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FTSE dips as anxious investors await ECB action

by Daniel Grote on Jun 03, 2014 at 10:59

FTSE dips as anxious investors await ECB action

The FTSE 100 dipped as caution prevailed amongst investors ahead of the European Central Bank's policy meeting on Thursday, when it is expected to announce stimulus measures.

The UK blue-chip index fell 22 points, or 0.4%, to 6,840 as pressure on ECB president Mario Draghi (pictured) to act was raised by new figures showing inflation in the eurozone fell to 0.5% in May, down from 0.7% in April. This was a bigger drop than many had expected, taking inflation even further below the central bank's target of 2% and further stoking fears of deflation or falling prices.

'Today's inflation numbers underscore the need for the ECB to act,' said Dominic Rossi, chief investment officer at Fidelity Worldwide Investment. 'The ECB has consistently underestimated the deflationary forces threatening Europe and now is the time for unconventional monetary policy.'

Azad Zangana, European economist at fund group Schroders, agreed the figures highlighted 'the degree of deflationary pressures in the eurozone economy'.

'Taking the weaker-then-expected gross domestic product growth figures along with the lower-than-expected inflation numbers, the ECB is now under pressure to deliver significant policy loosening,' he said.

'The market expects at least a cut in the main policy interest rate, along with a cut to the deposit rate, but will there be anything further to support bank lending and demand across the economy?'

The euro dipped only slightly on the news, with investors already expecting stimulus measures to be announced on Thursday.

Further disappointment came from the latest purchasing managers' index (PMI) figure for UK construction output, which was revealed as 60 in May, down from 60.8 in April. Investors had been expecting a reading of 61.2. Any reading above 50 shows an expansion in activity.

The latest figures show the slowest pace of expansion since October 2013. 'Slower overall construction output growth largely reflected a moderation in commercial building activity, with the latest expansion in this sub-category the weakest for seven months,' Markit said in its release of the figures. 

Despite the disappointment, the reading is still well above average and marks the first time since the survey started in 1997 that it has been at, or above 60 for seven successive months.

'While the PMI survey indicates that construction activity has come slightly off recent peak levels, this should not mask the fact that the sector still appears to be doing well and looks handily placed for further robust expansion over the coming months,' said Howard Archer, chief UK and European economist at IHS Global Insight.

House builders were among the FTSE 100 and 250 fallers, with Barratt Developments (BDEV) the heaviest hit, down 1.7% at 355.6p. Bovis Homes (BVS) fell 1.5% to 752p while Redrow (RDW) shed 1.2% to 268.2p and Taylor Wimpey (TW) dropped 1.1% to 109p.

Medium-sized companies fared badly across the board, with the FTSE 250 index down 0.7% at 15,977. The index has been mounting a recovery after a sharp sell-off in mid-May.

Wolseley (WOS) was the biggest FTSE 100 riser, adding 80p, or 2.4%, to £33.91 after it posted a 5.1% rise in third quarter like-for like revenue and said it expected revenue to grow by 4% in the next six months.     

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