LONDON MARKET MIDDAY: Pound Sinks As EU Puts UK On Notice Over Brexit

(Alliance News) - Stocks in London were higher at midday on hopes a highly sought-after US stimulus agreement could be reached, while the pound sank after the European Union started legal action against the UK.

US Treasury Secretary Steven Mnuchin said on Wednesday he was hopeful that a "reasonable compromise" could be reached with Democrats on additional stimulus spending for the battered economy.

President Donald Trump's administration and Democratic leaders have been deadlocked for weeks over a follow-up to the USD2.2 trillion CARES Act passed as the coronavirus pandemic intensified in March, after key provisions of the law that have been credited with bolstering the economy expired.

Following weeks of faltering negotiations, Mnuchin and Democratic House Speaker Nancy Pelosi spoke on both Monday and Tuesday and agreed to continue talking.

London's large-cap FTSE 100 index was up 52.49 points, or 0.8%, at 5,918.59. The mid-cap FTSE 250 index was up 75.06 points, or 0.3%, at 17,390.36. The AIM All-Share index was up 0.7% at 966.35.

The Cboe UK 100 index was up 0.8% at 588.92. The Cboe 250 was up 0.4% at 14,715.42, and the Cboe Small Companies was up 0.4% at 9,204.85.

In mainland Europe, the CAC 40 in Paris was up 0.6%, while the DAX 30 in Frankfurt was up 0.1%.

"Equity markets were well bid as negotiations continued on a possible second fiscal stimulus bill. In FX, cable came under pressure when the EU notified the UK that it will pursue legal action if there was no change in a current Internal Market Bill that abrogated former treaty arrangement regarding Northern Ireland," commented analysts at BK Asset Management.

The pound was quoted at USD1.2840 at midday on Thursday, down sharply from USD1.2928 at the London equities close Wednesday, with the currency displaying its fragility in the face of negative Brexit developments.

As the clock ticks down to the UK's departure from the bloc, Brussels has begun legal proceedings against the UK after the government refused to withdraw plans to override key elements of the Brexit divorce settlement.

European Commission President Ursula von der Leyen said a "letter of formal notification" would be sent to the UK after ministers rejected a demand to withdraw the provisions from the UK Internal Market Bill by Wednesday of this week.

In a press statement at the commission headquarters in Brussels, she said the move marked the first step in an "infringement procedure" with the British government now invited to send its observations within the month.

"This draft bill is by its very nature a breach of the obligation of good faith laid down in the Withdrawal Agreement," she said. "The deadline lapsed yesterday, the problematic provisions have not been removed, therefore the commission has decided this morning to send a letter of formal notice to the UK government."

However, von der Leyen gave no indication as to what action could follow if the commission did not receive a satisfactory response.

Analysts at OFX said: "Sterling took yet another heavy blow this morning as Ursula von der Leyen, president of the European Commission, announced legal action against the UK in relation to the Internal Market Bill...At a time when the pound was just rallying back towards the USD1.30 handle against the US dollar for the first time since mid-September, this news has well and truly knocked the wind out of its sails, sending it spiralling down by over 1%.

"The letter has now been sent, and the UK has one month to respond. This will likely lead to a further extension in negotiations into mid-November, whilst the bill is amended in the House of Lords. It feels like a double edge sword for our UK-based US dollar buyers, as they are faced with further Brexit uncertainty, and the realisation that their money will now purchase fewer US dollars."

On the London Stock Exchange, Coca-Cola HBC was the best blue-chip performer, up 3.9% after Goldman Sachs upgraded the soft drinks bottler to Buy from Neutral.

At the other end of the large-cap index, Rolls-Royce was worst performer, down 9.8% at 117.30 pence. The jet engine maker's shares fell to their lowest levels since 2003 after outlining plans to raise up to GBP5 billion in new funding, including a deeply discounted rights issue of new shares.

