29/07/10 - 01:30
UK Research Team, IG Group
Global markets dropped this afternoon as an unexpected reduction in US durable-goods orders spooked investors and cast doubt on the viability of the economic recovery.
The FTSE reversed all earlier gains this afternoon, retreating back towards the 5300 mark after its recent swell of positivity. The UK market’s biggest winner of the day was British Sky Broadcasting Group, up 10.00 points (1.41%) after announcing that it has reached an agreement on the sale of its business-to-business telecoms operation Easynet Global Services.
Oil companies pulled the FTSE down after a 7.3m rise in crude inventories, with Scottish & Southern energy floundering at the bottom of the table, down 63.00 points (5.35%). Invensys performed little better, down 14.00 points (5.35%) after revealing a somewhat level trading update.
UK investors reacted uncertainly to a NIESR economist’s suggestion that the UK’s positive second-quarter economic growth was a mere flash in the pan. After expanding 1.1% in the three months until the end of June – the fastest pace in four years – rumours had abounded that the MPC would soon move interest up from its current rock-bottom rate. But NIESR economist Simon Kirby told reporters, ‘I don’t think that growth rate will be sustained. Far from that, I think the growth rate will fall back somewhat sharply.’ [1] The uncertainty lies in whether inflation will prove resilient enough to warrant a rise in interest rates, or whether GDP temporarily dips back into negative figures.
European markets experienced a similarly disappointing day, witnessing the end of a six-month rally. More than two stocks decreased for every one that advanced in the Stoxx 600, on the back of disappointing orders for US durable goods. The DAX sat 28.37 points (0.46%) down on the day by 4.30pm (London time) while the CAC 40 just managed to waver around yesterday’s closing figure after reversing early gains.
Over in the US, we find the cause of the markets’ woes. The Commerce Department revealed that durable goods orders – goods that are designed to last more than three years – fell unexpectedly for the second consecutive month in June. Forecasts had widely pointed to a gain of 1%, but the results in fact showed the worst decline since last August – largely due to a 25.6% drop in non-defence aircraft orders. Stock-index futures dropped after the result was revealed, while Treasury debt prices rose.
The results caused an uncertain start to US trading, with the Dow’s winners and losers almost equally divided. Technology manufacturer Eaton Corp are among those companies to benefit from the rise in non-military capital goods orders, as the increased demand helps them to stem damage from a slowdown in customer spending.
Verizon Communications gained 0.43 points (1.50%) by 4.30pm (London time) to take the top of the table, amid speculation that the telecoms giant is the only likely buyer of Vodafone’s 65% stake in Verizon Wireless. Vodafone is considered to be structurally weak by the Ontario Teachers’ Pension Plan, which owns a 0.42% stake, and the chief executive himself admitted that the phone giant planned to sell all of its minority stakes in overseas companies.
Alcoa Inc sits at the other end of the table, down 0.20% (1.78%) after a ‘BBB-‘ rating from Fitch. The aluminium manufacturer received the negative outlook due to ‘limited earnings visibility and pressures on the aluminium market from growing high inventories and persistent surplus production’, the broker reported. [2]
In currencies, after gaining 17 cents against the euro from mid-April to early June on speculation over the European debt crisis, the dollar has lost about 11 cents as the euro now tries to hold onto the $1.30 level. This is a sure sign that Europe is starting to cope with their economic turmoil; the cheaper dollar also helps restore the competitiveness of American products abroad, contributing to higher sales.
Investors will be looking to tomorrow’s Beige Book at 7pm (London time) for a more detailed overview of the US economy. After last month’s review of economic conditions showing that all 12 regions strengthened in April and May, analysts will be looking for more clarity on Ben Bernanke’s comments on July 21, when the Fed Chairman noted that ‘the economic outlook remains unusually uncertain'. [3]
Source: [1] [3] Bloomberg News (28 July 2010), [2] Business Week (28 July 2010)
Regular Feeds
Chris Weston, Market Analyst, is the face of our video market updates and presents live from our trading floor daily. His expert commentary can also be seen regularly on Sky Business channel, plus Bloomberg, ABC2, the Australia Network’s Business Today program and Yahoo Finance.
Plan your day
More in-depth market news is available within our PureDeal platform, as well as a range of free charting and research tools.
Disclaimer: The above material does not contain (and should not be construed as containing) personal financial or investment advice or other recommendations. The information provided does not take into account your particular investment objectives, financial situation or investment needs. You should assess whether the information provided is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision based on the material above. You can either make this assessment yourself or seek the assistance of an independent financial advisor. IG Markets Limited accepts no responsibility for any use that may be made of these comments and for any consequences that result.