FTSE 100 closes down 177 pts
US indices drop
Non-farm payrolls rose by 164,000, in line with consensus
5.30pm: Big falls from markets globally
The FTSE 100 index joined other global indices in heading lower on Friday as markets were uninspired by in-line US jobs numbers and weak financial stocks weighed in London.
The UK's premier share index closed down almost 178 points at 7,407; the mid-cap FTSE 250 index shed over 381 points at 19,253.
Over the week as a whole, FTSE 100 lost around 1.8%.
On wall Street, the Dow Jones Industrial Average was sharply lower again as US jobs growth, although as expected, slowed in July, while the average workweek fell to its lowest level in nearly two years.
This could spell bad news for the economy which, together with the escalation in US/China trade tensions, might lead the US central bank to cut interest rates again.
Non-farm payrolls increased by 164,000 jobs last month, according to the latest official report, which was in line with economists’ expectations but down by 41,000 on the previous month.
The biggest Footsie loser on Friday was Royal Bank of Scotland (LON:RBS), which tanked 6.5% to 202.90p, despite the lender reporting a 47% rise in first-half profit as it warned it is unlikely to hit its long-term profitability targets.
Insurance and pensions giant Prudential (LON:PRU) was also lower, off 6.1% to stand at 1,600.5p.
2.30pm: US stocks fall
US benchmarks added to yesterday’s heavy losses after a July jobs report that traders found easy to ignore.
“Such a middling report – bang on market expectations – has consigned it to traders’ footnotes,” said James Bentley, a director of Financial Markets Online.
“The markets are instead being driven by President Trump’s dramatic upping of the ante in America’s simmering trade dispute with China. While we anxiously await Beijing’s response to the latest round of US tariffs on Chinese goods, the markets have an increasing sense of dread – that the trade cold war might become a trade hot war,” he added.
The Dow Jones was down 130 points (0.5%) at 26,454 and the S&P 500 was 16 points (0.5%) lower at 2,939.
In London, the FTSE 100 was off 138 points (1.8%) at 7,448.
2.00pm: FTSE 100 pares its losses following an in-line US jobs report
US jobs numbers for July came in on a par with economists’ expectations.
Non-farm payrolls rose by 164,000, in line with the consensus forecast, but down by 41,000 on the previous month.
The annual rate of wage increases was 3.2% versus the consensus forecast of a 3.1% increase.
“The latest escalation of trade tensions and the fear that it will hurt confidence, put up costs, damage supply chains and make business less inclined to invest and hire new workers will continue to drive market sentiment. Nonetheless, a strong domestic jobs market helps to mitigate the threat to activity in the near term. With unemployment at such low levels and the competition of staff remaining intense, workers have a sense of job security. With wages rising in a benign inflation environment, they have spending power too,” said James Knightley, the chief international economist at ING.
U.S. shares react negatively to in-line #NFP, strong hourly earnings print. The bigger puzzle is why yields fell. Soft trade deficit maybe. But really looks more like #Treasury mkt looks through these data ^KO
— Ken Odeluga (@Ken_CityIndex) August 2, 2019
In London, the Footsie perked up following the jobs numbers, cutting its losses to trade down 119 points (1.6%) at 7,466.
1.00pm: UK blue-chips deep in the mire
UK blue-chips remained deep in the mire as the minutes tick down to the release of the latest US jobs report at 1.30pm.
Royal Bank of Scotland Group PLC (LON:RBS) led the Footsie losers, with the index down 134 points (1.8%) at 7,451.
The taxpayer-owned lender was down 6.9% at 202.2p despite announcing a £1.7bn return to long-suffering shareholders.
READ RBS unveils special dividend and higher profits but shares fall on 2020 warning
“Normally you would have thought that investors would be pleased to see a huge jump in pre-tax profits, an increase in the dividend and a meaty 12p-a-share special dividend but shares in Royal Bank of Scotland are still down, despite this tempting trio,” said Russ Mould, AJ Bell’s investment director.
“This is because the quality of the earnings increase is poor, with a capital gain on disposal providing the bulk of the increase, there are signs that loan losses are ticking up and – most damningly – RBS is already backing away from its 2020 profitability targets,” he added.
Heavily indebted telecommunications giant BT PLC (LON:BT.A) was 4.2% weaker at 185.8p after its fiscal first-quarter results.
