London close: Stocks fall after surprise contraction for UK GDP

(Sharecast News) - London stocks closed well below the waterline on Monday, as investors mulled an unexpected contraction for the UK economy. The FTSE 100 ended the session down 1.53% at 7,205.81, and the FTSE 250 was off 2.61% at 19,160.21.

Sterling was also in negative territory, last trading down 1.19% on the dollar at $1.2169, and losing 0.37% against the euro to change hands at €1.1664.

"It's been another day of surging yields and risk averse stock markets today, as the hangover from Friday's hot US CPI number, carried over into a new trading week, with the FTSE 100 sliding back towards its lows last month," said CMC Markets chief market analyst Michael Hewson.

"Asia markets carried over from where US markets left off last week with sentiment also struggling on reports out of China, that authorities are looking to reimpose Covid restrictions in Shanghai and Beijing, as infection rates rise again.

This has fed into a narrative that the global economy will slow even further at a time when prices are showing little sign of doing the same."

Hewson said the wider concern was that central banks had no good options.

"They are now on the horns of a dilemma, allow inflation to rise and be sticky for longer, or hike aggressively to get on top of inflation in order to be able to cut rates later down the line."

Hogging the economic headlines was the news that the UK economy unexpectedly contracted in April - at its sharpest pace in more than a year - amid higher prices and supply chain issues.

According to data from the Office for National Statistics, the economy shrank by 0.3% in April following a 0.1% decline in March, and versus consensus expectations of 0.1% growth.

For the first time since January 2021, contractions were seen in services, production and construction.

The ONS pinned some of the blame for the contraction in GDP on the scaling back of the government's Covid test-and-trace and jab programmes.

"A big drop in the health sector due to the winding down of the test and trace scheme pushed the UK economy into negative territory in April," said ONS director of economic statistics Darren Morgan.

"Manufacturing also suffered with some companies telling us they were being affected by rising fuel and energy prices.

"These were partially offset by growth in car sales, which recovered from a significantly weaker than usual March."

Paul Dales, chief UK economist at Capital Economics, said the 0.3% contraction was not as weak as it looked, but still increased the chances that the Bank of England would opt for a 25-basis points rate hike on Thursday, rather than the 50 basis points the market was expecting.

He said GDP would need to rise by 0.4% or 0.5% month-on-month in both May and June to prevent it from contracting in the second quarter as a whole.

"That said, without the joint wind down of the Covid-19 NHS test-and-trace and vaccination programmes GDP would have risen," he noted.

"Those programmes subtracted 0.5 ppts from GDP growth and without them - and after rounding - GDP would have increased by 0.1% month-on-month.

"That's hardly strong, but it suggests the underlying momentum isn't as weak as the headline figure implies."

Still on the economic front, the Confederation of British Industry slashed its growth forecasts for the British economy earlier, and warned that the country was now at risk of recession.

The employers' organisation now expects GDP to grow by 3.7% in 2022, down from its previous guidance for 5.1% growth.

In 2023, GDP was expected to improve by 1.0%, compared to an earlier forecast for 3.0%.

"We're expecting the economy to be pretty stagnant - it won't take much to tip us into recession," said Tony Danker, CBI director-general.

"And even if we don't, it will feel like one for too many people."

Danker said the country had endured "weeks of politicking", and was now on the brink of a "summer of deadlock".

"There is only a small window until [Parliament's] recess.

"Inaction this summer would set in stone a stagnant economy in 2023, with recession a very live concern."

Across the pond, a wave of selling swept across government debt markets as economists and traders began to openly ponder the very real possibility that the Federal Reserve's next move on interest rates on 15 June should be a 75-basis point hike.

At one point during Monday's session, yields on two-year debt rose above those on 10-year notes for the first time since April, in what traders term an 'inversion' of the interest rate curve.

Elsewhere, the prospect of fresh Covid lockdowns in China were also weighing on sentiment overnight, which sent equities plunging during Asian trading.

"With easing restrictions only having been announced over the last few days, inevitably the news prompted concerns that demand and indeed consumer confidence would suffer a fresh blow, thus adding to the cocktail of factors which could inhibit global growth," said Richard Hunter, head of markets at Interactive Investor.

On London's equity markets, mining stocks were in the red, with Glencore down 4.79%, Antofagasta losing 2.76%, Anglo American 2.62% weaker, and Rio Tinto Group 1.93% lower.

On the upside, Go-Ahead Group surged 12.4% after the transport operator said it had received two separate takeover approaches at a price it would be minded to recommend if offers were made.

Approaches were made by Australian transport service provider Kelsian Group, and by a consortium consisting of Kinetic Holding Company and Globalvia Inversiones.

Reporting by Josh White at Sharecast.com. Additional reporting by Michele Maatouk, Frank Prenesti, Abigail Townsend and Alexander Bueso.

Market Movers

FTSE 100 (UKX) 7,205.81 -1.53% FTSE 250 (MCX) 19,160.21 -2.61% techMARK (TASX) 4,215.73 -1.58%

FTSE 100 - Risers

Fresnillo (FRES) 790.00p 5.56% Avast (AVST) 489.90p 1.28% United Utilities Group (UU.) 1,059.00p 1.24% HSBC Holdings (HSBA) 502.90p 0.76% BT Group (BT.A) 179.50p 0.76% Severn Trent (SVT) 2,900.00p 0.55% Vodafone Group (VOD) 126.00p 0.43% Pearson (PSON) 743.20p 0.35% Bunzl (BNZL) 2,645.00p 0.34% Kingfisher (KGF) 245.60p 0.29%

FTSE 100 - Fallers

InterContinental Hotels Group (IHG) 4,310.00p -7.93% Scottish Mortgage Inv Trust (SMT) 695.80p -6.70% Whitbread (WTB) 2,526.00p -5.64% Entain (ENT) 1,331.00p -5.50% Glencore (GLEN) 481.30p -4.79% Compass Group (CPG) 1,662.50p -4.67% International Consolidated Airlines Group SA (CDI) (IAG) 115.02p -4.55% Ocado Group (OCDO) 878.00p -4.23% Halma (HLMA) 2,002.00p -4.12% Informa (INF) 514.20p -4.03%

FTSE 250 - Risers

National Express Group (NEX) 219.60p 3.20% BH Macro Ltd. GBP Shares (BHMG) 4,500.00p 2.39% Hiscox Limited (DI) (HSX) 908.60p 1.52% Euromoney Institutional Investor (ERM) 1,096.00p 1.48% ContourGlobal (GLO) 252.50p 1.20% Pennon Group (PNN) 1,053.00p 0.96% SDCL Energy Efficiency Income Trust (SEIT) 121.00p 0.83% Beazley (BEZ) 474.40p 0.81% Vivo Energy (VVO) 144.00p 0.70% Telecom Plus (TEP) 1,750.00p 0.69%

FTSE 250 - Fallers

Aston Martin Lagonda Global Holdings (AML) 540.00p -11.74% Ascential (ASCL) 271.80p -9.52% Wizz Air Holdings (WIZZ) 2,081.00p -9.01% Carnival (CCL) 751.80p -8.52% Hammerson (HMSO) 22.99p -8.37% TI Fluid Systems (TIFS) 165.80p -8.09% TUI AG Reg Shs (DI) (TUI) 158.65p -7.44% Ferrexpo (FXPO) 152.30p -7.30% Oxford Biomedica (OXB) 451.00p -7.20% Bridgepoint Group (Reg S) (BPT) 260.80p -7.19%