on a CY13 PE [price-earnings multiple] of 16.1x which we believe is undemanding for its long-term growth prospects. With risk to forecasts now on the upside, we maintain our BUY recommendation and target price of £15. We still consider Burberry a strong long-term growth story with significant geographical and product mix opportunities,' she said in a note to investors.
Playtech (PTEC.L) added 7.2p or 1.75% to 418.2p after the provider of gaming software provided a better-than-expected third quarter update. William Hill is considering buying Playtech's 29% stake in its online gambling division.
Fenner (FENR.L) advanced 15p or 4.3% to 365p after the maker of industrial conveyor belts reported a 30% rise in full-year profits and said recent weakness in commodity prices would not hurt demand from the mining sector. Oliver Wynne-James, analyst at Panmure, said: 'After several weeks in the doldrums the share price deserves to rally and we re-iterate the "buy" recommendation with an unchanged target price of 465p.'
RPS Group (RPS.L) retreated 9.7p or 4% to 228.5p after the energy and environmental consultant's third quarter trading statement. Analysts at Panmure Gordon said the statement was 'solid' but maintained a 'cautious' view on earnings forecasts for the next two years 'given the scope for project delays and margin pressure'.
Among smaller companies Clarkson (CKN.L) plunged 11.8% to £11.46 after the ship broker warned that full-year profits would be lower than expected
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- Burberry Group PLC (BRBY.L)
- Randgold Resources Ltd (RRS.L)
- Vedanta Resources PLC (VED.L)
- Kazakhmys PLC (KAZ.L)
- EVRAZ plc (EVRE.L)
- Playtech Ltd (PTEC.L)
- Fenner PLC (FENR.L)
- Clarkson PLC (CKN.L)
- RPS Group PLC (RPS.L)
- Associated British Foods PLC (ABF.L)
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