LONDON (Alliance News) - London stocks ended mixed Tuesday, with the FTSE 100 index of large international companies back on track after giving back gains on Monday, but with the pound and more UK-exposed measures of stock performance continuing to decline.
Blue-chips were boosted by the Bank of England's announcement of a series of measures to stabilize in the UK financial system following the vote to leave the European Union.
The central bank, in its twice-yearly Financial Stability Report, unveiled moves to help boost lending, as it warned of a "challenging" outlook for financial stability after the Brexit vote. The bank slashed funding rules for banks as part of measures to shore up the economy and financial system and said it "stands ready to take any further actions" if needed.
"There will be a period of uncertainty and adjustment following the result of the referendum. It will take time for the UK to establish new relationships with the EU and the rest of the world," said the report.
The BoE added that, despite a severe hit to the pound and declines of as much as 20% for bank shares since the vote, the UK banking sector has proved resilient, with little sign so far of a credit squeeze.
The Bank of England will reduce the capital required to be held on banks' balance sheets by GBP5.7 billion, which it said would help bolster their ability to lend to households and businesses by up to GBP150 billion. The so-called countercyclical capital buffer rate has been slashed to zero from 0.5% and will remain at that level for at least a year, the central bank said.
However, Ben Brettell, senior economist at Hargreaves Lansdown, said it is worth remembering that lending volumes depend on demand as well as supply.
"If already indebted households become more risk averse following the referendum, the demand for credit simply won't be there, however much the banks are willing to lend," Brettell noted.
The BoE announcement came after Governor Mark Carney said last week that policymakers were preparing to ease monetary policy over the summer, with analysts saying that a cut to UK interest rates could arrive either at the Monetary Policy Committee meeting of July 14 or at the next meeting on August 4.
The pound stood at a new 31-year low of USD1.3035 at the London equities close Tuesday, having been at USD1.3324 at the same time Monday.
Equity investors responded to the BoE measures by sending large-cap stocks higher, with the FTSE 100 ending up 0.4%, or 27.20 points, at 6,549.46. The index had started the session lower, adding to losses from Monday, when it had ended its post-Brexit winning streak at four sessions.
However, the more domestically exposed FTSE 250 index fell 2.7%, or 428.92 points, at 15,687.78. The AIM All-Share declined 1.0%, or 6.76 points, at 707.10.
The UK service sector activity growth weakened to match the 38-month low registered in April, survey results from Markit showed. The Markit/Chartered Institute of Procurement & Supply services Purchasing Managers' Index dropped to 52.3 in June from 53.5 in May, below expectations of a reading of 52.8. Nevertheless, a reading above 50.0 signals growth in the sector.
"The majority of respondents completed the survey before Brexit and attributed these effects to both a general slowing in the UK economy and a pause in normal economic activity as customers and business awaited the results of the EU referendum," said David Noble, chief executive officer at CIPS.
This came a day after the UK construction PMI reading from Markit and CIPS fell to 46.0 in June, representing shrinkage, from 51.2 in May against economists' expectations of a drop to 50.5.
Germany's services sector weakened at the end of the second quarter. The final services PMI dropped to a 13-month low of 53.7 in June from 55.2 in May. Nonetheless, the reading was above the flash score of 53.2. Meanwhile, the same from France declined to 49.9, in line with the flash estimate, from 51.6 in May.
Eurozone retail sales increased for the second straight month in May, figures from Eurostat showed. Retail sales climbed 0.4% month-on-month in May, following a 0.2% rise in April. On a yearly basis, retail sales growth accelerated to 1.6% in May from 1.4% in April. That was below economists' expectations for a 1.7% gain, however.
The CAC 40 index in Paris fell 1.7% and the DAX 30 in Frankfurt lost 1.8%. The euro was quoted at USD1.1094 at the equities close, compared to USD1.1144 late Monday.
