London close: Stocks slip amid Italian debt tensions
London stocks rubbed out the worst of their earlier losses on Tuesday as the strong oil price helped offset renewed tensions around Italy's debt pile and doubts about new Brexit proposals.
The FTSE 100 dropped 21 points or 0.3% to 7,474.55 despite a 0.4% fall in the pound below $1.30, its lowest in almost three weeks. Sterling was also down 0.3% against the euro to 1.1234.
Sterling was dropping from an overnight spike on the back of reports that the UK will make a major new offer to unblock talks with the European Union over the crucial issue of the Irish border. Prime Minister Theresa May confirmed on Tuesday that she was willing to limit Britain’s ability to strike free-trade deals with other countries after Brexit in return for remaining tied to European customs rules on goods after the transition period ends in December 2020.
However, traders expressed doubt about whether the EU would agree to this or that Northern Ireland's DUP, which is propping up May's government, will also agree. Indeed, DUP leader Arlene Foster said Northern Ireland must leave on the same terms as the rest of Britain.
Former foreign secretary Boris Johnson told delegates in a packed fringe event at the Tory party's conference to "chuck Chequers" and instead "deliver what our people voted for, to back Theresa May in the best way possible, by softly, quietly and sensibly backing her original plan", putting his faith behind the PM's Lancaster House plan from January 2017.
Stocks markets around Europe were very much on edge following Italy's proposal last week for a public spending deficit of 2.4%. Italian government bond yields jumped and German and US were sent lower as money flowed towards safety.
Sparking this were comments from Claudio Borghi, the Five Star League’s economic chief, who mused that “most of Italy's problems would be solved” if it returned to its own currency. He later stressed that leaving the euro is not part of the government’s plans.
"Point made, and damage done, particularly to bank shares as typical anxieties on BTP-laden Italian lenders fan out to the wider European sector," said Ken Odeluga, market analyst at City Index.
Comments from President Trump and reports that US defence secretary James Mattis was cancelling his trip to China later this month, saw a mixed start on Wall Street. The President also claim it is "too early" for trade talks with China.
Michael Hewson, chief market analyst at CMC Markets UK: "The downside, if there is one, is that the apparent resolution of one problem usually opens up another front, and President Trump went on to aim a few barbs towards the EU, as well as China, at his press conference yesterday, with no signs of a resolution on the China question."
Closer to home, UK builders were in focus with mixed construction PMI and house price data.
The IHS Markit/CIPS UK construction purchasing managers' index for September showed another loss in momentum. The PMI fell to 52.1 from 52.9, in what was the weakest rise month for construction output for six months, though new orders showed the biggest rise since December 2016.
Meanwhile, UK house prices have remained stable compared to last year, according to research by mortgage lender Nationwide, with home prices continuing to rise at a 2.0% pace year-on-year in September.
Among individual shares, most banks and financials were in the red with eyes on Italy, while defensives were in the green.
Ferguson fell despite proposing to 're-base' its dividend upwards 10% and lift its final payout 21% ahead of last year, as the plumbing products supplier highlighted its "excellent cash generation and a strong balance sheet". However, tough trading conditions continued in the UK and some investors bemoaned a lack of share buyback, while others no-doubt took some profits from shares that having gained 27% over the past 12 months.
Pearson was down amid research from the UK's Office of National Statistics stating that the additional earnings premium from taking a university degree has fallen from 41% in 2004 to 24% in 2016 as the number of graduates has surged. "What hasn't been talked about much on the Pearson bear case on Higher Education is the threat to enrollment numbers as the advantage of a degree diminishes due to increased supply but there are some signs this may be happening - in the US, College enrollment has fallen from a peak of 21m in autumn 2010 to an expected 19.9m in 2018," said broker Liberum as it reiterated its 'sell' recommendation.
Royal Mail was down for the second day after a shock profit warning the previous afternoon, slashing its full year profit guidance on the back of lower letter volumes, a dip in parcel profits and slower progress with cost cutting since resolving industrial action in March. Productivity had improved just 0.1% in the first half of the year, leaving analysts at RBC Capital Markets and JPMorgan Cazenove incredulous that it can hit targets for 8-9% over the next two years, leading the latter to downgraded its rating.
Standard Chartered was another continuing the decline begun the day before when Bloomberg reported that the Asia-focused bank could be fined $1.5bn by Us authorities over Iran sanctions, 50% larger than the previous estimate of $1bn.
Likewise, Sports Direct was also moving slightly lower on news that emerged late the previous day, when the retail put out a short statement after the close that it has dismissed the former directors and senior managers of its new House of Fraser acquisition.
