London close: Rising bond yields, trade worries give investors indigestion

London stocks finished sharply lower on Wednesday as investors continued to digest a move higher in government bond yields around the globe against a backdrop of ongoing trade tensions, even as Sterling gained on the back of a stronger-than-expected reading on industrial production at home.

The FTSE 100 dropped by 1.27% or 91.85 points to 7,145.74.

To take note of, Financials, Telecoms and Utilities were among the best performers on the top-flight index, as investors reacted to rising yields by shifting from so-called 'growth' stocks into 'value' shares.

US Treasury yields initially moved higher after official data on factory gate prices appeared to point towards a higher-than-expected reading on CPI figures for September due out during the following session, but later fell back as shares on Wall Street continued to come under selling pressure.

Yet strategists at Barclays Research were positive about such 'rotation' from one sector to another, telling clients: "Bond yields and the oil price are reaching fresh highs, which many equity investors appear to be increasingly concerned about. We believe however that both are reflective of the resilient nominal growth backdrop, which is positive for equities."

Perhaps, but there were also concerns on the trade front, in part after France's LVMH reportedly said China was enforcing customs rules more strictly.

Also dragging on the Footsie, the pound was 0.47% firmer against the US dollar at 1.15380 and up by 0.05% on the euro to 1.1446, following a batch of data and reports that the UK and the EU have made progress in talks about the Irish border backstop.

Reuters cited diplomatic sources in Brussels as saying that the EU no longer expects a new proposal from Britain for the Ireland-UK border fix after Brexit, with negotiators from both sides looking to narrow the differences together in direct talks.

Nevertheless, in a speech delivered towards the end of the session, Brussels's top trade negotiator appeared to pour cold water on markets' optimism, delivering a speech in which he claimed that the UK would gain a "huge competitive advantage" over the EU under the Prime Minister's Chequers deal.

Meanwhile, data from the Office for National Statistics showed that UK economic growth was weaker than expected in August, but growth in previous months was revised up a touch.

Gross domestic product was flat in August compared to the preceding month, when economists had expected growth of at least 0.1%. However, GDP grew 0.7% in the three months to August compared to the three months to May, maintaining growth on a rolling three-month basis. This was higher than expected after growth in each of June and July was revised up by 10 basis points.

Separately, ONS reported that industrial production growth continued to recover, growing 0.2% in August versus the 0.1% from the month before, with year-on-year output up 1.3% versus the 1% forecast. This was despite another 0.2% monthly decline in manufacturing production.

The index of services was disappointingly flat in August compared to July, while construction output shrank 0.7% month-on-month.

David Cheetham, chief market analyst at XTB, said there is a danger that now the ONS has started releasing monthly growth updates the focus will be too short-term and market participants will miss the bigger picture.

"Short-term events can cause volatility in monthly updates and present a misleading representation and therefore a better read can still be found in the quarterly figures. In light of this the three month increase of 0.7% represents a pretty impressive recovery from the earlier parts of the year where weather wreaked havoc with economic activity, but having said that it is still below historic performance."

Elsewhere, volatile bond yields were also continuing to unnerve, albeit for different reasons.

Yields in Italy marched back down after earlier rising on comments from Deputy Prime Minister Matteo Salvini that there will be no changes to the government's budget. The earlier rise in yields was also attributed to an article in Italian newspaper La Stampa in which a Moody's senior economist said the country's budget plan was a mistake that will be reflected in Italy's rating.

In UK corporate news, Burberry was a big faller as Morgan Stanley downgraded its stance on the European luxury goods sector to 'underweight', while British American Tobacco fell as chief marketing officer Andrew Gray quit after a 32-year career, just two weeks after being overlooked for the top job.

Also weighing on Burberry perhaps may have been remarks from French rival LVMH's executives, who said Chinese officials were enforcing customs rules more strictly.

Paper and packaging companies DS Smith, Smurfit Kappa and Mondi suffered heavy losses, dragged lower after Goldman Sachs downgraded US-based rival International Paper to 'neutral' from 'buy'.

Rank Group climbed even after the Gambling Commission said it must pay £500,000 for failing to follow rules that protect problem gamblers.

On the upside, PageGroup edged up after saying it expects its full-year operating profit to be marginally ahead of consensus, while HSBC rose even after it agreed to pay a $765m settlement in the US over its sale of mortgage-based securities.

SSE pushed up as its merger with Npower was provisionally cleared by the UK's Competition and Markets Authority.

In broker note action, Dixons Carphone gained on the back of an upgrade to 'buy' at HSBC, Rio Tinto was raised to 'buy' at Goldman and Sage was upgraded to 'hold' at Deutsche Bank. Ocado was lifted to 'equalweight' at Barclays and Soco International was upgraded to 'outperform' at RBC Capital Markets.

Rightmove was bumped up to 'buy' at Liberum and Hunting was cut to 'equalweight' at Barclays.

Market Movers

FTSE 100 (UKX) 7,145.74 -1.27%
FTSE 250 (MCX) 19,239.16 -1.59%
techMARK (TASX) 3,315.77 -1.06%

FTSE 100 - Risers

Kingfisher (KGF) 261.10p 3.65%
BT Group (BT.A) 237.00p 3.63%
United Utilities Group (UU.) 721.40p 3.41%
Lloyds Banking Group (LLOY) 59.11p 3.16%
Marks & Spencer Group (MKS) 295.80p 2.96%
National Grid (NG.) 807.80p 2.89%
Barclays (BARC) 171.64p 2.31%
Severn Trent (SVT) 1,878.00p 2.26%
Sage Group (SGE) 560.20p 1.76%
Whitbread (WTB) 4,632.00p 1.53%

FTSE 100 - Fallers

Mondi (MNDI) 1,796.00p -8.74%
Burberry Group (BRBY) 1,728.00p -8.09%
Halma (HLMA) 1,267.00p -6.77%
Smith (DS) (SMDS) 419.40p -6.48%
Ashtead Group (AHT) 2,054.00p -6.08%
Scottish Mortgage Inv Trust (SMT) 465.40p -5.78%
Smurfit Kappa Group (SKG) 2,580.00p -5.70%
Experian (EXPN) 1,765.00p -5.67%
Antofagasta (ANTO) 779.60p -5.53%
Evraz (EVR) 534.20p -5.42%

FTSE 250 - Risers

Vivo Energy (VVO) 124.94p 3.91%
Dixons Carphone (DC.) 159.25p 3.75%
CLS Holdings (CLI) 218.00p 3.56%
TP ICAP (TCAP) 279.50p 3.52%
Sequoia Economic Infrastructure Income Fund Limited (SEQI) 109.50p 3.30%
Sophos Group (SOPH) 447.00p 3.14%
B&M European Value Retail S.A. (DI) (BME) 392.70p 3.04%
Dairy Crest Group (DCG) 463.40p 2.98%
Greggs (GRG) 1,080.00p 2.66%
Lancashire Holdings Limited (LRE) 543.00p 2.45%

FTSE 250 - Fallers

TI Fluid Systems (TIFS) 199.20p -9.30%
Vesuvius (VSVS) 571.00p -8.27%
Contour Global (GLO) 161.90p -7.64%
Victrex plc (VCT) 2,802.00p -7.22%
Bodycote (BOY) 794.00p -6.81%
Games Workshop Group (GAW) 3,315.00p -6.75%
Synthomer (SYNT) 484.20p -6.53%
Renishaw (RSW) 4,104.00p -6.09%
Amigo Holdings (AMGO) 202.40p -5.93%
Man Group (EMG) 152.25p -5.64%