Date: Thursday 05 Jul 2012
- BoE ups QE; ECB and PBoC cut rates
- Concerns over Chinese growth dampen sentiment
- GKN rockets after acquisition, trading update, placing
After a subdued morning, markets were choppy in afternoon trade on Thursday as investors took in major policy decisions by central banks in the UK, Europe and China.
The Bank of England (BoE) has decided to pump another £50bn in to the economy to give it a kickstart. However, critics are already emerging to say it could have only a marginal effect on the real economy. The decision to increase the Bank's asset purchase scheme, which now stands at a total of £375bn, was widely expected after a raft of bad economic news in the UK and ongoing troubles in the Eurozone. The Bank Rate was left at 0.5%.
The European Central Bank (ECB) cut its key interest rate in a bid to boost struggling Eurozone economies. The rate will fall from 1% to 0.75%, while the bank's deposit rate - the rate of return banks get for leaving money with the ECB overnight - will be cut to zero. The Bank hopes that this move will encourage banks to lend elsewhere to get a better return, rather than simply dumping money with it.
While both of these moves were widely expected, the People's Bank of China (PBoC) surprised markets announcing that it is cutting its benchmark interest rate for the second time in two months in an effort to counter a slowdown in the world’s second-largest economy. Effective tomorrow (July 6th), China is reducing the one-year lending rate by 31 basis points (bps) to 6%. It is also dropping the one-year deposit rate by 25 bps to 3%.
John Higgins from Capital Economics said that the muted reaction to the PBoC’s decision reflects two concerns: “First, that there has been little discernible boost to the real economy in China from the monetary easing undertaken by the central bank since November (although bank lending has at least picked up recently); and second, that the amount of Thursday’s easing, which is more than meets the eye at first, could be a sign that the Chinese authorities are worried about a hard landing.”
Shares in GKN rocketed after the announcement of its acquisition of Volvo Aero for £633m. To help fund the deal GKN raised £140m through a placing of new shares with institutional investors, with the rest of the money coming from new debt facilities. Investec said that the terms of the deal – price, equity raise and expected returns – were better than the market had been expecting.
Today’s statement also included a brief trading update, with GKN saying that group sales for the first five months of 2012 had increased by 17%.
The decision by Xstrata to postpone the vote on its controversial proposed merger with Glencore International gave a boost to both stocks. The company said that the delay is due to the proposed changes to the management retention awards announced last month. Shareholders were due to vote on the the Xstrata-Glencore merger on July 4th.
Banking stocks, which were rocked by the LIBOR and mis-selling scandals last week, continue to face downward pressure: both RBS and Lloyds fell sharply today. Meanwhile, Barclays, the lender at the centre of the interbank lending rate manipulation claims, finished the day in positive territory following its steep recent sell-off.
Insurance group Aviva rose after new Executive Chairman John McFarlane outlined details of its new strategic direction which, not for the first time, will result in changes at the senior management level. The new strategy has three main objectives: narrower focus; building financial strength; and improving financial performance.
FTSE 250: Dunelm up; recruitment stocks down
Homewares retailer Dunelm advanced after saying that total revenue increased 21.2% in the fourth quarter of the group's fiscal year, boosted by the unusually wet weather. However, the group cautioned that it expects consumer spending to remain under pressure.
Recruitment groups Hays and Michael Page were being weighed down by a gloomy trading update from AIM-listed sector peer Robert Walters. The group said that a banking sector slow-down in the Asia Pacific region put a dent in net fee income in the second quarter.
FTSE 100 - Risers
GKN (GKN) 211.00p +13.08%
Xstrata (XTA) 845.80p +3.05%
Experian (EXPN) 954.00p +3.02%
ARM Holdings (ARM) 521.00p +1.76%
Tate & Lyle (TATE) 666.50p +1.60%
Barclays (BARC) 168.20p +1.33%
Aviva (AV.) 284.60p +1.14%
Glencore International (GLEN) 315.60p +1.14%
SABMiller (SAB) 2,645.00p +1.11%
Vodafone Group (VOD) 182.45p +1.08%
FTSE 100 - Fallers
Royal Bank of Scotland Group (RBS) 207.20p -3.40%
Evraz (EVR) 257.80p -3.26%
Polymetal International (POLY) 894.00p -3.04%
Lloyds Banking Group (LLOY) 30.82p -2.65%
CRH (CRH) 1,214.00p -2.65%
Shire Plc (SHP) 1,802.00p -2.28%
International Consolidated Airlines Group SA (CDI) (IAG) 155.70p -2.20%
Kingfisher (KGF) 275.60p -2.10%
Tullow Oil (TLW) 1,476.00p -1.73%
Johnson Matthey (JMAT) 2,234.00p -1.63%
FTSE 250 - Risers
New World Resources A Shares (NWR) 354.00p +6.02%
Gem Diamonds Ltd. (DI) (GEMD) 224.00p +5.96%
Chemring Group (CHG) 278.70p +4.26%
Dunelm Group (DNLM) 531.00p +3.71%
Petra Diamonds Ltd.(DI) (PDL) 128.00p +3.23%
ITE Group (ITE) 197.60p +2.92%
Melrose (MRO) 373.30p +2.87%
Salamander Energy (SMDR) 170.70p +2.28%
Brown (N.) Group (BWNG) 264.30p +2.05%
Persimmon (PSN) 638.50p +2.00%
FTSE 250 - Fallers
Ocado Group (OCDO) 73.25p -7.10%
Man Group (EMG) 63.25p -6.37%
Avocet Mining (AVM) 64.50p -5.36%
Home Retail Group (HOME) 81.95p -4.76%
Yule Catto & Co (YULC) 138.70p -4.48%
Michael Page International (MPI) 363.00p -4.45%
Imagination Technologies Group (IMG) 483.10p -3.86%
Hays (HAS) 73.70p -3.53%
F&C Asset Management (FCAM) 83.35p -3.19%
Talvivaara Mining Company (TALV) 148.30p -3.01%
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