London close: Shares edge higher despite analysts' caution

London edged up on Wednesday, with sentiment underpinned by a more dovish stance from Federal Reserve chairman Jerome Powell the day before, even as investors digested the latest reading on activity in the UK services sector and analysts weighed in with cautious views on the outlook for shares.

Analysts at Barclays Research sounded a cautious note, although while they conceded that "many negatives remain", they added that they were likely now priced-in, revising their recommendation on the FTSE 100 higher to 'overweight' versus the Eurozone (and hedging for FX), explaining to clients that they were now 'long' exporters via the FTSE 100 against domestic plays (FTSE 250).

As regards recession fears in the States, Barclays said "it is too early to position for a downturn as Fed is not restrictive yet and has room to cut rates, if needed," although the US-China standoff was likely to be "sustained".

And on Brexit, they believed that "the conservative leadership battle could lead to a harder Brexit stance even though Parliamentary arithmetic is unchanged. This may ultimately lead to a second referendum."

The FTSE 100 was up 0.01% at 7,220.22, while the pound was edging lower by 0.01% against the US dollar at 1.26990 and trading up by 0.16% versus the euro to 1.1302 after data revealed that activity in the UK services sector picked up more than expected in May but remained subdued amid Brexit uncertainty.

Meanwhile, the FTSE 250 added 0.34% to 19,072.17.

The Markit/CIPS services purchasing managers' business activity index rose to 51.0 last month from 50.4 in April, beating expectations for a reading of 50.6 and coming in above the 50.0 mark that separates contraction from expansion for the second month running.

The recovery in output was underpinned by a modest rebound in new business and the fastest upturn in staffing levels since November 2018. In addition, business optimism improved in May, with service providers indicating that growth expectations were at their strongest levels since last September.

Chris Williamson, chief business economist at IHS Markit, said that while activity gained a little momentum in May, with growth reaching a three-month high, the pace of expansion remained "disappointingly muted" and failed to offset a marked deterioration in manufacturing performance and a fall in output of the construction industry during the month.

"As a result, the PMI surveys collectively indicated that the UK economy remained close to stagnation midway through the second quarter as a result, registering one of the weakest performances since 2012," he said.

David Cheetham, chief market analyst at XTB, said: "After the March reading fell below 50 there was a growing concern that the most important of the three sector surveys would signal further contraction but it seems to be just about holding up ok for the time being.

"Having said that, this is far from a picture of real strength and while a modest increase in business activity and new work rising for the first time this year is positive, most the signs continue to point to the UK economy being close to stagnation."

More broadly, the mood was boosted by a solid performance in the US overnight, with the Dow closing up more than 500 points in what turned out to be its second-best trading session of the year, after Fed chairman Powell signalled that the US central bank stands ready to ease monetary policy to protect the economy from the impact of trade wars.

Despite the positive tone, Neil Wilson, chief market analyst at Markets.com, said he'd be cautious about any rally like this "when it seems to be on nothing but fumes".

"There’s a lot of push and pull - trade war and recession risks on the one hand, and hopes for a dovish central bank on the other. But those betting the farm on the Fed cutting rates this year may be left with a small harvest. I still don’t see the Fed ready to cut."

In UK equity markets, software and information technology business Micro Focus racked up strong gains after US peer Salesforce.com posted-than-expected first-quarter results on Tuesday and lifted its financial outlook for fiscal year 2020.

Card Factory gained after the retailer maintained full-year profit expectations as it reported a positive start to the year, with first quarter sales up 6.4%, despite Britons spending less due to Brexit worries.

Doorstep lender Provident Financial surged after smaller rival Non-Standard Finance said it had abandoned its £1.3bn hostile bid for the company. NSF said in a statement late on Tuesday that the offer would lapse after it learned that the Prudential Regulation Authority had concluded it would not meet minimum regulatory capital levels.

IMI was boosted by an upgrade to 'buy' at Goldman Sachs, while British Airways and Iberia parent International Consolidated Airlines Group flew higher after an initiation at 'overweight' by JPMorgan Cazenove.

On the downside, Hargreaves Lansdown was under the cosh for the second day in a row as it got caught up in the fallout from the suspension of trading of Neil Woodford's flagship Equity Income Fund.

Market Movers

FTSE 100 (UKX) 7,220.22 0.08%
FTSE 250 (MCX) 19,072.17 0.34%
techMARK (TASX) 3,533.24 0.45%

FTSE 100 - Risers

Sage Group (SGE) 757.00p 3.25%
Associated British Foods (ABF) 2,575.00p 2.55%
United Utilities Group (UU.) 807.20p 2.54%
Micro Focus International (MCRO) 1,905.40p 2.51%
Ocado Group (OCDO) 1,135.00p 2.43%
National Grid (NG.) 800.70p 2.26%
Barratt Developments (BDEV) 565.80p 2.13%
easyJet (EZJ) 903.60p 2.10%
Coca-Cola HBC AG (CDI) (CCH) 2,899.00p 2.04%
DCC (DCC) 6,800.00p 2.01%

FTSE 100 - Fallers

Hargreaves Lansdown (HL.) 1,981.50p -6.80%
NMC Health (NMC) 2,260.00p -4.64%
Johnson Matthey (JMAT) 3,135.00p -1.91%
Rio Tinto (RIO) 4,521.00p -1.85%
Royal Bank of Scotland Group (RBS) 214.40p -1.83%
Aviva (AV.) 410.60p -1.72%
Just Eat (JE.) 597.60p -1.52%
BP (BP.) 537.60p -1.29%
Schroders (SDR) 2,901.00p -1.09%
Barclays (BARC) 152.50p -1.04%

FTSE 250 - Risers

Provident Financial (PFG) 517.80p 16.10%
Aston Martin Lagonda Global Holdings (AML) 1,017.00p 5.42%
888 Holdings (888) 150.00p 5.26%
Go-Ahead Group (GOG) 1,883.00p 5.25%
Aveva Group (AVV) 3,794.00p 4.98%
NewRiver REIT (NRR) 204.50p 4.87%
Royal Mail (RMG) 208.00p 4.68%
Metro Bank (MTRO) 677.50p 4.36%
Stagecoach Group (SGC) 127.70p 3.40%
Indivior (INDV) 46.09p 3.20%

FTSE 250 - Fallers

Entertainment One Limited (ETO) 350.00p -16.67%
Woodford Patient Capital Trust (WPCT) 66.00p -6.90%
IP Group (IPO) 77.70p -5.90%
Premier Oil (PMO) 73.42p -5.82%
Bakkavor Group (BAKK) 124.60p -5.08%
Kier Group (KIE) 153.80p -4.65%
Saga (SAGA) 42.54p -4.28%
HICL Infrastructure (HICL) 158.20p -3.06%
Wood Group (John) (WG.) 401.00p -2.98%
Tullow Oil (TLW) 199.15p -2.62%