Pound, FTSE, gilts rally as US data adds to Truss U-turn glee

Update: UK assets rally from morning lows, helped by strong opening on Wall Street after weak US manufacturing data raises hopes the hawkish Federal Reserve may ease up on interest rate hikes to fight inflation.

Update: UK assets rallied from their morning lows, helped by a strong opening on Wall Street after weak US manufacturing data raised hopes the hawkish Federal Reserve would ease up on interest rate hikes to fight inflation.

From a 0.8%, or 52 point deficit, the FTSE 100 closed 0.2%, or 15 points, higher at 6,908, with the mid-cap, more domestically exposed FTSE 250 advancing 0.7%. The blue-chip index is still below its pre-Budget level of 7,159 on 22 September, however.

By contrast, the pound has jumped above its $1.1257 level it stood at before chancellor unleashed £45bn of unaudited tax cuts in his financial statement. Sterling leaped 1.25% to $1.1271 against the dollar today as the chancellor responded to pressure to repeal his scrapping of the top 45p income tax band and the strong US currency gave up some gains following weaker-than-expected manufacturing data.

UK government bonds held on to their earlier gains with their influential yields slipping. Benchmark ten-year yields eased to 3.942% though five-year yields remain at 4.22%, up from 3.56% on the eve of the Budget.

The UK stock market’s gains came amid a broader rally with European equities up 0.7% as the US S&P 500 raced 2% higher in response to the ISM manufacturing activity index showing its slowest growth reading in 18 months. A score of 50.9 missed the 52.2 forecast and came close to the 50 level that separates growth from contraction.

‘The employment metric fell from a respectable 54.2 to 48.7. This could be an early warning the labour market is in trouble,’ said Equiti Capital market analyst David Madden.

‘In some pockets of the markets, there is speculation the Fed might “pivot”, meaning the bank might look to hike interest rates at a slower pace, hence the weakness in the US dollar,’ he said.

11.02: Pound rises after Truss’ tax U-turn

The government’s U-turn on the planned cut to the 45p top rate of tax received a mixed market response in volatile early trading as the pound strengthened but UK government longer-dated bond yields rose again as their prices fell.

Two-year gilt yields fell 11 basis points to 4.18% – with spreads unusually wide – and ten-year yields fell 3 basis points to 4.06%. However, 30-year yields climbed 6 points to 3.869.

The FTSE 100 traded down 0.8%, or 52 points, at 6,8842, while the pound strengthened 0.3% against the dollar to $1.12 this morning.

‘[The U-turn] is not the solution to the turmoil in the markets; high inflation and high interest rates are not going away quickly, and economic growth is under severe threat,’ said Neil Birrell, chief investment officer at Premier Miton Investor.

The unfunded spending programme announced by chancellor Kwasi Kwarteng a week and a half ago unleashed a flight from gilts, as investors worried about how the UK government would pay for its enormous spending spree.

Despite the Bank of England intenvening to stabilise the market on Wednesday with a £65bn gilt-buying programme, the market selloff culminated in ratings agency Standard and Poor cutting the outlook for its AA credit rating for UK sovereign debt from ‘stable’ to ‘negative’ on Friday. It also said it expects the UK to enter a technical recession in the coming quarters, with the economy shrinking by 0.5% in 2023.

Coca-Cola Hellenic (CCH) fell 2.9% to £18.39 and Ocado (OCDO), 3.1% to 458p, as investors turned to housebuilder and energy names. SSE (SSE) rose 2.8% to £15.71, BP (BP) moved up 2% to 442p and Shell (SHEL) gained 1.7% to £22.84 this morning.

Reversing Friday’s rebound, the FTSE 250 fell 1%, or 186 points, to 16,982 as consumer names saw big falls.

Cruise operator Carnival (CCL) fell 8.9% to 530p and Aston Martin (AML) fell 7.9% to 531p. Airlines fell, with shares in Wizz Air (WIZZ) down 7.8% to £14.62, TUI (TUI) weakening 4.8% to 103p and Easyjet (EZJ) off 4.8% 282p.

Telecom Plus (TEP) shares soared 18.2% to £20.40 after a trading update stating management expect profits to be ahead of market expectations.

Manufacturing group Essentra (ESNT) rose 9.5% to 200p after the group completed the sale of its filters business and announced a new chief exec.

Scottish Mortgage sags

Among investment trusts, Baillie Gifford’s flagship Scottish Mortgage (SMT ) and F&C (FCIT ) fell 4% to 751p and 3% to 873p, respectively, as investors responded to the S&P 500’s 1.5% loss at the end of last week. SMT has fallen 41% this year and stands on a relatively wide 12% discount below net asset value (NAV).

Vietnam funds struggled with Vietnam Enterprise (VEIL ) sliding 4.6% to 607p and VinaCapital Opportunities (VOF ) off 3.4% at 456p. Vietnam Holding (VNH ) gave up 3.3% to 291p on a 12% discount after annual results showed a 4.4% decline in the year to 30 June, outperforming the country’s stock market which fell 16.5%.

There was weakness among emerging markets trusts more broadly with Mobius (MMIT ) down over 5% to 116.6p.

Property funds resumed their falls after a rally on Friday. Residential Secure Income (RESI ) retreated over 6% to 102.8p.

Hipgnosis Songs Fund (SONG ) gained 2.5% to 91.3p after refinancing its debts, slightly narrowing the wide 37%  share price discount that has opened up after a 20% plunge on interest rate fears in the past month.

GCP Infrastructure (GCP ) rallied 5.3% to 103p as it extended its gains from a post-Budget fall that saw it end last week on a wide 14% discount to NAV.


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