“BT’s numbers look healthy on first glance, but the shine is taken off by the fact the better than expected performance is not being driven by any of the four main divisions, but is instead down to the rather opaque contribution from the fifth reporting line, ‘other’,” quipped George Salmon, an equity analyst at Hargreaves Lansdown.
“The overriding challenge for the group from here is to deal with a culture of customers wanting more, but for less. This is evident in the consumer unit, home of BT’s TV and broadband as well as the EE mobile business, where BT is having to cut prices at the same time as increase its content spend, and in Openreach, where the government continues to push for a better, but cheaper service,” Salmon said.
11.15am: Footsie stabilises at lower levels
Having plummeted in the first two hours of trading, the Footsie had stabilised at a lower level by late morning.
The top-shares index was down 128 points (1.7%) at 7,457, around 18 points above its lowest point of the day.
Most pundits ascribed the fall to escalating tensions between the US and China, but last night’s by-election defeat for the ruling Conservative Party in the UK won’t have helped sentiment, with new prime minister Boris Johnston's partliamentary majority now cut to just one member.
According to the bookmaker, Johnson is odds on to call a General Election this year; the bookie is offering 8/11 on a 2019 General Election and 2/1 on a “no-deal” Brexit at the end of October.
While waiting for this afternoon’s US jobless figures for July, traders and economists have been mulling over this morning’s construction activity update from IHS/Markit.
“All sectors saw contraction in July. Both commercial activity and civil engineering suffered sharp declines in activity in July as they contracted for a respective seventh and sixth month running. Meanwhile, house building contracted for a second month running, although the rate of decline was at least modest and slowed from June’s fastest drop for three years,” reported Howard Archer, the chief economic advisor to the EY ITEM Club.
“Brexit -related uncertainties were reported to be particularly affecting the commercial sector, with some companies unwilling to commit to major new projects. Civil engineering activity was hindered by a lack of new work to replace completed infrastructure projects,” he added.
“New orders contracted for a fourth month running and at a considerable rate, which does not bode well for any improvement in construction activity in the near term. This was the first time that new orders had fallen for four successive months since 2016. Weaker domestic economic conditions, political uncertainty and a lack of tender opportunities weighed down on new business.
“Confidence among construction companies fell in July to be at the weakest level since November 2012. Employment in the sector fell for a fourth month running in July, albeit at a modest rate,” Archer said.
Scrabbling around for good news story on what has been a bleak Friday, it is hard to ignore Highland Natural Resources PLC (LON:HNR), up 22% at 8.175p.
The company has agreed on a deal to supply cannabidiol (CBD) to a group developing CBD-infused wound dressings.
Another minnow going well was Hummingbird Resources PLC (LON:HUM), the West African gold producer, after its second-quarter update showed that at its Yanfolila mine, 27,466 ounces of gold was poured, a 15% increase on the preceding quarter.
10.00am: Just five blue-chips in positive territory
Just five Footsie stocks were in positive territory by mid-morning – with three of those utilities – as investors bale out of equities on fears of trade wars escalation.
London’s index of heavyweight shares was down 149 points (2.0%) at 7,436.
The “fortunate five” stocks on the up consisted of defensive favourites National Grid PLC (LON:NG.), Severn Trent PLC (LON:SVT) and United Utilities PLC (LON:UU.) - up 0.3% to 0.6% - plus precious metals miners Fresnillo PLC (LON:FRES), up 2.4%, and British Airways owner International Consolidated Airlines PLC (LON:IAG), up 1.6% after a trading update.
READ British Airways owner IAG rallies after quarterly profits beat market forecasts
“The financial markets got a Trump thumping on Friday morning, the European indices left reeling by the President’s shock – but not that shocking – escalation of the trade war with China,” reported Connor Campbell at Spreadex.
“Investors probably should have been prepared for this kind of move from the US considering Trump’s negotiations-tanking Twitter rant earlier in the week. The bellicose leader announced that, if a deal can’t be struck between the two superpowers, a fresh US$300 billion of Chinese imports would be slapped with a 10% tariff as of September 1st. This on top of those goods already being penalised,” Campbell noted.
Construction time is over
There was scant consolation for UK investors to be found in the IHS Markit/CIPS UK construction purchasing managers’ index (PMI) for July, which showed construction activity fell for the third month in a row.
