London midday: Stocks extend gains after Sino-US trade agreement

London stocks had extended gains by midday on Monday as investors shrugged off the release of disappointing UK PMIs, focusing instead on news of a ‘phase one’ trade deal between the US and China.

The FTSE 100 was 2.1% higher at 7,507.00, while sterling remained underpinned by post-election Brexit hopes, trading up 0.3% against the dollar at 1.3367 and flat versus the euro at 1.1995.

Speaking to CBS’s Face the Nation, US Trade Representative Robert Lighthizer said on Sunday that a deal between the two nations was "totally done" and will nearly double US exports to China over the next two years.

"A Christmas truce for now is support risk sentiment but with a phase one deal now effectively priced in, US markets could struggle to make more meaningful gains," said Neil Wilson, chief market analyst at Markets.com.

Analysts at Rabobank warned investors to curb their "yuletide enthusiasm".

"We believe the agreement…will ultimately prove to be a purely temporary hiatus in an otherwise long-run structural conflict between the US and China. This, we expect as the latter struggles to move up the value chain to underpin future growth now that its comparative advantage of cheap labour has been much eroded (this growth being essential if future Tiananmen Squares are to be avoided) while the former attempts to retain its status as the dominant world superpower.

"A further challenge to the deal is just how practical the enforcement mechanism will prove, with the ‘rules of engagement’ very much wide open to interpretation and disagreement, it would seem."

Encouraging Chinese data also helped to boost the mood. Retail sales rose 8% in November year-on-year versus a 7.2% increase the month before and expectations of 7.6% growth. Industrial output increased 6.2% on the year compared to 5% growth in October and expectations of a 4.7% jump.

On home shores, figures released earlier showed that UK business output fell for the second month running in December as manufacturing production suffered its heaviest fall since the financial crisis and the dominant services sector dipped.

The preliminary IHS Markit/CIPS purchasing managers' index fell to 48.5 from 49.3 - the lowest for more than three years. A score below 50 signals contraction, while a reading above indicates expansion.

New orders fell for the fifth month in a row and firms cut jobs as they reduced capacity in line with weaker demand. Manufacturing output fell at its fastest since early 2009 when the UK was in recession after the near-meltdown of the financial sector.

The service sector, which makes up about three-quarters of the UK economy, registered a slight drop in activity in December - the first time services had declined two months in a row since 2009.

Respondents blamed political uncertainty, worries over Brexit and the weak global economy for the gloomy picture. The survey follows official figures that showed the UK economy stagnated in October. IHS Markit said its results suggested the economy may have shrunk in the final quarter of 2019.

Chris Williamson, IHS Markit's chief business economist, said: "December’s PMI survey data sadly lacked festive cheer, indicating that the economy contracted for the third time in the past four months. The latest decline was the second-largest recorded over the past decade, and increases the likelihood that the economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified in the lead up to the general election."

In equity markets, miners and banks rallied.

British American Tobacco was sitting pretty at the top of the FTSE 100 after a double upgrade to ‘buy’ at Bank of America Merrill Lynch while Glencore was given an added boost by an upgrade to ‘buy’ at Societe Generale. RBS advanced after an upgrade to ‘overweight’ at Morgan Stanley.

BT rallied after agreeing to sell its Spanish business to funds managed by Portobello Capital for an undisclosed sum.

Sports Direct surged as it posted a rise in half-year profit and revenue and said it expects earnings to rise this year, although it also warned of more House of Fraser store closures.

On the downside, education publisher Pearson was on the back foot as Berenberg slashed its price target on the stock and said 2020 could be another testing year for the company.

Advertising giant WPP was under the cosh after Japanese peer Dentsu Inc downgraded its full-year net profit forecast.

Cineworld fell after saying it had agreed to buy Canadian cinema chain Cineplex for $2.1bn, while Virgin Money was hit by downgrades at HSBC and Barclays.

Tullow Oil gushed lower after a downgrade to ‘reduce’ at HSBC and Mitchells & Butlers was in the red after a downgrade to ‘hold’ by the same outfit.

Market Movers

FTSE 100 (UKX) 7,507.00 2.09%
FTSE 250 (MCX) 21,716.48 0.97%
techMARK (TASX) 4,146.44 1.31%

FTSE 100 - Risers

British American Tobacco (BATS) 3,164.00p 4.11%
Glencore (GLEN) 234.25p 3.74%
Experian (EXPN) 2,531.00p 3.43%
Bunzl (BNZL) 2,130.00p 3.35%
Auto Trader Group (AUTO) 592.80p 3.31%
Barclays (BARC) 188.52p 3.31%
Hargreaves Lansdown (HL.) 2,013.00p 3.07%
AstraZeneca (AZN) 7,437.00p 3.05%
Rentokil Initial (RTO) 439.50p 3.05%
Relx plc (REL) 1,859.50p 3.05%

FTSE 100 - Fallers

Pearson (PSON) 652.20p -1.18%
Taylor Wimpey (TW.) 199.35p -0.15%
Associated British Foods (ABF) 2,598.00p -0.04%
Barratt Developments (BDEV) 766.20p 0.16%
National Grid (NG.) 930.00p 0.20%
Severn Trent (SVT) 2,428.00p 0.33%
WPP (WPP) 1,026.50p 0.34%
Just Eat (JE.) 793.80p 0.48%
CRH (CRH) 3,000.00p 0.50%
Whitbread (WTB) 4,999.00p 0.77%

FTSE 250 - Risers

Sports Direct International (SPD) 443.60p 23.22%
Royal Mail (RMG) 249.40p 5.45%
Henderson Smaller Companies Inv Trust (HSL) 1,086.00p 4.83%
Moneysupermarket.com Group (MONY) 323.60p 4.49%
NewRiver REIT (NRR) 203.50p 4.36%
Wood Group (John) (WG.) 388.50p 4.10%
Temple Bar Inv Trust (TMPL) 1,482.00p 4.07%
Capita (CPI) 182.40p 3.93%
Computacenter (CCC) 1,658.00p 3.82%
Softcat (SCT) 1,154.00p 3.78%

FTSE 250 - Fallers

Tullow Oil (TLW) 61.60p -9.14%
Mitchells & Butlers (MAB) 438.00p -6.01%
Virgin Money UK (VMUK) 207.70p -4.11%
Future (FUTR) 1,332.00p -2.20%
Fisher (James) & Sons (FSJ) 2,055.00p -1.91%
OneSavings Bank (OSB) 437.40p -1.71%
PZ Cussons (PZC) 193.60p -1.53%
Premier Oil (PMO) 93.70p -1.41%
Cineworld Group (CINE) 203.70p -1.16%
Genus (GNS) 3,210.00p -1.11%