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FTSE 100 closes in the red as crude gains and sterling weakens

Last updated: 15:56 06 Oct 2022 BST, First published: 07:02 06 Oct 2022 BST

bank of england
  • FTSE 100 closes down 55 points
  • Shell drops after warning
  • Imperial Brands lifted by buyback plans

4.43pm: FTSE 100 closes lower

FTSE 100 index closed in the red on Thursday as the oil price gained and the pound weakened.

Footsie closed the day down around 55 points, or 0.78%, at 6,997.

Against the US dollar, sterling was down 1.26% to US$1.1184. Crude oil (West Texas Intermediate) added 0.82% at US$88.48 a barrel.

"Sterling has been under pressure over the course of the day, with dollar strength helping to weaken GBPUSD after a week of upside. With sterling having recovered from the volatility driven by Kwarteng’s mini budget, the focus returns to the question of when the dollar dominance will resume," said Joshua Mahony, senior market analyst at online trading group IG.

On the output cut from OPEC, the analyst noted that it risked prolonged inflation.

"With the Western world having to take drastic measures that will squeeze economic growth in a bid to drive down inflation, the timing of this production cut highlights a disregard for the interests of the US and Europe. Unfortunately, we are starting to see natural gas and crude oil gain ground, with fears around rising commodity prices likely to return as demand rises into the Winter period."

3.56pm: Footsie lower as economic woes grow and ex-divs take their toll

Leading shares remain deep in the red as economic concerns have the upper hand again.

Hopes that the US Federal Reserve might turn more dovish on interest rises have faded again, while the higher than expected production cut of 2mln barrels a day from OPEC+ is also undermining sentiment.

And after the Bank of England's intervention in the bond markets last week helped ease soaring gilt yields in the wake of the controversial mini-budget, the signs are they might be heading higher again.

Meanwhile the Bank confirmed that some funds could have faced collapse within a day if it had not acted.

So heading into the close the FTSE 100 is down 63.29 points or 0.9% at 6989.33.

A number of companies have fallen back as their shares went ex-dividend. These include Kingfisher PLC (LSE:KGF), down 4.97%, Centrica PLC (LSE:CNA), off 4.69% and DS Smith PLC (LSE:SMDS), down 4.18%.

Elsewhere Shell PLC (LSE:SHEL, NYSE:SHEL) has lost 3.53% after it warned on its third quarter results.

But Imperial Brands PLC (LSE:IMB) is up 2.19% after a positive trading statement and news of a £1bn share buyback.

Prudential PLC (LSE:PRU) has put on 1.4% to 939.8 after Bank of America analysts issued a buy note although they cut their price target from 1455p to 1360p.

3.03pm: Wrap up warm this winter, there could be power cuts

Better hope there is not a severe winter.

National Grid PLC (LSE:NG.) has warned of possible three-hour power cuts if Russia cuts off gas supplies and Britain experiences a cold snap.

The company said it was cautiously confident  there would be enough electricity to meet the demands of businesses and consumers this winter.

But in the "unlikely event" of a shortage of gas, it said some consumer could be without power for certain periods of the day to “ensure the overall security and integrity of the electricity system across Great Britain”.

Jess Ralston, senior analyst at the Energy and Climate Intelligence Unit said: “Last year the grid stood solid during the winter, but the gas crisis has changed the outlook this year because there is still a large unknown around how high the gas price will go and what will be available...

"Had investment in energy efficiency and onshore wind gone ahead over the past few years, we’d be much more certain about meeting demand. Every spin of a wind turbine and loft lagged means less gas we need to try to buy."

2.44pm: Wall Street makes a mixed start after jobless claims

Meanwhile US stocks had a mixed opening, rebounding from sharper declines in pre-market trading on the back of the new jobless claims data from the Labor Department.

Initial jobless claims for the week ended October 1 came in at 219,000, above the consensus analyst expectation per Bloomberg of 204,000, but still at a historically low level signalling the continued strength of the American labor market.

City Index and Forex.com market analyst Fawad Razaqzada noted that there was no major fundamental justifications for the stock market bulls to be aggressive buyers right now.

