The FTSE 100 struggled to break into positive territory this morning, as the release of disappointing first-quarter earnings from internet giant Google, along with China tightening fears, exerted pressure on the UK’s blue-chip index.
After the closing bell last night, Google reported a first-quarter net profit of $1.96 billion, or $6.06 a share, up 37% from last year’s comparative. When excluding certain one-off items, profit was $6.76 a share – missing the $6.91 median earnings per share estimate shown in a Bloomberg survey. Net revenues beat expectations by around 2%, however, coming in at $5.06 billion.
Google’s share fell as much as 5.3% in yesterday’s after-hours trading to $563.50, but in the greater scheme of things Google’s results aren’t all that bad; their bottom line missed consensus estimates by only 2%, predominantly due to an increase in costs associated with hiring and entering new markets – which is less of a cost and more of an investment.
News that China was introducing further measures to clamp down on property speculation hurt markets as well today. It has emerged that China’s government raised the requirements for down payments on new home purchases to 30% from 20% and those for second homes to 50% from 40%. Mortgage rates on second-home purchases were also raised and the country’s cabinet warned that ‘more forceful’ measures are needed to cool real estate speculation.
‘These tightening measures mark the true turning point of property-related policies and the property sector of this cycle,’ wrote Ting Lu, an economist at Bank of America-Merrill Lynch, in a note.
The FTSE 100 managed to recover from earlier losses by mid morning however, on speculation that Greece will ask to tap its emergency aid now in order to start tackling its structural problems. By 10.30am (London time) the FTSE 100 Index was practically unchanged at 5824.77 while the broader FTSE 250 was 7.45 points (+0.07%) above its previous close at 10546.60.
Unsurprisingly, miners took the most points off the FTSE this morning, with Xstrata, Rio Tinto and Antofagasta the sector’s worst performers, down between 1% and 1.5%. The sector was pressured by falling commodity prices, which retreated on the back of a broad increase in the value of the US dollar.
Sterling was also lower against the dollar, after a solid performance by Liberal Democrat leader Nick Clegg in a televised UK election debate last night led investors to bet on a higher probability of a hung parliament – a situation where there is no clear majority for one party. It stands to reason that this outcome could hamper the future government’s ability to tackle the budget deficit.
British Airways was also in the red today, down 1.3% to 239.4p as a volcanic ash cloud moving over Europe from Iceland continued to halt traffic.
In contrast, banks put in a solid performance, with Royal Bank of Scotland (RBS) rallying 7.6% to 49.44p after Bank of America-Merrill Lynch raised its price target on the bank 4% to 65p today.
‘We still believe RBS is one of most geared banks into recovery in Europe. We think it can turn a profit in 2010 and that profitability can recover strongly thereafter driven by rising margins, tight cost control and falling bad debts,’ the broker said. Meanwhile, Morgan Stanley added that it prefers RBS over Lloyds.
Sector peer Lloyds Banking Group climbed 2% to 66.74p and Barclays advanced 1.1% to 387.45p. Standard Chartered edged 0.6% higher to 1836.5p, while HSBC slid 0.5% to 709p.
Elsewhere, Game Group rose 0.3% to 102.7p this morning after a report from the NPD Group showed that the video game industry experienced its first period of growth in six months, with March sales of game software totalling $875.3 million – 10% higher from the same period last year. This exceeded the 5% gain shown in a survey of estimates by MarketWatch.
March is the first month of positive sales growth for the gaming sector since September 2009. The period was helped by high-profile new releases and lower prices on game consoles.
Looking ahead, the US building permits and housing starts are scheduled for release at 1.30pm (London time), followed by the Reuters/Michigan consumer sentiment index at 2.55pm. On the earnings front, investors should watch out for the quarterly results of US economic bellwether General Electric and Bank of America Corp, due later today.
By around 10.30am (London time), June Dow and S&P 500 futures traded between 0.1% and 0.2% lower, suggesting the market currently expects Wall Street to open slightly weaker this afternoon.
