London close: Shares hit by rising yields, sterling bounce

London stocks were knocked back into the middle of last week on Thursday as US Treasury yields spiked on the prospect of faster interest rate hikes and a pound that gained on the back of fresh Brexit rumours.

The FTSE 100 closed down almost 92 points or 1.2% to 7,418.34, erasing all the gains in the past five trading days. The pound rallied 0.6% against the dollar to 1.3014 and 0.3% versus the euro to 1.1309. The dollar fell for the first time in six days.

In early trading, markets across Europe and Asia were dented as US Treasury yields rose to levels not seen since 2011.

"The Treasury yield is commonly seen as the risk-free rate for investing, so an increase tends to be negative for other asset classes including shares," explained Russ Mould, head of investment at AJ Bell.

The surge in yields followed strong US jobs and services data overnight and some hawkish comments from Federal Reserve chair Jerome Powell, who indicated in a speech that the Fed remains "a long way from neutral at this point".

US 10-year yields pushed through the highs this year of 3.12% to push up to within touching distance of 3.25% and the highest levels since 2008, which came on the back of the non-manufacturing ISM report for September that saw economic activity to kick on to its best reading since 1997.

"Powell’s comments that he was very happy with the US economy, and that he could see the current expansion continue for some time, appears to raise the prospect that not only could we see another rate rise in December, but we could well see at least three more in 2019," said market analyst Michael Hewson at CMC Markets.

He added that the Fed chief's comments appearing to suggest that rates "could go up by more than the 1% that is currently starting to be priced by the markets by the end of 2019".

Lifting sterling, said Joshua Mahony at IG, was reports of Irish support for the Theresa May’s plan for the UK to remain within the customs union. "However, with the EU previously staunch opponents to the separation of any membership benefits, there is a good chance that hopes for the UK to remain within the customs union are seemingly unrealistic."

British proposals for avoiding extensive border checks in Ireland after Brexit were "a step in the right direction", an EU source told Reuters, that would "make finding a compromise possible".

On home soil there was data from the auto industry showing a sharp drop in car sales last month, with 338,834 vehicles registered in September marking a decline of 20.5% on the same period last year, with new stricter emissions standards being the most prominent of several factors taking the blame for the slump. Since 1 September all cars sold in the EU now have to undergo a new test on emissions and carmakers are seemingly struggling to cope

This has come at a bad time for manufacturers, noted Cheetham, with Nissan, which employs 7,000 people at its Sunderland plant, also on Thursday warning of the effects of a no-deal Brexit.

TED TANKS, BANKS BOUNCE

As US Treasury yields gained, UK gilt yields also moved higher, which lifted demand for banks. Shares in Barclays, HSBC, Lloyds and RBS were all higher.

"An environment of rising yields helps banks as it increases their chances of making more money on loans," explained David Madden at CMC Markets. "It appears the rising yields in the US have dragged the UK yields higher too, and uncertainty surrounding Brexit could weigh on UK gilts."

On the opposite side of the play, bond proxies such as Severn Trent and Reckitt Benckiser retreated as they became relatively less attractive to those hunting for yield.

In other UK corporate news, Ted Baker tumbled as it posted a rise in interim revenue thanks to a solid performance from its online segment but a 3.2% drop in reported pre-tax profit as it incurred exceptional costs of £600,000 related to debtor balances owed by House of Fraser which are not expected to be recovered following its entry into administration in August.

Budget airline EasyJet, which said last week that full-year profit would be at the upper end of its guidance, flew lower after posting a 14.2% rise in passenger numbers for September but a drop in the load factor.

Online grocery specialist Ocado was bottom of the FTSE 100 pile after a block of 2.8m shares was traded, equivalent to about 0.4% of the total in issue. The off-book trade was priced at 903.2p, a 1.3% discount to the previous day's close.

Electronics and industrial components distributor Electrocomponents rallied to a five-week high as it said it plans to invest more in the Asia Pacific region to "drive faster longer-term growth" after a half year where group profits are expected to grow 27%.

Canary Wharf owners Brookfield is preparing a bid for shopping centre owner Intu Properties, Estates Gazette reported just after Thursday's trading finished. It is understood that no formal offer has yet been made.