“This is why we are seeing the indices fail to show significant follow-through each time we have a bounce,” he explained.

Razaqzada added that speculation the Fed would pivot its stance was unjustified.

"We have repeatedly seen inflation data exceeding expectations and the Fed has correspondingly responded by being even more hawkish with its rate increases and language,” he said.

“The labour market has remained very hot until now, but following some weakness this week, investors are expecting the monthly non-farm employment report to disappoint expectations this time, but will the Fed be too concerned about one month’s worth of jobs data?”

Just after the market opened, the Dow Jones Industrial Average had shed 77 points or 0.3% at 30,196 points, the S&P 500 was steady at 3,780 points, and the Nasdaq Composite had added 24 points or 0.2% at 11,172 points.

In the UK, the FTSE 100 is still under the cosh, down 62.12 points or 0.88% at 6990.5.

2.39pm: US non-farm number key for market's next move

Tomorrow's US non-farm payroll report could be key to whether the rally at the start of the week resumes. Or not.

Craig Erlam, senior market analyst at Oanda, said: "Equity markets have erased early gains to trade in the red on Thursday, as investors take a cautious approach ahead of Friday's jobs report.

"The narrative in recent days of weaker data being positive as it could be a precursor to slower tightening didn't seem sustainable and it's already proving to be the case. I think it was more a reflection of the steep sell-off in the markets and the performance of risk assets in general over the six weeks previous, rather than the data. If the Fed wasn't prepared to jump at the first sign of inflation easing, it certainly won't on the back of a weaker PMI and decline in job openings.

"The recovery did provide some temporary relief and while weaker data is likely to precede a deceleration in rate hikes, I don't think we're there yet. Yesterday's services PMI - which is far more important - was still strong, as was the ADP number and tomorrow's jobs report is expected to remain hot.

"That may put an end to the narrative for now, although any weakness in the labour market data tomorrow, or signs of additional slack, could boost the relief rally once more and see equity markets end the week strong. As I say, it's all clutching at straws at this point but after weeks of heavy losses, perhaps that's not overly surprising."

2.15pm: Gilt yields on the rise again

The Bank of England's intervention in the gilt market last week may have stopped some pension funds going under and eased the surge in yields.

But now they seem to be heading north again.

The yield on the 10 year is now up 13 basis points at 4.165% while the 30 year is 12 basis points higher at 4.335%. And they had been higher earlier.

2.02pm: US jobless claims ahead of forecasts

US jobless claims have come in higher than expected, ahead of the widely watched non-farm payroll numbers tomorrow and adding to hopes the Federal Reserve will become more dovish over interest rate rises.

The number of Americans claiming unemployment benefits for the first time was 219,000 last week, up from 190,000 the previous week, itself revised down by 3,000 to the lowest level since April.

Analysts had been forecasting a rise last week but only to 204,000.

Earlier this week, figures showed US job openings falling sharply, suggesting some weakness in the labour market.

12.50pm: Footsie at its day's low

Leading shares continue to decline, with the blue chip index now below 7000 again.

The FTSE 100 is now down 54.22 points or 0.77% at 6998.4, the day's low, having previously climbed to 7079.

Shell PLC (LSE:SHEL, NYSE:SHEL) is still the biggest faller, down 4.46% after warning on its third quarter results, while peer BP PLC (LSE:BP.) is 2% lower.

11.54am: Wall Street set for downbeat start

US stocks are expected to open lower amid renewed attention on the gloomy economic prospects for the world’s biggest economy and beyond.

Futures for the Dow Jones Industrial Average were down 0.6% in pre-market trading, while those for the S&P 500 fell 0.7% and contracts for the Nasdaq-100 were 0.8% lower.

The recent run of economic data in the US was sturdy with the ISM services sector index pointing to bigger-than-expected growth. The ADP employment report also painted the picture of a strong labor market, with job creation continuing apace. The Federal Reserve is widely expected to continue hiking interest rates aggressively despite the threat to economic activity.

