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FTSE rallies, pound sinks on post-Brexit spending plans

29 June 2020

(Update) A weak pound, a positive open on Wall Street and a surprise disposal by BP help push the FTSE 100 into an unexpected bounce.

Update (17:00): The internationally-focused FTSE 100 rallied more than 1% after sterling dropped on concerns around Brexit talks and how the UK government will pay for its large scale infrastructure programme. 

Dollar earners on the main index, where three quarters of profits are earned overseas, received a boost. Education publisher Pearson (PSON) led the way, up 4.3% or 24p to 586p as the pound dropped 0.5% to $1.227 against the dollar and 0.7% against the euro at 91.5p.

Spreadex analyst Connor Campbell said ‘pessimism about the UK’s trade talks with the EU appeared to put a bullet in the pound’ as prime minister Boris Johnson said he would be happy to sign an ‘Australian-style’ deal with the EU.

As pressure mounts on the UK to draw up a deal before the end of the year when the country exits the EU, Downing Street confirmed Johnson would ‘be ready to leave the transition period on Australia terms if agreement could not be reached’.

The Australians do not have a full trade deal with the EU and most trade between the blocs follows World Trade Organisation rules. 

Campbell said the Australian-style deal is ‘one that is so sparse it is ‘no deal’ in all but name’.

Further stress was heaped on the pound as markets expressed concern about how the UK will pay for the huge infrastructure spending it has planned to kickstart the economy after Covid-19. 

Johnson was expected to announce a plan to fast-track the building of hospitals, schools, housing, roads, and railways tomorrow.

Jane Foley, head of FX strategy at Rabobank, said ‘the market is not a little bit more concerned about funding’ as the UK has a ‘current account deficit’. 

US hope, BP disposal

The FTSE advanced after a positive start on Wall Street saw the S&P 500 gain 0.8% to 3032.78 on hopes the coronavirus pandemic could be contained despite weekend news that global infections had passed 10 million and deaths exceeded 500,000 .

‘The market is taking a tremendous amount of comfort in the fact that as long as we contain the virus, the economy is going to recover every fast and you’re going to see cyclical stocks start to rally again,’ Thomas Hayes, managing director of Great Hill Capital in New York told Reuters.

Energy stocks provided most of the index’s upward momentum with Brent crude firming 0.2% to $41.23 a barrel.

BP (BP) gained 3.5% as it surprised the market by selling its global petrochemicals business to billionaire Jim Ratcliffe’s Ineos for $5bn. The disposal means the oil major hits its target of $15bn asset sales a year early as chief executive Bernard Looney shifts it to a low-carbon world.

‘Strategically, the overlap with the rest of BP is limited and it would take considerable capital for us to grow these businesses,’ Rooney said in a statement.

BP shares have slumped a third this year as oil prices tumbled in the coronavirus crisis and Russia-Saudi price war. 

Share Centre research analyst Ian Forrest cautioned: ‘While this deal is a good one and should help the company to reduce its relatively large debts, the news needs to be seen alongside the company’s recent reduction in its long-term expectations for the price of Brent crude. Dividends could be cut in early August when second quarter results are due.’

(10:43) FTSE inches higher 

The FTSE 100 has inched higher after a choppy open to the session, after global coronavirus cases passed the 10m mark over the weekend while in the UK a spike in infections in Leicester raised the prospect of a local lockdown. 

A number of US states, including California, Texas, and Florida, have reimposed lockdown restrictions as the number of new virus cases jumped.

The UK blue-chip index was trading 12 points, or 0.2%, higher at 6,172, swinging from a loss at the open.

The government warned Leicester could be the first city to go into local lockdown after a spike in new Covid-19 cases. A total of 650 people living in Leicester tested positive in the two weeks to 16 June and five schools in the area have been forced to close.

‘The increase in coronavirus cases and questioning of reopening plans has dented momentum which has been driving markets,’ said Fiona Cincotta, analyst at City Index. 

‘Investors are starting to question their blind optimism over the rebounding global economy.’ 

Ocado (OCDO) fell to the bottom of the FTSE 100, down 2.7%, or 55p, at £19.78 despite the supermarket delivery platform signing a three-year deal with a British technology company to manufacture more of its robots to capitalise on the boom in online shopping. 

UK mid-cap companies on the FTSE 250, with rely on the domestic UK economy for more of their revenues than their blue-chip rivals, slipped 0.2% lower.

It was led lower by Carnival (CCL), relegated from the FTSE 100 this month, which slid 2.7% to 943p after announcing the pricing of a new dual currency loan of $1.86bn and €800m as the cruise ship operator struggles with the impact of the coronavirus pandemic. Outsourcing group Capita (CPI) fell 3.9% to 43.5p. 

The pound dipped marginally against the dollar to $1.233 as a fresh round of Brexit talks kick off this week. 

Cincotta said currency traders would be ‘watching the headlines carefully’ and ‘any leaks of lack of progress could drag on demand for sterling’.

‘Heading into the talks the EU is looking for compromise, while the UK is appearing less flexible as key issues such as fishing, EU judicial power, and the “level playing field” remain contentious,’ she said.

‘Any hint of these being overcome could boost the pound.’ 

Morses Club (MCL) tumbled 3.9p or 8% to 45.1p after the lender’s online customer accounts were frozen by regulators in response to collapse of German payments processor Wirecard.

Among investment trusts, NB Private Equity Partners (NBPE ) narrowed its 33% discount with a 2% or 18p gain to 940p after a three-month review of payouts saw it maintain the interim dividend at $0.29 per share, reassured by the $64m of cash it has received from asset sales this year.

Volta Finance (VTA ) gained 2.2% to 4.65 euros after the debt fund’s directors said they would take a 20% fee cut in the next financial year after its slump in the coronavirus crash this year.

Gore Street Energy Storage (GSH ) also gained 2% or 2p to 101p after announcing talks to buy 81MW of cash-generating operational assets across Great Britain and a 50MW project under development in southern England.

Other closed-end fund movers included Middlefield Canadian Income (MCT ), up 2p or 2.5% to 82p; and UK deep value trust Aurora (ARR ), which also firmed 2p or 1.3% to 166p.

But engaged UK small-cap investor Strategic Equity Capital (SEC ) slid 9.6p or 4.8% to 189.4p and BMO Commercial Property Trust (BCPT ) dropped 3.1p or 4.5% to 65.9p.

Investment company news brought to you by Citywire Financial Publishers Limited.

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