LONDON MARKET CLOSE: Stocks Slide As Sunak's Measures Underwhelm

(Alliance News) - Stocks in London ended lower on Thursday after the UK government set out plans to help support the domestic labour market, leading to analysts questioning whether the latest measures go far enough heading into winter.

UK Chancellor of the Exchequer Rishi Sunak on Thursday launched a new Winter Economic Plan that will support wages of staff, keeping at least one third of their usual working hours.

The FTSE 100 index closed down 76.48 points, or 1.3%, at 5,822.78. The mid-cap FTSE 250 index ended down 190.30 points, or 1.1%, at 16,802.69. The AIM All-Share index closed down 7.06 points, or 0.7% at 941.98.

The Cboe UK 100 index closed down 1.4% at 579.49. The Cboe 250 ended down 1.0% at 14,253.51, and the Cboe Small Companies ended 0.6% higher at 9,020.41.

In Paris the CAC 40 ended down 0.8%, while the DAX 30 in Frankfurt shed 0.3%.

"The return to tighter restrictions in the UK, if not (yet) full lockdowns, has concentrated minds in Westminster. While today's job support schemes push the potential cliff-edge for employment back to January, there appears to be a tacit acknowledgement that more will be forthcoming. Like central banks, governments are going to find it hard to reverse out of policy support, leaving measures in place for far longer than imagined a few months ago," said IG Group's Chris Beauchamp.

"Given how widely-trailed the package was the lack of market reaction was to be expected, and sterling's lacklustre performance will also be down to continuing Brexit fears, the other major headache for [prime minister] Boris Johnson and his cabinet," Beauchamp added.

The pound was quoted at USD1.2713 at the London equities close, down from USD1.2755 at the close Wednesday.

Under the new jobs protection scheme, employers will pay a third of salaries earned by workers on reduced hours and begins in November. The UK government and employers will top up wages to cover the remaining lost pay. However, the scheme does not go as far as the current furlough scheme due to end next month that has paid out billions of pounds to support wages of almost ten million workers.

Analysts warned that the UK faces soaring unemployment despite the new support as many businesses cannot afford to keep staff, even on reduced hours.

"The policy measures just announced by the chancellor will go some way to cushioning the blow to the economic recovery from the new restrictions to contain Covid-19 and limiting the long-term hit to unemployment. But these actions won't eliminate the hit entirely. That is why we think GDP will stagnate in the last three months of the year and take until end-2022 to return to its pre-crisis level," said analysts at Capital Economics.

The government's new Covid-19 control strategy for England, unveiled earlier this week, will see office staff once again working from home, the wider use of face masks and a 2200 BST curfew on pubs and restaurants. UK Prime Minister Boris Johnson said "we must reserve the right to go further" if the rate of infection continues to rise.

Berenberg's Kallum Pickering pointed out that the new package will only help if the UK avoids a second national lockdown.

"Amid the renewed surge in Covid-19 cases in the UK, the near-term economic outlook has darkened materially. With luck, the modest new restrictions, including closing restaurants and pubs at 10pm, limiting the number of people in social groups, a return to home working for more office workers and stricter adherence to mask-wearing will help to bring down the case load while not inhibiting economic activity so badly that the recovery stalls," said Pickering.

"However, if the UK is forced to lockdown after 31 October, a mere wage subsidy scheme that requires workers to be on at least 33% of their normal hours will not help those workers in sectors that are forced to shut down. During the first wave, that included all non-essential in store retail as well as restaurants, bars and entertainment. At peak, nearly a third of the labour force was on the scheme," added Pickering.

In the FTSE 100, housebuilders ended in the green with Persimmon, Barratt Developments, Berkeley and Taylor Wimpey up 3.9%, 3.2%, 0.7% and 0.3% respectively following a positive research note from Jefferies, saying the stocks are "too cheap to ignore".

"With construction looking un-impacted by the latest Covid measures and the strength in the housing market providing increasing comfort on the sustainability of demand, we see the UK housebuilders as oversold. News flow on Covid, Brexit, stamp duty and help to buy changes will likely create share price volatility near term. Nonetheless, we see current share price weakness as presenting a great entry point for our key picks: Persimmon, Berkeley, Barratt," analyst Glynis Johnson said.