“Both figures did not match the idea that the Fed would slow its rate hikes, but the market reaction remained rather mild. Now all eyes are on Friday’s NFP (non-farm payroll) number, and wages growth data,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

The pivotal non-farm payrolls data is expected to show continued resilience in the face of higher interest rates and elevated inflation. Consensus estimates point to a 275,000 rise in payrolls in September after a 315,000 increase the previous month.

Out today, initial jobless claims figures will also be in focus.

The Federal Reserve has delivered three 75 basis point interest rate hikes this year and is expected to keep on raising interest rates as it attempts to tackle runaway inflation but its moves are also expected to dampen growth. Investors fear that the US will be stuck in a prolonged recession as a result. They will be hoping that softer labor market data will dissuade rate setters from hiking interest rates aggressively.

Elsewhere, gloomy estimates from the World Trade Organisation are also weighing on investors’ minds.

“The World Trade Organization (WTO) gave a scary forecast for the global trade next year,” said Ozkardeskaya.

The WTO estimated growth of 3.5% for global merchandise trade volumes this year but slashed its expectations for next year to 1% from its previous estimate of 3.4%, and warned that major central banks could overshoot by implementing interest rate hikes too aggressively and triggering recessions in some countries.

Back in the UK, the FTSE 100 has fallen further and is now down 49.31 points or 0.7% at 7003.31.

11.27am: Bank's Cunliffe spells out why it had to intervene in gilt markets

The Bank of England has warned pension funds need to learn lessons from the turmoil in the UK bond market last week which led it to intervene with firepower of up to £65bn.

Deputy governor Sir Jon Cunliffe, in a letter to the Treasury Committee, said the Bank had so far only spent £3.7bn but he spelled out how it had to step in as the value of government debt plunged in the wake of the mini-budget.

He said that pension funds' liability-driven investments (LDIs) , used to try and match their long term liabilities against their assets, were under pressure following the gilt falls.

Some said they could go bust within a day.

He wrote: "The Bank was informed by a number of LDI fund managers that, at the prevailing yields, multiple LDI funds were likely to fall into negative net asset value. As a result, it was likely that these funds would have to begin the process of winding up the following morning. In that eventuality, a large quantity of gilts, held as collateral by banks that had lent to these LDI funds, was likely to be sold on the market, driving a potentially self-reinforcing spiral and threatening severe disruption of core funding markets and consequent widespread financial instability...

"Had the Bank not intervened on Wednesday 28 September, a large number of pooled LDI funds would have been left with negative net asset value and would have faced shortfalls in the collateral posted to banking counterparties. [Defined benefit] pension fund investments in those pooled LDI funds would be worth zero."

Cunliffe has also included a graphic which shows exactly what happened to gilt yields following the mini-budget.

He said the Bank and regulators were closely monitoring the progress of the LDI funds.

And he added: "While it might not be reasonable to expect market participants to insure against all extreme market outcomes, it is important that lessons are learned and appropriate levels of resilience ensured."

10.12am: Footsie goes into reverse

Leading shares have dipped into the red as the early enthusiasm - tenative as it was - wears off.

The FTSE 100 is now down 11 points at 7041.61, having earlier touched 7079.

AJ Bell investment director Russ Mould said: “It doesn’t feel like Tuesday’s market rally was built to last as the dollar is back on the march.

“The gilt market is once again under pressure as a second ratings agency effectively puts the UK on watch for a credit downgrade. The current government still has a job on its hands to convince it has a handle on the country’s finances.

“Adding to a difficult picture, oil prices are back on the move. Having helped ease inflationary pressures in the last month or two as crude slipped back, OPEC’s decision to go for higher-than-expected output cuts is driving the market higher once again.”

Brent crude is currently up 0.16% at US$93.52 a barrel.

9.58am: Energy and inflation still top of business concerns

UK businesses are worried about the outlook, but slightly less so than a month ago.

According to the latest Office for National Statistics insights survey, 70% said they had some concern for their business but this is marginally down on the September figure of 72%.

High inflation and energy prices are, unsurpringly, the main worry.

9.39am: UK construction improves but outlook is cautious

UK builders did better than expected in September, but growth was mainly fuelled by the resumption of delayed projects and they remain cautious about their prospects amid rising interest rates.

