Retailers weighed on the top share index Wednesday morning after leading investment banks forecast more gloom for the sector in the face of Europe's debt crisis, austerity measures and flagging consumer sentiment.
The FTSE 100 index <.FTSE> was down 28.48 points, or 0.5 percent, at 5,461.67 by 8:47 a.m., giving up most of the previous session's gain with uncertainty over Europe's ongoing debt crisis also weighing on sentiment.
The recent Metro profit warning and the light Tesco trading update could signify a pattern of several retailers reporting soft fourth-quarter sales and profits. Decreasing consumer confidence in mature markets and weakening growth trends in most emerging markets will contribute to this, ING said.
In Europe, ongoing problems related to sovereign debt and to the euro, together with new austerity measures for 2012, make us cautious on most retailers.
Citigroup said a combination of severe economic conditions and unsustainable industry trends meant EPS contraction would not be an unreasonable scenario for food retailers in 2012/13.
Tesco has a five-year EPS compound annual growth rate of minus 2.3 percent, compared with minus 8.8 percent for Marks & Spencer, StarMine data showed. The FTSE 100 index, by comparison, is minus 3.6 percent over the period.
JPMorgan said investors should expect more retail pain over the Christmas period. We would typically be relatively positive going into Christmas ... However, this year the combination of a weakening consumer, unseasonal weather, heavy promotional activity, weak footfall and what we view as still too high estimates is causing us more concern, JPMorgan said in a note.
As ever, there will be winners and losers, but on balance we expect to see more of the latter than the former.
Morrison outperformed, rising 0.4 percent as ING lifted its rating to buy from hold for its defensive qualities and support from a two-year 1 billion pounds share buyback program that still has more than half to run.
Deutsche Bank said Europe's debt crisis will continue into 2013. It questioned whether the European Central Bank has the mandate or the desire to again step up bond purchases sufficiently to arrest declines without some kind of dramatic ECB treaty change or cast iron move toward a fiscal European union.
It might be that unless the ECB has bought somewhere close to an extra trillion euros of European government bonds by the time we write 2013's outlook, we may be seeing the endgame of 'thinking the unthinkable' (restructurings, defaults, haircuts, full fiscal European union or extreme levels of money printing).
Traders also said the lack of action in injecting extra stimulus overnight from the U.S. Federal also provided an excuse to take profits.
The FED said turmoil in Europe remained a big risk.
Integrated oils <.FTNM0530>, the previous session's top gainers, were Wednesday's top fallers as investors banked profits. Heavyweight oil giant BP
Miners <.FTNMX8350> also weakened following a robust performance Tuesday, with Rio Tinto
Banks <.FTNMX8350> were lower with so much of their financial performance, given their debt exposure to Europe, linked to events in the euro zone.
On the FTSE 250 <.FTSE> there was pain for Logica
Ex-dividend factors knocked 0.5 point off the FTSE 100 index Wednesday, with Fresnillo
(Editing by Dan Lalor)