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LONDON (Alliance News) - Stocks in the UK were higher Tuesday midday, as investors returned to equities following two sessions of Brexit-induced declines, despite post-referendum uncertainty being highlighted by downgrades to the UK's sovereign rating by two credit-ratings agencies.

Financial stocks such as banks and insurers were recovering some of the ground lost in the past days, having been the worst hit in the aftermath of the Leave vote. Conversely, gold miners were firmly in the red, after having benefited strongly from the risk avoidance climate in the equity markets as investors looked for safe havens such as the precious metal.

"While equity volumes are picking up, they are still below average and so bargain-hunting may be helping, as opposed to emergence of genuine support, as markets adjust to a new normal and the prospect of the UK outside the EU," said Accendo Markets Michael van Dulken.

Standard & Poor's Global Ratings downgraded the sovereign ratings of the UK by two notches, citing weak predictability, stability and effectiveness of policymaking following the Brexit result last Friday.

According to S&P, the lack of clarity will hurt confidence, investment, GDP growth and public finances. "Uncertainty surrounding possibly long-lasting negotiations around what form the UK's new relationship with the EU will look like will also pose risks," the agency said. Consequently, S&P lowered the ratings of the UK to 'AA' from 'AAA' and the outlook remained negative.

Fitch Ratings also trimmed the UK ratings, but by one notch to 'AA' from 'AA+'. The agency said the uncertainty following the referendum outcome will induce an "abrupt" slowdown in short-term GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment.

The FTSE 100 was up 2.5%, or 146.53 points, at 6,128.73 at midday. The FTSE 250 was up 2.8% at 15,392.00 and the AIM All-Share up 1.2% at 685.18.

"The FTSE 100's unwillingness to stay below 6,000 is remarkable," said IG senior market analyst Chris Beauchamp. "A bounce was overdue, of course, and it doesn't change the short-term narrative of uncertainty and fear, nor the longer-term bear market in equities that has been ticking along for over a year now".

The FTSE 350 Insurance/Assurance sector index was up 7.8%, the best performing sector index, with Prudential the biggest blue-chip gainer, up 11%. The life insurer's shares were still 10% below their pre-Brexit level last Thursday.

Life insurer and investment manager Legal & General was another gainer, up 8.2%. L&G said it has appointed Whitehall veteran John Kingman as its new chairman, after his appointment was approved by UK financial industry regulators. Kingman is the former Second Permanent Secretary of HM Treasury and is the former chief executive of UK Financial Investments, the body managing the UK government's stakes in Royal Bank of Scotland Group and Lloyds Banking Group.

Meanwhile, the FTSE 350 Banks sector was adding 3.0%, with Lloyds Banking up 5.6%. Nevertheless, shares in the lender were still down 25% since the results of the EU referendum were announced early Friday.

Outside financial stocks, shares in Associated British Foods were up 7.5% after the food, ingredients and retail group was upgraded to Buy from Hold by Berenberg. With the stock still down 11% since Thursday, the German bank said the recent sell-off provides an attractive entry point.

Outsourcing company Capita was up 5.7% after saying it has signed a five-year strategic partnership for customer management services with telecommunications company Tesco Mobile, which is part of supermarket Tesco. The deal is worth GBP140 million over the five-year term and is due to commence on August 1. Capita was also upgraded to Neutral from Underperform by Exane BNP.

The buying pressure among investors was pushing up stocks despite downgrades by brokers. Clothing and homewares retailer Next was up 9.5%, despite suffering a cut to Neutral from Buy by Citigroup. easyJet was up 5.6%, despite being downgraded by Liberum to Hold from Buy. The stock fell 23% on Monday after issuing a post-Brexit profit warning.

Among the handful of decliners in the FTSE 100, gold miners Fresnillo and Randgold Resources were down 5.4% and 2.6%, respectively, tracking a lower gold price. The precious metal was standing at USD1,309.45 an ounce midday Tuesday, down from USD1,320.10 at the London equities close Monday, and well off its 2016 high of USD1,358.19 reached on Friday.

In the FTSE 250, online grocery retailer Ocado Group was up 10%, after reporting growth in profit in the first half of its financial year. Sales grew on the back of a rise in active customer numbers and order volumes, Ocado said, although the average basket value declined in a deflationary food market.

Lender Shawbrook Group was the biggest mid-cap decliner, down 8.8% after it said trading has been in line with its expectations in 2016 so far, but it will book a GBP9.0 million impairment charge due to irregularities uncovered in its Asset Finance unit.

Shore Capital cut bank's recommendation to Hold from Buy, saying that its confidence on the group "has been severely damaged by this news". Shawbrook also said it had accepted the resignation of Tom Wood as its chief financial officer. Dylan Minto, currently director of strategy, will step in as interim CFO.

In Europe, the CAC 40 index in Paris was up 2.7%, while the DAX 30 in Frankfurt was adding 2.2%. The euro was recovering against the dollar, quoted at USD1.1087 Tuesday midday compared to USD1.0999 at the close Monday.

The pound also was higher against the greenback, standing at USD1.3329, compared to USD1.3207 at the London equities close Monday. Sterling had touched on Monday new 31-year low of USD1.3118.

UK retail sales registered weak growth in June, the Distributive Trades Survey from the Confederation of British Industry showed. The retail sales balance fell to +4% from +7% in May. Nonetheless, it was better than the -5% balance predicted in May.

Prime Minister David Cameron faces leaders of other EU states for the first time since the referendum vote for Brexit, as he is in Brussels for what is likely to be his last European Council summit as prime minister.

Asian stocks ended mixed Tuesday, with the Nikkei 225 index in Tokyo up 0.1%, the Shanghai Composite up 0.6% and the Hang Seng in Hong Kong down 0.3%.

In New York, stocks were expected to follow Europe higher, with the Dow 30 index seen up 1.2%, while both the S&P 500 and the Nasdaq 100 indices were pointed up 1.1%.

Still in the economic calendar, US first quarter GDP is at 1330 BST, the same time as personal consumption expenditure. At 1400 BST are S&P/Case-Shiller home price indices, followed by consumer confidence and the Richmond Fed manufacturing index at 1500 BST.

By Daniel Ruiz; danielruiz@alliancenews.com

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