The S&P Global / CIPS UK Construction Purchasing Managers’ Index came in at 52.3 last month, up from 49.2 in August and the highest reading for three months.

But the report said subdued demand persisted, as signalled by the weakest trend for new orders since the recovery began in June 2020.

Looking ahead to the next 12 months, survey respondents remain cautious about their growth prospects. The degree of confidence towards the business outlook dropped to its lowest for over two years in September, mostly reflecting concerns about higher interest rates and a downturn in the wider UK economy.

On a more positive note, supply shortages eased in September, with delivery delays the least widespread since February 2020.

House building was the best-performing category in September, with growth reaching a five-month high. Commercial work increased only marginally while civil engineering activity fell for the third month in a row.

Tim Moore, economics director at S&P Global Market Intelligence,said: "UK construction companies experienced a modest increase in business activity during September, but the return to growth was fuelled by delayed projects and easing supply shortages rather than a flurry of new orders.

"Reports of delivery delays for construction products and materials were the least widespread since the pandemic began as greater business capacity and improved transport availability helped to ease pressure on supply chains.

 "However, forward-looking survey indicators took another turn for the worse in September, with new business volumes stalling and output growth expectations for the year ahead now the lowest since July 2020. This reflected deepening concerns across the construction sector that rising interest rates, the energy crisis and UK recession risks are all set to dampen client demand in the coming months."

9.14am: UK bond yields edging up again

UK bond yields have been edging up after the Bank of England seemed to ease things with its intervention in the gilts market in the wake of the turmoil caused by the mini-budget.

The yield on 30 year gilts is up 5 basis points at 4.272% while the 10 year is up a similar amount to 4.09%, and if things carry on, the Bank may have to act again after pausing its buying programme.

The decision by Fitch to cut the outlook on the UK's credit rating is not helping matters of course.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: "This matters because even without a downgrade the UK’s borrowing costs have risen sharply, and if the ‘stable’ rosette is ripped off, foreign creditors are going to demand even more money to fund the government’s growing debt pile. Moody’s has also warned that large unfunded tax cuts risks damaging the country’s debt affordability.

"Interest payable on long dated government debt had come down, after the Bank of England intervened last week to scoop up bonds, with 30 year gilt yields retreating from highs of 5%. But they are creeping higher again, and although the Bank paused its emergency purchases, to assess the market, if yields start to march up, it may have to dive back into bond buying. The Bank is still having to deal with an internal policy tug of war, it’s poised to keep stimulus flowing to bring down government borrowing costs, yet is also warning that interest rates will have to rise further given the parlous state of inflation."

Meanwhile the FTSE 100 continues to drift, now up 4.77 points at 7057.39.

8.34am: Ex-divs hit market but Imperial provides support

Imperial Brands PLC (LSE:IMB ) is leading the FTSE 100 risers after an upbeat trading statement and news of a £1bn share buyback.

Its shares are up 3.88%, and Richard Hunter at interactive investor, said: “Having reduced net debt and further strengthened its balance sheet to its own acceptable levels, Imperial Brands has accelerated shareholder returns.

"The announcement of a share buyback programme to the tune of £1 billion should lend further to the share price and the key metrics such as earnings per share in particular. In addition, a dividend yield which currently stands at a punchy 7.4% is an attraction to income-seeking investors in its own right...

"In terms of outlook, the group is maintaining expectations for full-year trading to be in line. Net revenues and adjusted operating profit are both expected to benefit by 1% due to currency tailwinds, while overall capital expenditure to drive future growth will be between £300 million and £350 million per annum."

A handful of companies have gone ex-dividend and seen their shares slip accordingly.

These include DS Smith PLC (LSE:SMDS), down 3.6%, Centrica PLC (LSE:CNA), off 1.4% and Kingfisher PLC (LSE:KGF), 0.67% lower.

Meanwhile Shell PLC (LSE:SHEL, NYSE:SHEL) continues to be weak after it warned on third quarter profits, down 2.99%.

Overall the FTSE 100 is just about still in positive territory but has lost much of its early gains. It is now up just 3.35 points at 7055.97.

