London close: Stocks overcome rising yields and sterling rebound

London-listed stocks held onto gains on Tuesday, overcoming pressures from a rebound in the pound and rising bond yields as government borrowing figures, commodity prices and deal news provided support.

The FTSE 100 finished 0.4% higher at 7,425.40, despite the pound crawling out of the gutter after a seven-day slump to rise 0.3% against the dollar to 1.3983 and 0.1% versus the euro at 1.1433, respectively.

As government bonds continue to fall out of favour with investors, sending yields higher, analyst Jasper Lawler at London Capital Group wondered, "Will US 10-year Treasuries yielding 3% bring about an immediate collapse in equity markets? The answer from today was an unequivocal no. The tone across markets was cautious, but nothing akin to the drop in February when Treasury yields rose above 2.9%.

"Shorter-dated treasury yields have been rising in anticipation of further rate rises from the Fed and the end of stimulus from other central banks. Rising inflation expectations in the US are seeing longer-dated yields follow suit. That’s a good thing. Yields on longer-dated actually need to rise to keep the yield curve from inverting to avoid a recession."

Some traders pointed to news that the UK had its first budget surplus since 2002 as a boost to the pound and the FTSE 100. Figures from the Office for National Statistics revealed that public sector borrowing was £1.35bn last month, below the £3.25bn forecast and down £0.8bn compared to the same period a year ago.

Borrowing for the full year was £42.6bn, £2.6bn lower than the Office for Budget Responsibility's forecast and the lowest since 2007.

Howard Archer, chief economic advisor at the EY Item Club, said: "The Chancellor will be heartened by the better than expected public finances in 2017/18 but he is unlikely to make any significant decisions on fiscal policy ahead of the November budget. There have been some hints that he could lift public spending in the next budget, particularly on health.

"However, the chief secretary to the Treasury has recently stated that there will be no further rises in public spending unless the UK economy grows faster than official projections and boosts revenues"

Elsewhere, the latest survey from the Confederation of British Industry showed that manufacturing growth slowed over the three months to April, but remained well above average. The headline balance of total orders remained at +4, versus expectations for an increase to +6.

“Although manufacturing growth has slowed again this month, manufacturers continue to enjoy the fruits of stronger growth in Europe and the lower pound," said Rain Newton-Smith, the CBI's chief economist. "For manufacturing to continue its resurgence in the years ahead, it will be critical for trade to remain as frictionless as possible with the EU - our closest and biggest trading partner."

On the corporate front, Shire was the standout early gainer on the back of reports that it was close to thrashing out a deal with Japan's Takeda Pharmaceutical. The Dublin-based biotech put out a statement in early afternoon that it was considering a new takeover proposal that it had received on Tuesday, which Takeda confirmed, though neither said at what price.

London Stock Exchange was in the black after it reported first-quarter trading broadly in line with expectations before an annual shareholder meeting that will seek to draw a line under the group’s recent troubles.

BP and Shell were higher as oil prices remained elevated and analysts looked forward to another rise in quarterly earnings expected from global oil players, while copper prices bouncing off their lows lifted miners such as Antofagasta and Glencore.

On oil, analyst Michael Hewson at CMC Markets said: "Crude oil prices continue to be a cause for concern hitting a fresh three year high above $75, despite comments from Iranian oil minister Bijan Zanganeh that there would be no need to extend the current pact of output freezes beyond this year.

"It is this move higher in crude oil prices, along with the rise in demand, that is helping fuel the recent rise in yields as well as the positive tone for equity markets, however if it continues too far we could start to see it act as a drag on equity markets, if prices along with yields start to move even higher."

Meggitt ticked up after announcing the sale of photo etching group Precision Micro for £22.5m in cash, while defence technology group QinetiQ rallied after saying it has agreed to buy German airborne training services provider EIS Aircraft Operations for €70m.

Polymetal gained after buying the 50% of the Prognoz silver project in Russia that it didn't already own from Garden Ring Capital for $140m in shares.

