FTSE wanes on growth pain ahead of earnings
LONDON (Reuters) - Commodity stocks led the top share index lower on Monday as equities' bright start to the third-quarter continued to fade against a backdrop of waning global growth and as investors geared themselves up for the earnings season.
London's blue chip index .FTSE closed down 35.30 points, or 0.6 percent at 5,627.33 , and is now 1.8 percent lower than the second-half intraday high hit on Thursday as the early third-quarter rally showed signs of flagging.
Integrated oil stocks .FTNMX0530 and mining shares .FTNMX1770, which had gained more than 7 percent over the seven trading days since June 27, fell as the market's focus shifted to company earnings. U.S. aluminium maker Alcoa (AA.N) was set to kick things off after Chinese, European and British policymakers took steps on Thursday to boost growth.
But hopes that a cut to zero in the European Central Bank's deposit rate might encourage commercial banks to start lending to each other again look misplaced, a Reuters poll found.
"(Policymakers) continue to focus on maintaining the perception of the balance sheet rather than focusing on the profit and loss of the economies ... The more they maintain the current policies, the more they are pretty much guaranteed more stagnation," Tim Rees, fund manager at Insight Investment, said.
ECB policymaker Peter Praet said on Monday the euro zone debt crisis is more acute than the 2008 financial crisis that brought down U.S. investment bank Lehman Brothers but that a recent EU summit had brought important steps towards tackling the crisis.
Friday's weak jobs data in the United States illuminated the difficulty facing policymakers, with the latest growth outlook from the OECD on Monday also painting a rather gloomy picture.
"What we saw in the two or three decades which led up to the financial crash was a credit-induced growth spurt. Take away the credit aspect and it is entirely rational to accept lower growth and lower nominal GDP," Insight's Rees said.
With doubts lingering over the economic outlook the recent FTSE 100 rally has petered out around 5,700, the technically significant 61.8 retracement of the fall which began in March, when euro sovereign debt worries resurfaced, and bottomed out at the beginning of June, as expectations of central bank intervention grew.
The focus is now switching to how far companies have been able withstand the economic slowdown.
JPMorgan analysts said the second-quarter earnings season looks "challenging", with the hurdle rate higher than for the first quarter in both Europe and the United States even though business activity has weakened.
Blended (reported and estimated) quarterly earnings growth for U.S. companies as at July 9 was 5.9 percent, compared with 14.3 percent in October and 9.2 percent in 9.2 percent in April, according to Thomson Reuters data.
JPMorgan said sectors most at risk include capital goods, chemicals and discretionary.
Capital goods firm IMI (IMI.L) was the top FTSE 100 faller, down 3.3 percent. Mid cap recruiter Michael Page (MPI.L) fell 3.8 percent after the firm reported a fall in second-quarter profit, hit by a pull-back in discretionary spending, and predicted a tough third quarter.
UBS, meanwhile, said sectors such as tobacco, beverages, retail and consumer durables could be at risk because they trade at high premiums relative to long-run average P/E multiples, and earnings momentum has started to fall.
Luxury goods firm Burberry (BRBY.L), which is liked for its exposure to Asia and trades on 12-month forward PE of 15 times, compared with 9.8 times for the FTSE 100, was down 2.6 percent.
Traders also cited news that China was prohibiting government agencies from buying luxury goods as adding further downside pressure for companies such as Burberry.
SuperGroup (SGP.L) and Marks and Spencers (MKS.L) are among the most shorted UK-listed stocks ahead of earnings, according to data from Markit Securities Finance, highlighting investors' concerns over the outlook for earnings among retailers.
Marks & Spencer, however, managed to post gains of 0.9 percent in short covering ahead of its first-quarter trading update due out on Tuesday.
Elsewhere, aerospace firms such as BAE Systems (BAES.L) and Meggitt (MGGT.L) added up to 2.6 percent as the Farnborough airshow began.
"We suspect that BAE's media briefing - scheduled for Wednesday 11 July - on ‘An Affordable Solution to F-16 Upgrades' may generate some comment," Jeffries said in a note.
UBS, however, said politics and macroeconomics remain the key drivers for European equities and that was reflected in a 9.4 percent fall in Centamin Egypt (CEY.L).
The Egypt-focused gold miner's shares plunged on a combination of both reported breaches in the company's concession agreement and political events over the weekend in Egypt, according to analysts.
Elsewhere, blue chip miner Xstrata XTA.L shed 2.2 percent, giving up some recent gains after the Sunday Times said the firm would tell shareholders this week that a vote on its planned merger with Glencore (GLEN.L) has been put back to September.
Glencore fell 0.5 percent as the percentage of shares outstanding on loan crept towards the 7 percent level, an all-time high since its flotation, according to Markit.
(Written by David Brett; Editing by Catherine Evans)
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