At the other end of the large caps, Smiths Group ended the worst performer, down 7.5% after the engineer said it achieved a "robust" performance in financial 2020, despite reporting a sharp fall in profit.

Revenue from continuing operations for the year to July 31 was up 2% to GBP2.55 billion, though down 1% on an underlying basis. Pretax profit more than halved to GBP133 million, however, from GBP304 million the year before.

Smiths said profit was hit by lower volumes in the second half as well as additional costs to support business continuity, and the firm also took GBP31 million in restructuring costs and GBP24 million of write-downs.

In the FTSE 250, Pets at Home ended the standout performer, up 28% after the pet products retailer issued upbeat profit guidance.

Pets at Home reported continued sales momentum across the second quarter of its financial year, leading to confidence in annual profit being ahead of market expectations. At the end of July, the retailer said sales momentum had returned to all areas of its business in the last eight weeks of the first quarter ended July 16, as customer shipping habits returned to normal and services were reinstated.

At the other end of the midcaps, Cineworld group ended worst performer down 15% after the multiplex chain reported a sharp swing to loss for the first half of 2020, as revenue was severely hit by the Covid-19 pandemic.

For the six months to the end of June, Cineworld reported a pretax loss of USD1.64 billion, compared to a profit of USD139.7 million the year before. Adjusted earnings before interest, taxes, depreciation and amortisation fell by 93% year-on-year to USD53.0 million from USD758.6 million.

"In the hours since Cineworld signed off its trading update, two more big name films, West Side Story and Black Widow, have been pushed back to 2021. Ultimately there isn't anything out now or coming very soon that will really make people want to take the risk of sitting in a room with a load of strangers for two hours. If the new James Bond film No Time To Die gets pulled from its November release date then the cinema industry is really in trouble," commented AJ Bell's Russ Mould.

In the currency space, the euro stood at USD1.1645 at the European equities close, lower from USD1.1685 late Wednesday. Against the yen, the dollar was trading at JPY105.50, up from JPY105.30 late Wednesday.

Gold was quoted at USD1,859.50 an ounce at the London equities close, lower against USD1,868.00 late Wednesday.

"Gold hit a two-month low today and remains under pressure as support for the dollar continues to grow. The yellow metal clearly has not lost its correlation with risk, with the dollar continuing to be the preferred save haven during times of turbulence. If the next month is going to be a challenge for risk markets, the dollar could have more downside to come yet," said Oanda Markets analyst Craig Erlam.

Stocks in New York were mixed at the London equities close amid concerns of a slowing US economic recovery, stalled stimulus talks and election uncertainty.

The DJIA was down 0.1%, the S&P 500 index flat and the Nasdaq Composite up 0.1%.

With the northern hemisphere now moving into autumn and winter, there is also concern that a second wave of coronavirus will see the reimposition of strict, economically devastating containment measures.

Investors are now growing concerned that rising infections could see similar moves, and several Federal Reserve officials including Chair Jerome Powell have called for a new stimulus package to mitigate the fallout. But politicians on Capitol Hill appear deadlocked ahead of the presidential election in November.

On the economic front, US weekly initial jobless claims remained roughly flat, data from the Department of Labor showed, defying expectations for a decrease in pace.

For the week to September 19, seasonally-adjusted claims came in at 870,000, up from 866,000 the week before. Consensus, according to FXStreet, had seen claims falling to 843,000.

Continuing claims fell by 167,000 to 12.6 million for the week to September 12, again a disappointment versus the market forecast of 12.3 million.

Brent oil was quoted at USD41.52 a barrel at the London close, down from USD42.16 at the close Wednesday.

The economic events calendar on Friday has US durable goods orders at 1330 BST.

The UK corporate calendar on Friday has a trading statement from water company Pennon Group and interim results from agriculture and engineering services firm Camellia.

By Arvind Bhunjun; arvindbhunjun@alliancenews.com

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