Smiths Group shares reached parity by the close after announcing the acquisition of industrial tube maker United Flexible from Arlington Capital Partners for an enterprise value of $345m.

Shares in BTG advanced to their highest level since early June as the healthcare company upgraded its full-year sales expectations thanks to strong products sales in the first half for its interventional medicine business.

CYBG and Virgin Money rose after they received approval by the FCA and PRA for their £1.7bn merger. Dealing in Virgin Money will cease on 12 October and completion is expected three days later.

In broker note action, Primark owner AB Foods was upgraded to ‘buy’ at Berenberg and Ferrexpo was boosted to ‘overweight’ at Barclays. Tullow Oil was upgraded to ‘buy’ at Citi and Renishaw was lifted to ‘hold’ by Stifel.

Spire Healthcare was downgraded to ‘underperform’ at Jefferies and Spirent was cut to ‘hold’ by Stifel.

British American Tobacco, British Land, DS Smith, Intertek, Kingfisher, Smith & Nephew, Taylor Wimpey, WPP, 888 Holdings, AG Barr, Balfour Beatty, Bodycote, Daejan Holdings, Hastings, Hays, Hunting, James Fisher & Sons, Rightmove, SIG, Synthomer, TP ICAP and Travis Perkins were among the companies whose stock went ex-dividend.

Market Movers

FTSE 100 (UKX) 7,418.34 -1.22%
FTSE 250 (MCX) 20,103.30 -0.97%
techMARK (TASX) 3,478.72 -1.07%

FTSE 100 - Risers

Legal & General Group (LGEN) 259.60p 1.21%
Direct Line Insurance Group (DLG) 325.10p 1.09%
Barclays (BARC) 174.30p 1.03%
Lloyds Banking Group (LLOY) 58.88p 0.84%
BHP Billiton (BLT) 1,702.00p 0.59%
RSA Insurance Group (RSA) 583.00p 0.55%
Aviva (AV.) 480.40p 0.46%
Schroders (SDR) 3,079.00p 0.46%
HSBC Holdings (HSBA) 671.00p 0.28%
Barratt Developments (BDEV) 557.60p 0.25%

FTSE 100 - Fallers

Ocado Group (OCDO) 843.80p -7.78%
Smith (DS) (SMDS) 460.90p -6.21%
Smurfit Kappa Group (SKG) 2,802.50p -5.96%
Burberry Group (BRBY) 1,913.00p -5.67%
Intertek Group (ITRK) 4,750.00p -5.38%
British Land Company (BLND) 576.00p -5.29%
Mondi (MNDI) 1,998.00p -4.58%
Croda International (CRDA) 5,076.00p -4.55%
Relx plc (REL) 1,553.50p -4.28%
Reckitt Benckiser Group (RB.) 6,855.00p -4.19%

FTSE 250 - Risers

Just Group (JUST) 82.15p 9.68%
Ferrexpo (FXPO) 223.00p 6.39%
BTG (BTG) 588.00p 5.09%
Electrocomponents (ECM) 749.40p 4.29%
Virgin Money Holdings (UK) (VM.) 384.60p 4.20%
Indivior (INDV) 206.40p 3.90%
Greencore Group (GNC) 198.60p 3.28%
Euromoney Institutional Investor (ERM) 1,382.00p 3.13%
CYBG (CYBG) 318.40p 2.84%
Bank of Georgia Group (BGEO) 1,736.40p 2.64%

FTSE 250 - Fallers

Ted Baker (TED) 2,076.00p -10.05%
BBA Aviation (BBA) 284.40p -7.30%
Hays (HAS) 191.20p -6.37%
Spire Healthcare Group (SPI) 137.50p -6.34%
Inchcape (INCH) 630.50p -5.47%
Syncona Limited NPV (SYNC) 286.00p -5.45%
Hammerson (HMSO) 431.00p -5.40%
Hunting (HTG) 770.00p -4.70%
Genus (GNS) 2,362.00p -4.29%
JPMorgan Emerging Markets Inv Trust (JMG) 821.00p -4.20%