US-North Korea Tensions Spook Investors
London (Aug 9) Stocks in London closed lower Wednesday as escalating tensions between the US and North Korea had investors moving towards safe havens such as gold, with gold miners Randgold Resources and Fresnillo ending the day as the best performers in the FTSE 100.
Tensions have been ratcheting up between Washington and Pyongyang in recent days over North Korea's nuclear weapons programme and missile tests, after the US intelligence community determined that North Korea had successfully produced a miniaturised warhead that can fit inside its missiles, and on new UN sanctions against North Korea.
North Korea warned on Wednesday that it is considering a pre-emptive strike against the US Pacific territory of Guam, following comments from US President Donald Trump that further threats from North Korea would be met with "fire and fury".
An attack with "enveloping fire" against US military interests on the Pacific island could be conducted at any moment once approval has been given by leader Kim Jong-un, a North Korean army spokesman said on Wednesday, according to state media.
US Secretary of State Rex Tillerson sought to downplay the threat posed by North Korea on Wednesday as he travelled to Guam.
"I think Americans should sleep well at night, have no concerns about this particular rhetoric of the last few days," Tillerson said.
Tillerson defended Trump's remarks, which he argued send a clear message to North Korea that the US will defend itself and its allies. "What the President is doing is sending a strong message to North Korea in language that Kim Jong-un can understand, because he doesn't seem to understand diplomatic language," Tillerson said.
"European stocks have suffered greatly today as traders were prompted to cut-and-run due to the escalating tensions between the US and North Korea. The stand-off between the two countries has encouraged dealers to dump stocks and seek safe haven investments like gold. While the two nations are at loggerheads, it is going to be difficult to imagine money flowing into stocks," said David Madden, market analyst at CMC Markets UK.
The FTSE 100 index closed down 0.6%, or 44.67 points, at 7,498.06. The FTSE 250 ended down 0.4%, or 74.46 points, at 19,875.03, and the AIM All-Share closed down 0.5%, or 4.93 points, at 1,003.45.
The BATS UK 100 ended down 0.6% at 12,742.25, the BATS 250 closed down 0.4% at 18,064.11, and the BATS Small Companies ended flat at 12,242.37.
The pound was quoted at USD1.3002 at the London equities close Wednesday, compared to USD1.2965 at the same time on Tuesday.
Gold prices were benefiting as traders favoured safe haven assets, hitting a two-month high of USD1,275.37. An ounce of the precious metal was quoted at USD1,273.94 at the London equities close, against USD1,254.02 at the close on Tuesday.
Gold miners Randgold Resources and Fresnillo closed as the top two gainers in London's blue-chip index, ending up 1.9% and 4.9%, respectively.
In mainland Europe, investors were also digesting a suspected terror attack after a car crashed into soldiers outside barracks in Paris, injuring six. The euro stood at USD1.1734 at the European equities close, against USD1.1744 the prior day.
In Paris the CAC 40 ended down 1.4%, while the DAX 30 in Frankfurt ended down 1.1%.
Stocks in New York were down at the London equities close. The Dow Jones Industrial Average was down 0.3%, after breaking a nine-day rally on Tuesday. The S&P 500 index was also down 0.3% and the Nasdaq Composite down 0.2%.
Adding to the concerns over North Korea, the Dow was also being weighed on by declines in Walt Disney, with shares in the entertainment giant trading down after it reported third-quarter earnings that came in above estimates but on weaker-than-expected revenue. Netflix shares were also suffering as Disney said it would pull its content from the streaming service and launch its own competing product.
US economic data did little to distract from the tensions with North Korea, as US labour productivity increased by slightly more than expected in the second quarter.
A report released by the Labor Department on Wednesday said labour productivity climbed by 0.9% in the second quarter after inching up by a revised 0.1% in the first quarter.
Economists had expected productivity to increase by 0.7% compared to the unchanged reading that had been reported for the previous quarter.
The Labor Department also said unit labour costs rose by 0.6% in the second quarter following an upwardly revised 5.4% spike in the first quarter. Unit labour costs had been expected to climb by 1.2% compared to the 2.2% jump that had been reported for the previous quarter.
The Energy Information Agency reported that oil inventories dropped by 6.5 million barrels in the week to last Friday, against the 2.7 million decline that had been expected. Meanwhile, the report showed that gasoline inventories grew by 3.4 million barrels, against an expected drop of 1.5 million barrels.
Brent oil was quoted at USD52.25 a barrel at the close on Wednesday against USD52.49 at the same time the prior day.
"Crude prices have experienced yet another day of indecision despite a sharp drawdown in US crude inventories last week. Recent months have seen a strong contraction in US crude stocks, with driving season clearly raising demand and subsequently reducing the overcapacity that has been evident in recent years. With the break-even cost of production for US shale producers speculated to be around USD50, there may be some form of bottom around that level, which could explain the strength seen in recent weeks," said IG Market Analyst Joshua Mahony.
Back in London Worldpay closed as another gainer in the FTSE 100, up 0.4%, after it agreed to a GBP9.30 billion takeover by US rival Vantic after weeks of talks, in a deal which is set to create a GBP22.20 billion payments giant. The new company will retain the Worldpay name and will seek a secondary listing in London, with its primary listing to remain in New York.
After the granting of an extension earlier this week, both companies have now reached a deal for Vantiv to pay 55 pence in cash and 0.0672 of a new Vantiv share for each Worldpay share held. Worldpay also said it will pay a special dividend of 4.20p per share conditional on the merger being completed.
This will see Vantiv shareholders owning the majority of the new group with 57% and Worldpay shareholders with the remaining 43%.
At the other end of the index, G4S was the worst performer, closing down 5.1%. This comes despite the company reporting a big rise in pretax profit for the first six months of the year, rising to GBP218 million from just GBP115 million the year before.
Revenue rose 13% in the period, or 6.2% higher at constant currency to GBP3.97 billion from GBP3.53 billion, but G4S said it is still expecting annual revenue in 2017 to grow only by 4.0% to 6.0%.
Investors seemed to focus instead on a lack of growth in emerging markets, as G4S reported a rise in revenue across all geographies except for the Middle East and India.
The stock has had an impressive rally in 2017 so far, up 30% in the year to date.
Shares in Legal & General were down 1.5%. The insurer said its interim profit jumped on the back of an increase in operating profit, supported by strong growth in its retirement division, but warned that it expects "some adverse experience to continue emerging albeit at a reduced level" in the second half of 2017.
Peers Aviva and Prudential also closed down 2.1% and 2.3%, respectively, with financial services suffering amid the tensions between the US and North Korea. Prudential reports interim results on Thursday at 0930 BST.
In the FTSE 250, Acacia Mining closed up 14%, after being upgraded to Sector Perform from Underperform by RBC Capital.
Pets At Home closed up 2.7%, after being upgraded to Buy from Hold by HSBC. The stock was extending the gains seen on Tuesday, when it rose 5.7% after reporting growth in revenue in the first quarter of its financial year, with like-for-like sales growth accelerating from its main Merchandise division, keeping the firm on track to meet expectations for the full year.
Essentra was the worst mid-cap performer, down 4.8%. The plastic and fibre products manufacturer was cut to Hold from Add by Numis. The broker expressed disappointment that Essentra's recent strategy review did not offer "a radical change of direction".
In the economic calendar on Thursday, the UK trade balance is at 0930 BST, while the UK NIESR GDP estimate is at 1300 BST. In the US, the producer price index is at 1330 BST, together with initial jobless claims.
Also highlighted in the UK corporate calendar are half-year results from Coca-Cola HBC and Glencore, while TUI Group releases third-quarter results.
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