London close: Stocks drop after China lets yuan weaken to decade low

London stocks finished sharply lower on Monday amid escalating Sino-US trade tensions and speculation that the Prime Minister might be plotting calling snap elections after his majority in the House of Commons was cut to just one seat following a by-election in Brecon and Radnorshire.

The FTSE 100 was 2.47% weaker at 7,223.85, ending the session near its worst levels of the day, while the pound was flat against the US dollar at 1.2164 and 0.8% lower versus the euro at 1.0863 amid ongoing concerns about a no-deal Brexit and in anticipation of a possible snap election.

Market participants were also still reacting to news last Thursday that US President Trump was set to slap 10% tariffs on a further $300bn of Chinese exports. Also weighing on the mood was China's decision to allow the yuan to drop below seven to the dollar for the first time in 10 years.

The euro was also higher versus theyuan, by 2.33% to 7.8872.

Oanda analyst Craig Erlam said: "This level has been protected for a long time by the Chinese who fear the consequences of rapid capital outflows and have spent large amounts of reserves to keep the currency just below. It seems they're now prepared to relax this policy after the US ramped up the trade war last week.

"This unintended consequence of the new tariffs will undoubtedly infuriate Trump who has accused China of currency manipulation in the past, even though this is effectively a case of them manipulating it less as market pressures grow.

"The timing of the move will spark speculation that this is being done intentionally as a counter-measure against US tariffs, which could cool relations further and make negotiations that much tougher. We now await Trump's response which I imagine will come via Twitter shortly."

Reports that the Chinese government had called on state buyers to stop purchasing US agricultural goods also dented sentiment.

On home shores, data released earlier showed that activity in the UK's services sector unexpectedly picked up in July, rising to a nine-month high but remaining subdued.

The IHS/Markit CIPS services purchasing managers' business activity index rose to 51.4 from 50.2 in June, beating expectations of an unchanged reading and hitting its highest level in nine months.

The index was also above the 50 mark that separates contraction from expansion for the fourth consecutive month.

Meanwhile, the seasonally-adjusted all sector output index - which measures the services, manufacturing and construction sectors together - ticked up to 50.3 in July from 49.2 the month before, with manufacturing and construction both contracting.

Chris Williamson, chief business economist at IHS Markit, said: "An improved rate of growth in the service sector to the highest since October is welcome news after other PMI surveys showed the sharpest drop in manufacturing output for seven years and a construction sector that is mired in its deepest downturn for a decade.

"However, the overall picture is one of an economy that is only just managing to skirt recession, with July’s performance among the worst since the height of the global financial crisis in 2009. The latest PMI numbers are indicative of the economy stagnating at the start of the third quarter after indicating a 0.1% decline in the second quarter."

ING economist James Smith said: "Despite a modest improvement in the latest UK services PMI, the underlying details highlight the challenges facing the sector over the coming months. With business investment set to fall further as Brexit uncertainty mounts, activity in the sector is likely to remain under pressure for some time to come."

In equity markets, miners were a drag, with Antofagasta, Rio Tinto, Glencore and Anglo American all lower as copper and iron ore prices slumped. Iron ore company Ferrexpo also suffered heavy losses.

HSBC lost ground as it said chief executive John Flint had stepped down as the bank believed a change was needed "to meet the challenges" it faces. HSBC said Flint had resigned "by mutual agreement with the board" as it revealed first-half pre-tax profit rose 15.9% and a further buyback of $1bn (£823m).Pre-tax profits were $12.41bn, up from $10.71bn a year ago.

Hargreaves Lansdown slumped ahead of its full-year results on Thursday and BBA Aviation fell as it posted a small drop in interim pre-tax profit despite a solid performance in its signature division.

Marks and Spencer and Ocado saw their shares drop as they announced the completion of their joint venture arrangements. The companies also said that Melanie Smith, currently strategy director at M&S, has been appointed as chief executive officer of the new JV.

Just Eat was hugging the flat line as it and Dutch rival Takeaway.com agreed the terms of a merger that will create one of the largest food delivery companies in the world. The terms of the combination imply a value of 731p per Just Eat share.

Precious metals miner Fresnillo bucked the trend, with gold prices on the rise as investors opted for somewhere safe to park their cash.

Market Movers

FTSE 100 (UKX) 7,223.85 -2.47%
FTSE 250 (MCX) 18,871.42 -1.98%
techMARK (TASX) 3,766.23 -2.01%

FTSE 100 - Risers

Fresnillo (FRES) 640.00p 4.75%
NMC Health (NMC) 2,402.00p 0.00%
Croda International (CRDA) 4,662.00p -0.04%
Next (NXT) 5,904.00p -0.37%
Just Eat (JE.) 731.20p -0.71%
RSA Insurance Group (RSA) 536.00p -0.81%
International Consolidated Airlines Group SA (CDI) (IAG) 444.50p -0.83%
Evraz (EVR) 607.20p -0.91%
Associated British Foods (ABF) 2,393.00p -0.95%
BAE Systems (BA.) 538.80p -1.10%

FTSE 100 - Fallers

Hargreaves Lansdown (HL.) 1,903.50p -6.83%
Prudential (PRU) 1,512.00p -5.53%
JD Sports Fashion (JD.) 582.00p -5.24%
Taylor Wimpey (TW.) 147.40p -5.18%
Micro Focus International (MCRO) 1,650.20p -5.15%
Marks & Spencer Group (MKS) 190.65p -5.15%
Smith (DS) (SMDS) 320.90p -5.12%
Standard Chartered (STAN) 638.40p -5.08%
Melrose Industries (MRO) 170.50p -4.91%
Ocado Group (OCDO) 1,152.50p -4.63%

FTSE 250 - Risers

Vivo Energy (VVO) 118.80p 3.13%
Centamin (DI) (CEY) 133.45p 3.09%
Hochschild Mining (HOC) 208.20p 3.07%
Acacia Mining (ACA) 232.20p 3.01%
Amigo Holdings (AMGO) 150.00p 2.88%
Hill & Smith Holdings (HILS) 1,081.00p 1.99%
Pets at Home Group (PETS) 219.80p 1.67%
Polymetal International (POLY) 1,000.00p 1.54%
PPHE Hotel Group Ltd (PPH) 1,850.00p 1.10%
Daejan Holdings (DJAN) 5,510.00p 1.09%

FTSE 250 - Fallers

SIG (SHI) 118.90p -7.97%
Intu Properties (INTU) 40.01p -7.13%
Kainos Group (KNOS) 514.00p -6.55%
PayPoint (PAY) 930.00p -6.34%
Riverstone Energy Limited (RSE) 754.00p -6.22%
Premier Oil (PMO) 70.76p -5.38%
Electrocomponents (ECM) 563.60p -5.18%
Weir Group (WEIR) 1,305.00p -5.16%
Metro Bank (MTRO) 315.40p -5.11%
Future (FUTR) 1,056.00p -5.04%