Equities
UK blue chip shares bucked the trend on Friday with the FTSE 100 higher thanks to a weaker pound whilst the rest of the European stock indices were lower. Overall, markets were looking a little dazed and confused- traders were left reeling from a historic flash crash in the British pound.
There was some clear separation in investor demand for the blue chips and more domestically-focused mid-cap stocks. The lower Sterling is a win-win for firms listed on the FTSE 100 which do little in the way of business inside the UK, like mining companies.
Teresa May’s anti-business agenda and Philip Hammond’s plans to add to the country’s national debt with higher spending that stoked the move lower in the pound this week is not great for doing business in Britain.
For now a weaker pound continues to be a positive for UK equities, but the size of the drop in currency markets was not mirrored in the rise in the FTSE 100. The benefits of a weaker pound for exports and higher inflation are being offset by a concern the exchange rate’s decline has become destabilising.
The British pound’s flash crash has shaped the winners and losers on the FTSE 100. Multinationals including miners and firms with large overseas sales, which benefit from a weak pound were on top. On the back of EasyJet’s profit warning, airlines were caught the brunt of the selling of equities which lose out from a weaker domestic currency. Homebuilders were sold given the sensitivity of housing to the UK economy and retailers dropped as Sports direct cut its profit guidance on the weaker British pound.
Shares of Lloyds (LON:LLOY) dropped 5% after the government abandoned its plans to offer shares to the public. The government will instead sell its shares via a trading plan of small tranches to institutional investors. The volatility in banking shares had made a sale to the public too risky. The government exiting its stake will ultimately be a good thing for the business, but not in the short term. A large stakeholder leaking its shares back onto the market will mean limited upside for the shares until Lloyds is entirely private again. Shares of RBS (LON:RBS) were down 2%, though Philip Hammond said future litigation costs and meant it was not practical to sell the government’s stake in the bank.
Equity indices in the Eurozone, which don’t reap the currency benefits of a devalued British pound were showing caution over the implications of a “Hard Brexit” for the European economy.
US stocks were choppy in early trading. Early gains following a US jobs report that missed expectations and lowered the odds of another rate hike this year were offset by other concerns including the flash crash in the pound, Hurricane Mathew and Sunday’s second US presidential debate.
FX
One currency stood out head and shoulders above all else on Friday. The early hours flash crash in the British pound put all other currency moves to waste, even on US payrolls day. After its initial 6% nose dive against the dollar in two minutes, the pound was volatile all day. Liquidity proved pretty thin on the ground with small orders causing unusually large price swings.
The mechanical cause of the pound’s drop will have been algorithms, options expiries, stop orders and low Asian liquidity but the ultimate reason was a lack of buyers. The United Kingdom’s historical record of relative stability has been thrown into doubt by Brexit and the populist political rumblings of Teresa May’s new government. Were the pound not under such pressure, seeing 31-year lows for four straight days, there would have been willing buyers at 1.25 to the dollar and 0.9 to the euro.
Commodities
Crude oil prices pulled back after the Russian oil minister said he didn’t expect Russia to agree on a freeze or cut in output in a meeting next week. It’s not to say an agreement can’t be reached in November put provided any excuse to take profits at the end of another week of big gains for oil.
Weakness in the dollar following a miss in the US unemployment figures held gold stabilise after a huge drop this week.
"DISCLAIMER: CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed.
No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. "