Following its own profit warning at the start of the week, Ryanair put out September traffic figures on Tuesday showing an 11%, or up 6% excluding Laudamotion, impacted by strikes as 400 flights were cancelled. Load factor was unchanged at 97%.
EasyJet shares were down despite agreeing a partnership with Virgin Atlantic for connections at London Gatwick. Meanwhile, analysts were still reacting to rival Ryanair's profit warning the day before, with Berenberg cutting its target price on easyJet to 1,215p from 1,310p.
The oil sector was among the leading lights as Brent crude topped $85 a barrel, giving a boost to several FTSE 350 names, including BP, Shell and Premier Oil.
Shell also gave the green light to proceed with a major liquified natural gas (LNG) project in Canada where it has a a 40% working interest. Construction will start immediately with first LNG expected before the middle of the next decade, the company said, adding that it forecast an integrated internal rate of return of around 13%, with “significant, long life and resilient” cash flow.
Rising even higher was Energean Oil & Gas as it appointed 30-year oil and gas industry veteran Iman Hill as its new chief operating officer.
Meggitt was boosted by winning a $323m new contract with the US Defense Logistics Agency to supply wheels, brakes and related spare parts for the F-16 Falcon jet and H-60 Blackhawk and CH-47 Chinook choppers.
Lower US yields, on the back of Italian government debt worries, were good news for utilities, sending defensive stocks including SSE and United Utilities to the top of the leaderboard.
In broker action, CYBG was given a 'sell' rating and a 311p price target from UBS, which also upgraded Saga to ‘buy’ with a 150p target price at UBS, thanks to “supportive trends and recovering sentiment”. Citi upgraded Mediclinic to 'buy' from 'neutral' with a 550p target price, while Jefferies downgraded Unilever to 'hold' from 'buy'.
Market Movers
FTSE 100 (UKX) 7,474.55 -0.28%
FTSE 250 (MCX) 20,264.86 -0.67%
techMARK (TASX) 3,496.41 -0.23%
FTSE 100 - Risers
United Utilities Group (UU.) 719.60p 2.10%
Randgold Resources Ltd. (RRS) 5,518.00p 1.85%
Evraz (EVR) 578.00p 1.72%
BHP Billiton (BLT) 1,698.40p 1.68%
SSE (SSE) 1,145.00p 1.55%
British American Tobacco (BATS) 3,557.00p 1.54%
Imperial Brands (IMB) 2,680.00p 1.52%
Anglo American (AAL) 1,741.20p 1.49%
Fresnillo (FRES) 820.00p 1.49%
Glencore (GLEN) 336.25p 1.30%
FTSE 100 - Fallers
Royal Mail (RMG) 358.60p -8.38%
Ferguson (FERG) 6,083.00p -6.83%
Pearson (PSON) 854.00p -3.87%
Johnson Matthey (JMAT) 3,476.00p -3.34%
Ashtead Group (AHT) 2,358.00p -3.28%
Informa (INF) 736.40p -2.64%
Just Eat (JE.) 652.00p -2.48%
Melrose Industries (MRO) 195.60p -2.03%
Lloyds Banking Group (LLOY) 57.47p -1.83%
Prudential (PRU) 1,713.50p -1.81%
FTSE 250 - Risers
Saga (SAGA) 136.20p 4.37%
Ferrexpo (FXPO) 206.00p 2.95%
Premier Oil (PMO) 143.60p 2.50%
Mediclinic International (MDC) 441.40p 2.18%
Avast (AVST) 296.20p 1.79%
Polymetal International (POLY) 614.80p 1.75%
Syncona Limited NPV (SYNC) 295.00p 1.72%
Centamin (DI) (CEY) 105.60p 1.64%
Dunelm Group (DNLM) 544.00p 1.59%
Nex Group (NXG) 1,025.00p 1.59%
FTSE 250 - Fallers
Just Group (JUST) 75.80p -5.60%
AA (AA.) 94.12p -5.58%
Fisher (James) & Sons (FSJ) 1,810.00p -5.53%
Thomas Cook Group (TCG) 55.20p -5.24%
Equiniti Group (EQN) 247.50p -4.07%
Dixons Carphone (DC.) 160.80p -4.06%
Wizz Air Holdings (WIZZ) 2,544.00p -4.00%
IWG (IWG) 236.70p -3.78%
OneSavings Bank (OSB) 394.60p -3.76%
Ascential (ASCL) 408.80p -3.68%