Oil and mining shares weigh down on FTSE as third quarter rally fades

COMMODITY stocks led Britain’s top share index lower yesterday 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 closed down 35.30 points, or 0.6 per cent at 5,627.33 and is now 1.8 per cent lower than the second-half intraday high hit last Thursday as the early third-quarter rally showed signs of flagging.

Integrated oil stocks and mining shares, which had gained more than seven per cent over the seven trading days since 27 June, fell as the market’s focus shifted to company earnings. US aluminium maker Alcoa was set to kick things off after Chinese, European and British policymakers took steps last 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 yesterday the Eurozone debt crisis is more acute than the 2008 financial crisis that brought down US 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 US illuminated the difficulty facing policymakers, with the latest growth outlook from the OECD yesterday 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 US even though business activity has weakened.

Blended (reported and estimated) quarterly earnings growth for US companies as at 9 July was 5.9 per cent, compared with 14.3 per cent in October and 9.2 per cent in 9.2 per cent in April, according to Thomson Reuters data.

JPMorgan said sectors most at risk include capital goods, chemicals and discretionary.

Capital goods firm IMI was the top FTSE 100 faller, down 3.3 per cent. Mid cap recruiter Michael Page fell 3.8 per cent after the firm reported a fall in second-quarter profit, hit by a pull-back in discretionary spending, and predicted a tough third quarter.

Luxury goods firm Burberry, 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 per cent.