At 45.3 in July, the headline seasonally-adjusted total activity index was below the 50.0 “no-change” value for the fifth time in the past six months. The latest reading was up from June's ten-year low of 43.1 but still signalled a marked downturn in total construction activity, the IHS report revealed.
Commercial construction was the worst-performing category in July, followed closely by civil engineering activity.
“Anecdotal evidence suggested that risk aversion among clients in response to Brexit uncertainty continued to hold back work on commercial projects. At the same time, some survey respondents noted that delays to contract awards for infrastructure work had acted as a headwind to civil engineering activity,” IHS Markit said.
“House building fell for the second month in a row during July, but the rate of decline was only modest and eased from the three-year record seen in June,” it added.
UK July construction PMI 45.3 vs 46.0 expected https://t.co/7T5xBo9hRy pic.twitter.com/IyKwNyYCm7
— tradermeetscoder (@trdrmtscdr) August 2, 2019
Tim Moore, the economics associate director at IHS Markit, said, “UK construction output remains on a downward trajectory and another sharp drop in new orders has reduced the likelihood of a turnaround in the coming months”.
"Total business activity declined at a softer pace than the ten-year record seen in June, but this should not detract attention from the challenges ahead for the construction sector. Customer demand has been squeezed on all sides in recent months, which has pushed down business expectations to the lowest since the second half of 2012,” Moore said.
8.45am: Triple-digit dive for the Footsie
The FTSE 100 slumped to a triple-digit deficit at the open as the index of blue-chips succumbed to the global stocks rout.
It dropped 120 points to 7,464.45 following an escalation in the Sino-American trade conflict with President Trump piling tariffs on US$330bn of Chinese goods.
This after the markets effectively spat out the dummy over US interest rates on Wednesday, which are unlikely to decline at the pace priced in by traders following the first rate cut in over a decade this week.
Closely monitored later will be the print on American job numbers for July. The world’s largest economy is expected to have added a net 165,000 to the national payroll last month compared with 224,000 in June.
“Even with a good number, last night’s escalation by the US President has muddied the waters with respect to the normal reaction function of the market,” said Michael Hewson, analyst at CMC Markets.
“Amidst all of this uncertainty there is no guarantee that a good number might be positive if investors perceive that it might push the Fed away from cutting rates sooner rather than later.”
Turning to the stock market, British Airways owner International Consolidated Airlines Group (LON:IAG) got off to flyer, rising 3.9% after its quarterly profits topped expectations.
Royal Bank of Scotland (LON:RBS) was at the vanguard of the financial service sector sell-off, falling 4.9% after warning it is unlikely to hit its long-term profitability targets.
6.35am: Trade Wars - The Empire Strikes Back (or does it?)
“Trade wars” has had more sequels than “Star Wars” and another episode rolled off the assembly line yesterday, sending markets reeling.
US and Asian markets tanked after president Trump imposed a 10% tariff on another US$300bn worth of Chinese goods that were previously exempt from duties.
The FTSE 100 looks set to join in the retreat, albeit not as substantially as some markets, with spread betting quotes pointing to the index starting at around 7,505, down 80 points from last night’s close.
“Talks between the US and China will continue in September, but there is no apparent willpower to resolve the yearlong trade dispute. Trump threatens to ‘tax the hell out of China’ and to raise the tariffs to 25% if there is no progress in talks. The truth is, these attacks could make it gradually harder to find a common ground between the two counties. China’s Wang Yi said that this is not a way to resolve frictions. The risk is that the US’s rising pressure on China could backlash and compromise the future of negotiations,” suggested Ipek Ozkardeskaya at LCG.
READ Trade war sparks fly as President Trump says US will impose an additional 10% tariff on $300 billion worth of Chinese imports
Last night, the Dow Jones and S&P 500 reversed course after solid starts, with the former tumbling 281 points to 26,583 and the latter plunging 27 points to 2,954.
This morning in Asia, Japan’s Nikkei 225 was off 538 points at 21,003 and Hong Kong’s Hang Seng index was 642 points lighter at 26,924.
With rising panic in equity markets, it is small wonder the price of gold has been edging up.
