Sterling Strength, IMF UK Downgrade Knocks Stocks

Stocks in London ended deep in negative territory on Monday, after sterling strengthened on weakness in the dollar and the International Monetary Fund lowered its growth forecasts for the UK, while Brexit continues to take its toll on business sentiment.

The FTSE 100 index of large-cap dollar earners took a heavy hit to close down 1.0%, or 75.18 points at 7,377.73. The FTSE 250 of mid-caps ended down 0.7%, or 134.99 points, at 19,616.25, and the AIM All-Share closed 0.1% lower, or 0.72 point, at 968.98.

The BATS UK 100 ended down 1.3% at 12,488.72, the BATS 250 down 0.9% at 17,784.92, and the BATS Small Companies 0.3% lower at 12,066.12.

"The FTSE [100] was consistently the market's worse performer this Monday, dropping...to plunge back below 7,400. There were multiple reasons for the index's decline, from the IMF cutting the UK's 2017 growth forecasts, to sterling's rebound and notable losses from the likes of easyJet, Next and Reckitt Benckiser," commented SpreadEx analyst Connor Campbell.

The pound was quoted at USD1.3029 at the London equities close, up from USD1.2959 at the same time on Friday.

"The UK had no major economic announcements today, but the relatively fragility of other major currencies made the pound attractive. Sterling is also attracting bargain hunters seeing as it rough ride last week on the back of the British CPI data," said analyst David Madden from CMC Markets.

While the IMF left its projections for global output growth unchanged at 3.5% for 2017 and 3.6% in 2018, it lowered its growth forecast for the US and the UK, while the Eurozone growth outlook was raised.

The UK growth forecast was revised down for 2017 due to weaker-than-expected activity in the first quarter. The economy is forecast to grow 1.7% in 2017 and 1.5% in 2018.

On the other hand, eurozone growth outlook was revised up, with the IMF citing stronger momentum in domestic demand than previously anticipated. GDP is forecast to climb 1.9% this year and 1.7% in 2018. The growth projections were revised from 1.7% and 1.6%, respectively.

"Although there appear to be some signs that the key eurozone surveys may have reached a cyclical peak, they are still a long way away from pointing to a marked slowdown in GDP growth in the second half," said eurozone economist Ben May from Oxford Economics.

"We still think that the consensus eurozone growth forecast for 2017 of 1.9% – in line with the IMF’s new estimate which was published today – looks too cautious. We continue to see a rise of around 2.2% this year, even if the surveys continue to weaken," May added.

The growth forecast in the US was revised down by the IMF to 2.1% from 2.3% in 2017 and to 2.1% from 2.5% in 2018. The downward revision was based on the assumption that US fiscal policy will be less expansionary going forward.

Data from IHS Markit also was at the forefront of economic news. The squeeze on UK household finances intensified in July, while Eurozone private sector growth slowed for the second successive month in July to the lowest since January.

According to data compiled each month by IHS Markit, using data collected by Ipsos MORI, the UK household finance index dropped to 41.8 in July from 43.7 in June. The score was well below the 50.0 no-change mark and revealed the fastest deterioration in financial wellbeing for exactly three years.

The index measuring expectations for UK household finances came in at 47.0 in July, up from 45.8 in June. At 51.0, down from 52.6 in June, the index measuring workplace activity eased to its lowest reading for 12 months. Further, the gauge for living costs and inflation expectations climbed to 80.7 in July from 79.2 in June.

The proportion of UK households anticipating an increase in the Bank of England base rate during the next six months fell to 27% in July from 34% in June.

In mainland Europe, the CAC 40 in Paris ended up 0.2%, while the DAX 30 in Frankfurt ended 0.3% lower.

The euro stood at USD1.1645 at the European equities close, firm against USD1.1651 at the close on Friday.

"Over in the Eurozone the CAC and DAX spent the day on divergent paths. The French index managed to claw its way 0.3% higher after a perky manufacturing PMI compensated for a weaker services reading; its German counterpart wasn't as lucky, the index falling 0.2% following a pair of disappointing PMIs. Of course the main driver of movement in the region remained the euro's strength," said SpreadEx's Campbell.

For the eurozone, IHS Markit flash data showed that the composite output index fell to a six-month low of 55.8 in July from 56.3 in June. The reading was expected to drop marginally to 56.2.

The services PMI index remained unchanged at 55.4 in July. The expected reading was 55.5. The factory PMI declined more than expected to 56.8 in July from 57.4 in June. The score was seen at 57.2.

German private sector output growth slowed for the second month in July. The composite output index slid to 55.1 in July from 56.4 in June. This was the weakest expansion since January. However, output has risen continuously since May 2013, the second-longest sequence of growth since the series started in January 1998.