Stocks in New York were firmly in the red at the London close, with the Dow 30 down 0.6%, the S&P 500 down 0.8% and the Nasdaq Composite down 1.0%. New orders for US manufactured goods pulled back in line with estimates in May, a report from the US Commerce Department showed.
The Commerce Department said factory orders fell by 1.0% in May following a 1.8% increase in April. The drop in orders matched economist estimates. The decline in factory orders was primarily due to a sharp pullback in durable goods orders, which tumbled by 2.3% in May after surging up by 3.2% in April.
Gold stood at USD1,349.32 an ounce late Tuesday in London, against USD1,351.08 on Monday, while Brent oil fell below the USD50 line, quoted at USD47.89 a barrel, compared to USD50.15 on Monday.
On the London Stock Exchange, Royal Dutch Shell 'A' shares and BP ended among the best blue-chip performers, up 2.6% and 1.5%, respectively, after Barclays lifted its price targets on both oil producers. Meanwhile, tobacco giants British American Tobacco, up 2.7%, and Imperial Brands, up 0.9%, also benefited from price-target upgrades by Goldman Sachs.
International Consolidates Airlines Group ended up 0.9%, taking back some of its losses from Monday after an investigation was launched in Spain into IAG's low-cost airline Vueling following chaos at Barcelona airport over the weekend.
IAG, which also owns British Airways, Ireland's Aer Lingus, and Spain's Iberia, said Tuesday its group traffic measured by revenue passenger kilometres rose 14% in June on a year before. Group capacity measured in available seat kilometres rose 13%, while load factor improved as a result to 84.0% from 83.7%.
On a pro-forma basis, taking into account the acquisition last year of Irish flag carrier Aer Lingus, traffic rose 3.5%, whilst capacity rose 3.3%. Group premium traffic rose 0.1% in May on a year before, also on a pro-forma basis.
Also gaining were GlaxoSmithKline, up 2.8%, and Hikma Pharmaceuticals, up 2.2%, as well as National Grid, up 2.3% and United Utilities Group, up 1.0%.
"With UK property funds in turmoil and looking vulnerable to further falls, the list of 'safe haven' dividend payers has got shorter, and this helps to explain why stalwart firms like utilities and pharmaceuticals are in the ascendant," said IG senior market analyst Chris Beauchamp.
Real estate investors ended amongst the worst performing stocks again after downgrades by French bank Societe Generale. Land Securities Group fell 3.7% after SocGen cut its recommendation on the stock to Hold from Buy, British Land dropped 2.6%, having received the same downgrade.
SocGen said the UK exit from the European Union comes at a time when the property cycle was reversing anyway due to fast-rising speculative supply. While the outcome of this is difficult to predict, SocGen forecasts property prices to fall 25% peak-to-trough.
Persimmon shares fell 5.4%. The housebuilder sounded a note of caution about the uncertainty caused by the Brexit vote for the UK's new homes market, despite reporting higher house sales at higher prices for the first half. Other housebuilders also closed in the red due to the Brexit-related cloud of uncertainty over the sector, with Barratt Developments down 5.4% and Berkeley Group Holdings down 6.4%.
Insurers suffered as well, with Legal & General down 6.8% and Standard Life down 4.3%. Standard Life Investments, the investment management arm of Standard Life, suspended trading in Standard Life Investments UK Real Estate Fund, saying it wanted to "protect the interests of all investors" as a high number of investors attempted to withdraw their funds following the Brexit vote.
In the UK corporate calendar, easyJet releases June traffic statistics, and Low & Bonar publishes half-year results. Carillion, Topps Tiles and Booker Group release trading statements.
Economic calendar highlights for Wednesday are German factory orders at 0700 BST, the US Redbook index at 1355 BST, and US Markit services and composite PMI readings at 1445 BST.
At 1900 BST, the result of the first round of the Conservative Party leadership selection process is expected.
After the London equities close on Wednesday, the US Federal Reserve will release the minutes of its last monetary policy meeting at 1900 BST.
By Daniel Ruiz; danielruiz@alliancenews.com
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