23rd May 2013
A flurry of bearish data has sent the FTSE 100 into downfall in early morning trading with top flight losing 120 points after Japan’s Nikkei index endures its biggest plunge in more than two years writes Philip Scott.
The Nikkei, arguably due a correction, after surging by some 50% since the start of the year, pulled back after the flash HSBC Purchasing Manager’s index (PMI) for May fell below the 50 point level to 49.6 – marking the first contraction since October last year. The Japanese index closed on Thursday 7.3% per cent lower, its steepest one day fall since March 2011.
Mark Williams, chief Asia economist at Capital economics says: “Today’s sub-50 reading on the flash PMI will shake the confidence of China’s policymakers, who have remained sanguine in the face of slow growth so far this year. We suspect they will resist the temptation to inject further stimulus since this would heighten the risk of financial instability and because there is only limited evidence of weakness in the labour market.
This is the first time that the Markit PMI has dropped below 50 since October last year. At face value, a sub-50 reading signals that manufacturing is contracting. In practice though, the PMI has averaged 49.8 over the past 12 months, with industrial output expanding 9.5% year-on-year over the same period.
“The reality is therefore probably not quite as bad as may first appear. But it is bad enough, with the economic slowdown apparently deepening after a weak first quarter,” adds Williams.
In the UK, sterling fell on Wednesday as poor high street sales figures, put a spanner in the works of the economic recovery. Figures from the Office for National Statistics reported that in April sales and spending each fell by 1.3%, with the largest source of downwards pressure coming from the food sector, where, compared with March 2013, the quantity of goods bought decreased by 4.1%, the lowest since May 2011. Over the same period the amount spent in the food sector decreased by 3.5%. Bad weather was largely blamed for the month-on-month drop.
The pound dropped against the euro and the dollar following the negative numbers from the ONS on Wednesday. Dr Howard Archer, chief European & UK economist, at IHS, says: “Much of the latest news on the UK economy has been relatively encouraging; but even allowing for the negative impact of ongoing cold weather and the fact that Easter occurred in March this year, April’s marked drop in retail sales provides a reminder that the economy is not yet out of the woods and still has a challenging job to develop sustained, clear growth.”
Official data has also confirmed that the UK economy expanded by 0.3% in the first three months of the year, narrowly missing falling into a so-called triple dip recession, but the International Monetary Fund this week warned that Britain is still a long way from “a strong and sustainable recovery”.
While the UK’s benchmark FTSE 100 index has lost some ground today, it remains up a compelling 27% over the past 12 months, 5% of which the past month accounts for, but investors are now concerned about how much further this can run. Adrian Lowcock, senior investment manager at fund broker Hargreaves Lansdown says: “I am confident long term equity markets will continue to perform my concern is investors should not put all their eggs in one basket. Likewise a market correction could happen but we do not know when. Investors should be prepared for markets to fall as well as rise.”