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FTSE edges lower amid fresh eurozone disappointment

by Daniel Grote on Jun 04, 2014 at 11:36

FTSE edges lower amid fresh eurozone disappointment

The FTSE 100 has edged lower as yet more economic disappointment for the eurozone strengthened the case for stimulus measures ahead of the European Central Bank's (ECB) policy meeting tomorrow.

Gross domestic product growth in the eurozone has been confirmed as 0.2% quarter-on-quarter in the first quarter of the year, down from 0.3% the previous quarter. It follows yesterday's news that inflation in the eurozone had fallen to 0.5% in May, down from 0.7% in April.

The news will further strengthen the case for ECB president Mario Draghi to announce a drop in interest rates alongside further stimulus measures, as he is expected to do tomorrow.

'Lacklustre and slower eurozone GDP growth of 0.2% in the fourth quarter reinforces the case for the ECB to deliver a package of conventional and unconventional stimulative measures at its June policy meeting on Thursday,' said Howard Archer, chief UK and European economist at IHS Global Insight. 'This already seems odds-on to occur with eurozone consumer price inflation falling to just 0.5% in May.'

Investors have adopted a 'wait-and-see' approach ahead of the ECB announcement tomorrow in order to shield themselves from any potential disappointment. The FTSE 100 fell 28 points, or 0.4%, with even strong figures on the performance of the UK service sector failing to inject some optimism.

The purchasing managers' index (PMI) reading for the sector has come in as 58.6 for May, compared to 58.7 for April. Any reading above 50 indicates expansion. Employment growth in the sector has strengthened to its joint fastest rate in 17 years.

'The UK economy continued to boom in May, in what is the best spell of growth since 2007,' said Chris Williamson, chief economist at Markit, which compiles the survey. 'The buoyant services PMI follows similar upbeat manufacturing and construction reports, which collectively suggest that the economy is on course to grow by 0.8% again in the second quarter. That would push the economy above its pre-crisis peak.'

Smith & Nephew (SN) rose 1.8% to £10.49 as excitement continued to build over a possible bid for the medical device maker from US rival Stryker (SYK.N). Berenberg analyst Tom Jones said an offer would make 'both strategic and financial sense at up to, and possibly exceeding, £12 per share' but that he did not expect an imminent bid.

Mondi (MNDI) rose 1.6% to £10.92 as analyst at Jefferies issued a positive note on the packaging group, labelling it a 'buy' with a £13.25 target price.

Tesco (TSCO) fell 0.5% to 296.1p as its first quarter update confirmed further sales falls in Asia and the supermarket group said it expected UK sales to remain under pressure.

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