IMF growth gloom and poor data in manufacturing send FTSE lower

UK shares fell for a second session yesterday, dented by a wary view of Europe’s debt troubles and concerns that gloomy global economic data bodes ill for the upcoming corporate earnings season.

Data showed manufacturing output shrank more than expected in August and exports fell steeply, pointing to deterioration both in the domestic and the global economy.

The International Monetary Fund forecast that the UK economy would contract 0.4 per cent this year versus growth of 0.2 per cent expected in July, and combined this with a more downbeat view on global growth.

That backdrop exacerbated concerns about the third quarter earnings season, which kicks off with US aluminium giant Alcoa after the market close, along with fast food restaurant operator Yum Brands.

“People are getting cautious about the earnings season. I am quite bearish,” said Nick Xanders, who heads European equity strategy at broker BTIG.

“Tonight is going to tell you exactly which way we are going ... Alcoa will tell you what’s going in terms of UK miners. Yum will be very interesting to see in terms of Chinese growth.”

The FTSE 100 closed down 31.49 points, or 0.5 per cent, at 5,810.25 points, adding to a 0.5 per cent drop the previous session.

Mining stocks, particularly sensitive to economic news and a regular catalyst for the overall market direction, helped pare the FTSE’s losses for the day. Vedanta rose 2.1 per cent, while Rio Tinto put on 1.5 per cent and Evraz gained 1.1 per cent.

Concerns about the Eurozone remained in the spotlight, with Spanish bond yields edging higher as the country continued to drag its feet over a formal bailout request needed to kick-start a European Central Bank plan to ease the crisis through sovereign bond purchases.

After jumping some 700 points between early June and mid-September, the UK benchmark has stalled, trading in a relatively narrow 200 point range over the past month as the risks associated with the Eurozone, economic growth and earnings make investors reluctant to push it higher.

On individual stocks, analysts are starting to reconsider whether companies still look attractive after the summer rally, prompting a downgrade on Aggreko by HSBC and on Sage by Bank of America Merrill Lynch.

The shares dropped 3.4 per cent and 2.2 per cent respectively.

Marks & Spencer was the FTSE 100’s biggest riser, up 3.2 per cent, in the wake of a bullish outlook on the retail sector from JP Morgan Cazenove.

From a technical point of view, the market is not yet looking negative, with the 50-day moving average serving as a floor yesterday.

“Given we came off the trend line off the highs in September, the price action so far is a little bit disappointing. That said ... above 5,800, I'd be tempted to give it the benefit of the doubt,” said Phil Roberts, technical strategist at Barclays.

Shares in BAE Systems trod water yesterday, closing around 0.3 per cent lower, ahead of today’s Takeover Panel deadline for its planned merger with French aerospace giant EADS. Talks among the firms and the various governments with interests in the tie-up were said to be continuing last night.