FTSE 100 / 250 / All Share hit record highs. IMF backtracks on Brexit

Investors have jumped both feet first into British stocks, trampling all over concerns that Brexit might make the UK less investable. It was a threesome of records for UK equity index benchmarks. The FTSE 100, FTSE 250 and FTSE All Share indices all struck record intraday highs.

Equities

Investors have jumped both feet first into British stocks, trampling all over concerns that Brexit might make the UK less investable. It was a threesome of records for UK equity index benchmarks. The FTSE 100, FTSE 250 and FTSE All Share indices all struck record intraday highs.

The gains corresponded with a fresh 31-year low in the British pound, a scenario that boosts the earnings of UK-listed multinationals. Reports that UK Prime Minister Theresa May is not looking for any favourable treatment for the financial services sector has been cited as one reason behind the latest sterling decline.

It wasn’t all currency effect through – the FTSE 250, which does have its fair share of firms with foreign earnings, is more domestically focused.

At the moment, UK investors are getting their cake and eating it. The threat of more rate cuts and money-printing from the Bank of England if the government chooses a “Hard Brexit” has sent the British pound lower, but UK economic data continues to impress. Britain’s construction industry expanded again in September according to purchasing managers.

The IMF, in its latest forecasts conceded its dire warnings for the UK economy in the event of voting to leave the EU have fallen pretty wide of the mark. The IMF revised its forecast for UK economic growth in 2016 to 1.8%, the highest in G7, including the US and Germany. The IMF is however doubling down on its weak forecast for the UK in 2017, it expects the “Brexit boogieman” to visit us further down the road.

The concern that Prime Minister May is not prioritising the financial sector wasn’t being reflected in the share prices of banks or insurance companies, all of which posted gains on the FTSE 100.

Today’s gains have been fairly broad based though a broad mix of financials, industrials and oil and gas shares led the gainers. Provident Financial was top the UK benchmark.

Stocks in Germany rose on the return from a long weekend and Deutsche Bank’s shares stabilised as investors have become more sanguine. This is despite there being no further details about the level of fine that might be levied by the US Department of Justice.

US stocks rose in early trading in a positive read-across from the gains in Europe. There are some signs of apprehension ahead of tonight’s vice-presidential debate and this week’s payrolls numbers for September.

 

FX

It was a bad day for sterling. The pound dropped to a new 31 year low against the US dollar, and its lowest levels against the euro since 2013. Investor concerns about the UK’s future trading relationship with the EU continue to rise.

The pound did not travel in the same direction as the economic data. The latest UK construction PMI numbers for September came in at 52.3, breaking a run of 3 consecutive monthly contractions, as evidence continues to build of a bounce back in the UK economy, post Brexit vote. 

The pound wasn’t the worst performer today. Traders shunned traditional haven currencies the Japanese yen and the Swiss franc.

The US dollar saw strong gains after the Fed’s Lacker, who is a non-voting member, said he would have dissented at the September meeting. The comments helped edge higher the odds of a December rate rise to 61%, on the basis of Fed Funds futures. The US ISM- New York current conditions index rose more than expected to 49.6 in September. More worryingly though, the employment sub-index crashed into contraction to 33.9 from 54.9 in August.

 

Commodities

The aforementioned persistent weakness in the price of gold finally resulted in long-term support giving way. Gold prices slumped to the lowest since the Brexit vote, below $1300 per oz. The drop below $1300 per oz opened up the floodgates and the precious metal soon slid to below $1285. The rise in speculative positions in the last week would suggest many traders got caught on the wrong side of the break lower.

Crude oil steadied near recent peaks with WTI crude near $49 per barrel ahead of API inventory data.

 

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