Europe Concerns Impact FTSE

The FTSE 100 index experienced high levels of volatility over the first half of October as investors mulled the possibility of another economic downturn in the eurozone and, at one point, the blue-chip index dropped to its lowest level since the middle of 2013.

Over the month as a whole, the FTSE 100 fell by 1.2%, the FTSE 250 index rose 0.8% and the FTSE SmallCap index fell 1%. Following so-called ‘stress tests’ on 123 European banks, the European Banking Authority reported that 24 institutions had failed. Four UK banks – Lloyds, HSBC, Barclays and Royal Bank of Scotland – were tested and all passed, although Lloyds’ pass was uncomfortably tight.

The UK banking sector also received a boost from Bank of England proposals that called for a lower-than-expected increase in the amount of capital that banks will have to hold in reserve. The Confederation of British Industry meanwhile has found the UK’s financial sector is expanding at its fastest pace since 2007, and most companies expect the momentum for rising business volumes and profits to continue.

Although the economy has continued to improve, UK companies are continuing to struggle with competitive and pricing pressures and profits warnings during the third quarter of 2014 reached their highest level since 2008. A study by Ernst & Young found that UK-listed companies issued 69 profits warnings during the third quarter of 2014, compared with 56 during the third quarter of 2013. Profits warnings from firms in the construction and materials sector reached their highest level since the second quarter of 2012.

Indeed October provided little respite for the UK’s retailing sector. In particular, Tesco was placed under investigation by the Financial Conduct Authority for overstating its profits, with the investigation later handed over to the Serious Fraud Office. During the month, Tesco’s share price plumbed depths last seen in 2003. For its part, high-street retailer Next downgraded its forecast for full-year 2014 profits, citing lower demand caused by unusually mild weather. Elsewhere in the retailing sector, department store Debenhams reported a 24.8% drop in full-year post-tax profits, with the company blaming a “tough” market, hampered by ongoing pressures on shoppers’ disposable income.

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