On the downside, bookies William Hill and Paddy Power Betfair were under pressure following a report that a move to cut the maximum stake on gambling machines to £2 is set to be announced within weeks. According to The Times, Chancellor Philip Hammond is understood to have accepted expert recommendations that stakes for fixed-odd betting terminals should be reduced to £2. Ladbrokes-Coral owner GVC Holdings and Rank Group also lost ground.

Melrose fell after revealing that GKN's profit and cash generation were below market expectations in the first three months of the year prior to the completion of the takeover earlier this month.

AstraZeneca was under the cosh after saying that a third-line cancer combination study had missed its primary endpoint.

Anglo American slipped after cautioning that its earnings this year will be hit by around $300m to $400m due to problems at its Brazilian iron ore unit. Separately, the company also reported a 4% rise in total production for the first quarter.

Wealth manager St James's Place retreated as it posted a drop in first-quarter assets under management, but beat expectations with net inflows of £2.60bn versus consensus of £2.30bn.

BAE Systems was boosted by an upgrade to 'buy' at Berenberg, but Victrex was hit by a downgrade to 'hold' by the same outfit.

Card Factory, Dixons Carphone and Superdry were all knocked lower by downgrades to 'hold' at Liberum, while shipbroker Clarkson was cut to 'neutral' by JPMorgan Cazenove.

Market Movers

FTSE 100 (UKX) 7,425.40 0.36%
FTSE 250 (MCX) 20,195.31 -0.60%
techMARK (TASX) 3,433.87 -0.33%

FTSE 100 - Risers

Shire Plc (SHP) 3,930.00p 3.42%
Royal Mail (RMG) 581.80p 2.86%
BP (BP.) 533.60p 2.30%
Antofagasta (ANTO) 977.40p 2.24%
BAE Systems (BA.) 618.00p 2.12%
London Stock Exchange Group (LSE) 4,300.00p 2.02%
Old Mutual (OML) 253.30p 1.65%
Evraz (EVR) 413.20p 1.62%
Glencore (GLEN) 385.90p 1.47%
Unilever (ULVR) 3,920.00p 1.40%

FTSE 100 - Fallers

Paddy Power Betfair (PPB) 6,965.00p -4.85%
Mediclinic International (MDC) 671.80p -2.13%
Kingfisher (KGF) 303.00p -2.07%
St James's Place (STJ) 1,123.00p -2.05%
GKN (GKN) 451.40p -1.85%
Halma (HLMA) 1,218.00p -1.69%
Barratt Developments (BDEV) 553.60p -1.63%
CRH (CRH) 2,487.00p -1.62%
Anglo American (AAL) 1,747.60p -1.58%
Marks & Spencer Group (MKS) 279.60p -1.55%

FTSE 250 - Risers

Purecircle Limited (DI) (PURE) 392.00p 4.53%
QinetiQ Group (QQ.) 231.70p 2.89%
Sirius Minerals (SXX) 29.50p 2.64%
Assura (AGR) 59.50p 2.59%
Charter Court Financial Services Group (CCFS) 323.00p 2.38%
Ferrexpo (FXPO) 241.00p 2.34%
Tullow Oil (TLW) 238.70p 2.27%
Syncona Limited NPV (SYNC) 201.50p 2.08%
IG Group Holdings (IGG) 811.00p 1.88%
Go-Ahead Group (GOG) 1,964.00p 1.71%

FTSE 250 - Fallers

William Hill (WMH) 293.40p -12.70%
GVC Holdings (GVC) 912.50p -6.02%
Superdry (SDRY) 1,505.00p -5.35%
Spire Healthcare Group (SPI) 229.60p -3.93%
Dunelm Group (DNLM) 555.50p -3.89%
Thomas Cook Group (TCG) 118.10p -3.83%
Card Factory (CARD) 231.80p -3.58%
Renishaw (RSW) 4,874.00p -3.49%
Dixons Carphone (DC.) 201.00p -3.46%
Victrex plc (VCT) 2,640.00p -3.37%