France's private sector output grew at the slowest pace in six months in July. The composite output index fell to a 6-month low of 55.7 in July from 56.6 in June. Softer increases in output were seen across both manufacturers and service providers in July.

The flash US composite output index expanded to 54.2 in July from 53.9 in June, reaching a six-month high. The US services business activity index was unchanged month-on-month in June at 54.2.

The US manufacturing PMI rose to 53.2 in July from 52.0 in June , and the manufacturing output index expanded to 54.3 from 52.6 in June, both hitting four-month highs.

"These reports are encouraging, not the sort that would get traders worried about an interest rate hike anytime soon. Dealers are still divided over whether there will be another interest rate hike from the Fed this year or not," said CMC's Madden.

Meanwhile, the National Association of Realtors said there was a bigger than expected drop in existing home sales in the month of June, as existing home sales slumped by 1.8% to an annual rate of 5.52 million in June from 5.62 million in May. Economists had expected existing home sales to drop by 1.0%.

Stocks in New York were down at the London equities close. The DJIA was trading 0.3% lower, the S&P 500 index was 0.2% lower and the Nasdaq Composite was down 0.1%.

All eyes are on the Federal Reserve's monetary policy announcement due on Wednesday. While the Fed is widely expected to leave interest rates unchanged, traders will pay close attention to the accompanying statement.

"The Dow is staring at a very busy earnings calendar, the highlight being tonight'ssecond quarter report from Google-parent Alphabet. As for the greenback, Wednesdaysees the month’s Federal Reserve meeting, with the currency on the lookout for any hawkish hints to help rescue it from a sour summer," said SpreadEx's Campbell.

Alphabet is due to release second-quarter results after the US market close.

3M, DuPont, General Motors, McDonald's, AT&T, Boeing, Coca-Cola, Ford Motor, Facebook, Amazon, and Exxon Mobil are among a slew of US companies due to report results this week.

Back in London, the FTSE 100 only had a small group of gainers. Airlines lost ground after low-cost operator Ryanair Holdings said the pricing environment will remain "very competitive" into the second half of 2017, as it aims to lower average fares by 8%.

For the quarter ended June 30, Ryanair reported a rise in pretax profit of 55% to EUR397.0 million from EUR256.0 million the year before. Ryanair said it expects pretax profit for the full-year to be between EUR1.40 billion to EUR1.45 billion.

Ryanair closed down 2.2%, while peers easyJet and British Airways-ownerInternational Consolidated Airlines were dragged down as well to end the day 2.9% and 1.3% lower, respectively.

Clothing retailer Next closed down 3.1% at 3,707.43 pence, after RBC Capital cut its target price on the stock to 4,000.0 pence from 4,300.0p.

Provident Financial ended down 3.6%, the worst blue-chip performer. The subprime lender's shares were lower ahead of its interim results on Tuesday, which is its first earnings report since its profit warning last month. The company previously warned the restructuring of its Consumer Credit division will see underlying profit in 2017 drop by almost half.

Reckitt Benckiser closed down 2.0%. The consumer goods giant reported growth in profit in the first half of 2017 thanks to a rise in net revenue - thanks in mostly to currency movements - but the like-for-like figure was pushed down as Reckitt coped with the 'Petya' global cyber attack.

Brent oil took a knock and was quoted at USD48.58 a barrel at the close, down from USD49.56 late Friday. The FTSE 350 oil and gas producers sector closed down 1.5%, with BP ending the day 1.4% lower, while Royal Dutch Shell 'A' shares ended down 1.0%.

Following a meeting of oil ministers in St Petersburg, OPEC and other countries including Russia are considering extending production restrictions beyond March next year. The cartel started cutting their output in January to prop up prices before deciding in May to uphold the cut until the first quarter of 2018.

The extension should be kept as an "option should further action be required for the stabilization of the market," ministers of the group said in a statement after reviewing their production deal in the Russian city.

Gold continued to climb, with an ounce of the precious metal quoted at USD1,256.36 at the European equities close against USD1,250.78 on Friday.

The economic calendar on Tuesday sees the UK CBI industrial trends survey at 1100 BST and a speech by the chief economist of the Bank of England, Andrew Haldane, at 1800 BST. Elsewhere, the German import price index is at 0700 BST, followed by German business climate data at 0900 BST. French producer prices and business climate data are at 0745 BST.

In the afternoon, the US Redbook index is at 1355 BST and the US housing price index is at 1400 BST. The US API weekly crude oil stocks are at 2130 BST.

In addition to Provident Financial's first half results, the UK corporate calendar on Tuesday sees interims from Croda International, Fevertree Drinks, Segro, Virgin Money, Rathbone Brothers, Domino's Pizza Group and Informa.