Rolls-Royce intends to raise gross proceeds of around GBP2 billion by way of a fully underwritten 10 for 3 rights issue of 7.4 million new shares at 32 pence each. The rights issue price effectively represents a 41% discount to its Wednesday closing price of 130p.

In conjunction with the rights issue, Rolls-Royce said it intends to commence a bond offering to raise gross proceeds of at least GBP1 billion. The Trent 1000 engine maker also agreed commitments for a new two-year term loan facility of GBP1 billion and received an indication of support from UK Export Finance for an extension of its 80% guarantee to support a potential increase of the existing GBP2 billion five-year term loan of up to GBP1 billion.

Rolls-Royce said the measures will provide the company with "improved financial resilience" and a more appropriate balance sheet structure in order to weather macro-economic risks, before "we return to strong cash generation" - which is expected in 2022.

"Investors taking part in the share and bond issue need to have considerable faith in the aviation industry getting back on its feet. Handing over money now to back Rolls-Royce would also require considerable patience as this is unlikely to be a rapid recovery story," commented AJ Bell's Russ Mould.

DCC was second-worst performer, down 5.0% after Goldman Sachs downgraded the Irish support services firm to Sell from Neutral.

British American Tobacco was down 3.0%. The stock went ex-dividend, meaning new buyers no longer qualify for the latest payout.

GVC Holdings was down 2.5%. The Ladbrokes betting chain owner welcomed new regulatory measures in Germany but warned it will take a GBP70 million earnings hit in 2021 as a result.

The 16 German federal states last month confirmed they had agreed plans to impose a transition-period tolerance policy, tightening gambling regulations in the country. The policies implement many parts of the Interstate Treaty, GVC noted, a legal framework governing gambling in Germany.

The Interstate Treaty is penned to come into effect next summer.

The measures, published on Thursday and which come into effect on October 15, will see all table casino games turned off until individual states choose to issue licences under the Interstate Treaty. The curbs will limit monthly deposits by customers across poker and slots to EUR1,000 per month but could be raised once licences have been issued.

On the economic front, the UK manufacturing sector continued its recovery from the coronavirus pandemic induced downturn, but the improvement was a touch slower than in August, the latest figures from IHS Markit showed.

The seasonally adjusted IHS Markit/CIPS purchasing managers' index fell slightly to 54.1 in September from August's two-and-a-half year high of 55.2.

The September reading was just shy of the market forecast, cited by FXStreet, of 54.3. Still, the figure remained above the 50.0 mark which separates expansion from contraction.

The euro stood at USD1.1745, flat from USD1.1744 at the European equities close Wednesday

The manufacturing sector in the eurozone grew in September, with sharply higher output and new orders, data from Markit showed.

The eurozone manufacturing PMI score, after accounting for seasonal factors, posted 53.7 points in September, unchanged on the earlier flash reading and up from 51.7 in August.

September marked the strongest growth in over two years, Markit noted, and was the third straight month of growth.

In addition, the headline IHS Markit/BME Germany manufacturing PMI print climbed to 56.4 points in September from 52.2 in August - which IHS Markit noted is a 26-month high.

The "main highlight" of the survey, Markit said, was a "steep and accelerated" increase in new orders.

Against the yen, the dollar was trading at JPY105.55, firm compared to JPY105.46.

Brent oil was quoted at USD41.94 a barrel Thursday at midday, flat from USD41.92 at the London equities close Wednesday. Gold was trading at USD1,897.62 an ounce, flat from USD1,898.89.

US stock market futures were called higher on Thursday amid the stimulus hopes. The Dow Jones Industrial Average was called up 0.9%, the S&P 500 up 0.8%, and the Nasdaq Composite up 1.2%, based on futures trading.

In Thursday's economic calendar, there are US personal consumption expenditure figures and initial jobless claims at 1330 BST, followed by a manufacturing PMI reading at 1445 BST.

By Arvind Bhunjun; arvindbhunjun@alliancenews.com

Copyright 2020 Alliance News Limited. All Rights Reserved.