8.25am: Fitch warns of rise in UK deficit, IFS says tax cuts will not benefit households

The decision by Fitch to move the outlook for the UK's credit rating from stable to negative is largely driven by the fact that the government has not yet announced how it will fund its tax-cutting package.

Despite earlier suggestions, there is still no sign that the costing statement will be brought forward from 23 November, although there is still pressure for this to happen.

Fitch said: "The large and unfunded fiscal package announced as part of the new government's growth plan could lead to a significant increase in fiscal deficits over the medium term.

"We consider that statements by the chancellor hinting at the possibility of additional tax cuts and the likely modification of fiscal rules legislated in January reduce the predictability of fiscal policy."

Fitch was not the only one to come out with its verdict on the mini budget.

The Institute for Fiscal Studies said that by 2025-26, the cuts will not only put a considerable strain on public finances but it will not benefit households either.

It said the freeze on thresholds for income tax and benefits will take away £2 for every £1 given through the cuts.

8.12am: Footsie up, Shell down

Leading shares are edging higher as investors shrugged off news that another ratings agency - Fitch - had followed Standard and Poor's in putting the UK's credit rating on negative watch.

The FTSE 100 is up 16.86 points at 7069.48 in early trading after falling 33 points on Wednesday as prime minister Liz Truss pointedly stuck to her controversial economic plans in a speech to the Tory party conference.

The tentative rise today also comes despite a drop on Wall Street following its surge earlier in the week, as investors wondered if they had been too optimistic about the US Federal Reserve turning more dovish.

Jim Reid at Deutsche Bank said: "After an astonishing rally at the beginning of the fourth quarter, markets reversed course yesterday as investors became much more sceptical that we’ll actually get a dovish pivot from central banks after all. The idea of a pivot has been a prominent theme over recent days, particularly after the financial turmoil during the last couple of weeks, thus sparking the biggest 2-day rally in the S&P 500 since April 2020 as the week began.

"But over the last 24 hours, solid US data releases have created a pushback against that narrative, since they were seen as giving the Fed more space to keep hiking rates over the coming months. And if markets had any further doubt about the Fed’s intentions, San Francisco Fed President Daly explicitly said yesterday that she didn’t expect there to be rate cuts next year, in direct contrast to futures that are still pricing in rate cuts from the second quarter."

All eyes now will be on the US non-farm payroll report to see if the market continues to treat good news as bad and vice versa.

Markets had also been rattled by news that OPEC+ unveiled a 2mln barrel a day cut in oil production, more than had been expected.

Back in the UK, chancellor Kwasi Kwarteng is due to meet bank bosses to discuss the mortgage market, which has been disrupted by the turmoil following the mini-budget.

The average rate of a new two year fixed mortgage is now above 6%, the highest level since 2008.

This follows lenders removing hundreds of mortgage products in the wake of soaring bond yields last week.

Elsewhere Shell PLC (LSE:SHEL, NYSE:SHEL)is down 3% after it said its third quarter results, due for release on 27 October, would be hit by a sharp fall in refining margins while results from its Integrated Gas business were expected to be significantly lower compared to the second quarter.

7.00am: FTSE set for a bright start

FTSE 100 is set to open higher on Thursday despite another hit resulting from the chancellor’s mini budget.

Spread betting companies are calling the lead index up by around 50 points.

Sterling was higher in Asian trading at $1.1363 despite a downgraded outlook for the credit rating of UK government debt as Fitch lowered the outlook for the debt to negative from stable while leaving the rating itself unchanged at "AA-".

In the US markets ended down, but off earlier lows, consolidating some of the strong gains of the past two days.

By the close The Dow Jones Industrial Average was down 42 points to 30,275, the S&P 500 lost 7 points to 3,784 and the Nasdaq Composite slipped 28 points to 11,149.

“It’s a moment of pause for the market to reflect on how durable the rally the past two days actually could turn out to be,” said Yung-Yu Ma, chief investment strategist for BMO Wealth Management.

In the UK, results from mining firm Ferrexpo and a trading statement from tobacco firm Imperial Brands are due.

In the economic calendar, there is the UK construction PMI reading while US jobless claims are due this afternoon.

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