U.S. stimulus fears, China slowdown sparks FTSE sell-off

U.S. stimulus fears, China slowdown sparks FTSE sell-off
Business & Markets 2013
Written by Reuters
Thursday, 20 June 2013 16:02

LONDON (June 20): UK stocks were dealt a double-blow early on Thursday after the U.S. Federal Reserve signalled its intention to begin scaling back stimulus later this year, while data showed Chinese growth continued to wane.

Banks and miners were the sharpest fallers as London's blue chip index declined 71.93 points, or 1.1 percent, to 6,276.89, by 0729 GMT.

The index was near support levels at around 6,225 - lows hit in February, April and early June.

The prospect of life after quantitative easing weighed heavily on markets following Fed Chairman Ben Bernanke's statement that the U.S. economy was growing fast enough for the central bank to begin slowing the pace of its $85 billion monthly purchases of Treasuries and mortgage-backed securities this year, with the goal of ending it in mid-2014.

"In the short-term there are going to be lots of market wobbles because we are in period of sea-change for investors where investment ideas which might have worked in the past (post credit crisis and stimulus driven) may not work in the next few years," James Humphreys, Senior Investment Manager at Duncan Lawrie Private Bank.

Central banks' stimulus measures had contributed to UK equities inflating over the past year to near record highs, but the threat of withdrawal has seen the index dive almost 9 percent since mid-May.

"We see (Bernanke's statement) as a good sign in the long-term as it shows that a return to normal monetary policy is in the offing, that economic growth is picking up which will ultimately be reflected in company results and the market will find a floor, which will allow the bull market to kick on," he said.

Adding to short-term concerns over how global growth and corporate earnings will perform in a post stimulus environment was data showing China's factory activity weakened to a nine-month low in June as demand faltered.

Miners fell 3 percent in tandem with weaker metals prices on worries over the demand outlook following the China data.

Financials including insurers, asset managers and banks also succumbed to selling pressure on uncertainty over how monetary easing will impact bond markets, to which the sectors are heavily exposed, and falling markets which devalues assets held on balance sheets.

Additionally, uncertainty remained over the outlook for Lloyds Banking Group after Finance Minister George Osborne said Britain is ready to start selling its shares in the UK lender and that it will examine whether to break up Royal Bank of Scotland.

And Britain's banks have plans to raise 13.7 billion pounds to plug a collective capital shortfall by the end of this year. - Reuters