Shock GDP contraction pulls FTSE and sterling downward

RETAILERS were hit as Britain’s top share index fell yesterday after a shock 0.5-per cent contraction in UK GDP in the last three months of 2010.

The FTSE 100 closed was down 26.14 points, or 0.4 per cent, at 5,917.71, having risen 0.8 per cent on Monday.

Figures from the Office of National Statistics showed the UK economy unexpectedly shrunk 0.5 per cent in the last three months of 2010, after 0.7 per cent growth in the third quarter.

“There hasn’t been a correction (on the back of the news). The market is adjusting to the stories as and when they break, but it feels as if there is a resilience in the market, that could well get us back through the 6,000 level,” Martin Dobson, head of trading at Westhouse Securities, said.

British retailers were among the worst affected by the figures, with Next down 3.1 per cent.

“In times of uncertainty, retailers bear the brunt as when we see the economy hit, households are more cautious,” John Stevenson, retail analyst at Peel Hunt said.

Next peer Marks & Spencer fell 2.2 per cent while home improvements retailer Kingfisher lost 0.9 per cent.

Luxury goods firm Burberry, however, added 3.2 per cent after a bullish trading update from peer Luxottica.

US consumer confidence rose more than expected in January to its highest level in eight months.

Demand from US and Asia helped the luxury goods industry recoverfrom its worst slump in decades.

However, Wall Street was lower after a slew of earnings including 3M, Johnson & Johnson and American Express failed to persuade investors to add to the previous session’s gains.

Miners also dragged the FTSE 100 lower, tracking weaker commodity prices, as risk appetite ebbed.

However, precious metals processor Johnson Matthey rallied, up 1 percent, helped by improving sales trends in the automotive industry for which it manufactures catalytic convertors, traders said.

Elsewhere on the upside, British insurance consolidator Resolution rose 3.1 per cent. The firm said Trevor Matthews would quit as head of its Friends Provident arm, making way for industry veteran Andy Briggs.

Investors toasted drinks group Diageo, up 1.6 per cent supported by further positive broker comment and figures for the US spirits industry.

Morgan Stanley raised its target price for Diageo, with Exane BNP Paribas having done the same on Monday.

Vodafone gained 0.9 per cent after its venture with Verizon beat expectations with wireless growth.

BSkyB added 0.3 per cent after the Culture Secretary Jeremy Hunt gave News Corp a final chance to avoid a prolonged investigation into its $12.5 bn (£7.9bn) buyout of BSkyB.