Friday brings a bit of a let-up at the end of a busy week for blue-chip news, but there are still updates due from Royal Bank of Scotland Group PLC (LON:RBS) and BT Group PLC (LON:BT.A), both of which have a sizeable element of private investors on their shares register.
RBS is the fourth of the FTSE 100 banks to post numbers this week, with its rivals variously reporting larger than expected payment protection insurance (PPI) mis-selling provisions and a “challenging income environment”.
Following a first quarter that was down less than forecast, UBS expects the state-owned bank to report an adjusted pre-tax profit of £1.3bn for the second quarter, down 17% year-on-year, as RBS continues to face extra challenges from a net interest margin much lower than its peers.
"We expect the firm to announce interim dividend per share totalling 7.5p, 2.5p ordinary and 5p special, leaving CET1 ratio at 16.6%," UBS analysts said.
Some investors will also be looking out for a potential announcement on the next chief executive to replace Ross McEwan.
McEwan is leaving to become the boss of the National Australia Bank but he has a 12-month notice period extending to April 2020 and will remain in the role to ensure an orderly handover to his successor.
There is already a new broom at BT, which will be ringing up its first-quarter numbers.
New chief executive Philip Jansen, who joined at the start of the year, has already increased BT’s target for investing in laying superfast broadband from 3mln to 4mln homes and businesses by March 2021, with an “ambition” to reach at least 15mln premises by the mid-2020s.
The consensus forecast for the first quarter is for a 2.2% drop in revenue to €5.6bn and underlying earnings (EBITDA) to fall 4% to €1.9bn.
Analysts expect BT to re-iterate its full-year guidance for adjusted revenue and adjusted EBITDA to fall 2% and free cash flow to equity of £1.9-2.1bn.
British Airways owner International Consolidated Airlines Group SA (LON:IAG) is also lining up on the runway to release its interims; Brexit uncertainty might well be a key feature of the outlook statement.
Significant announcements expected on Friday:
Interims: BT Group PLC (LON:BT.A), Royal Bank of Scotland Group PLC (LON:RBS), International Consolidated Airlines Group PLC (LON:IAG), Essentra PLC (LON:ESNT), Millennium & Copthorne PLC (LON:MLC), Airea PLC (LON:AIRA)
Economic data: US non-farm payrolls, US factory orders and durable goods orders, University of Michigan sentiment index
Around the markets:
- Sterling: US$1.2107, up 0.32 cents
- 10-year gilt: yielding 0.595%, down 1.61 basis points
- Gold: US$1,444.00 an ounce, up US$11.60
- Brent crude: US$62.00 a barrel, up US$1.50
- Bitcoin: US$10,389, down US$25
City Headlines:
- Manufacturing activity eased for the second month in a row across Asia in June.
- Rio Tinto surprised the City with a US$1bn special dividend after soaring iron ore prices contributed to the miners best half-year profits since 2014.
- Donald Trump has imposed a surprise 10% tariff on US$300bn of Chinese goods, escalating Washington’s ongoing trade war with Beijing.
- The Bank of England has warned that the pound would probably fall, inflation rise and growth tumble if Britain leaves the EU without a deal.
- Barclays has slashed 3,000 jobs and is plotting further cost cuts despite unveiling its best performance for almost a decade.
- Luxury car maker Rolls-Royce has delivered a record first half, with a 42% rise in sales showing the upmarket automotive sector is booming.
- The latest film in the popular Lego franchise failed to keep the tills ringing at its eponymous theme parks.
- Factories suffered their biggest slump in production in seven years in July after new orders dwindled and job losses piled up.
- KPMG has been fined for the fifth time in 15 months after it failed to adhere to rules of “very great importance to the financial system” in its preparation of client asset reports by BNY Mellon in 2011.
- Kier on Thursday said that it had reduced its debt by more than expected and was in talks to sell its housebuilding division, in a bid to win investors’ confidence.
- Smith & Nephew has raised its full-year sales guidance on stronger sales in China and the US.
- Royal Dutch Shell has posted a sharp fall in profits, blaming a slowdown in the global economy.
- BlackRock has lost nearly US$90 billion over the last decade by ignoring the serious financial risk of investing in fossil fuel companies, according to economists.
- The German utility giant RWE will close its last UK coal plant after the coming winter.
- BMW chief executive Harald Krüger has urged Boris Johnson to respond to calls from business to find a compromise on Brexit.