1-31-18 4:43 AM EST | Email Article

By Sara Sjolin, MarketWatch

Pound rally continues to drag on exporters

U.K. stocks struggled for direction on Wednesday, staying on course for a monthly loss, as investors remained nervous after a recent global equity selloff that left the FTSE 100 at a more-than-one-month low.

At the same time, a stronger pound was weighing on the main index's many international companies.

Off the main benchmark, a 40% plunge in shares of outsourcer Capita PLC after a profit warning was rattling investors. The warning comes only weeks after its rival Carillion PLC said it was entering liquidation.

What are markets doing?

The FTSE 100 was marginally lower at 7,585.28, after closing at its lowest level since Dec. 20 on Tuesday (http://www.marketwatch.com/story/ftse-100-slides-as-us-bond-selloff-spooks-investors-2018-01-30). For the month, the London benchmark is now set for a 1.3% loss, erasing part of its 4.9% rally from December.

The pound rose to $1.4188 from $1.4149 late Tuesday in New York.

What is driving the market?

U.K. stocks traded in tight ranges as investors digested the recent days' equity selloff that was largely driven by a rise in global bond yields. Higher returns on bonds typically make stocks and other assets perceived as riskier less attractive to investors.

However, after what analysts called an uneventful State of the Union address by U.S. President Donald Trump (http://www.marketwatch.com/story/trump-takes-more-optimistic-tone-in-state-of-the-union-2018-01-30) late on Tuesday, bond yields in the U.S. inched lower on Wednesday, dragging European rates down as well. The yield on 10-year U.K. gilts was down 1 basis point at 1.452%, according to Tradeweb.

The stronger pound weighed on the London benchmark, as it cuts into earnings made by overseas companies, when they convert their profits back into the U.K. currency. About 75% of the FTSE's revenue is generated outside Britain, so the index is particularly sensitive to sterling fluctuations. Sterling is on track for a 4.9% January gain against the dollar. That would be its biggest monthly rise since May 2009, when it jumped 8.8%, according to FactSet data.

Miners were also taking a hit after an official gauge of China's factory activity fell for a second straight month in January (http://www.marketwatch.com/story/china-official-manufacturing-pmi-falls-to-513-2018-01-31). China is a major user of natural resources so any sign of a slowdown in the country's manufacturing sector tends to weigh on the resource sector.

What are strategists saying?

"With cable back teasing $1.42, the FTSE failed to make any headway in regaining yesterday's 2018 low-hitting losses this Wednesday," said Connor Campbell, financial analyst at Spreadex, in a note.

"While [Capita] isn't actually part of the FTSE 100, Capita's 35% plunge following its bad news hat-trick -- profit warning, dividend suspension, GBP700 million cash call -- seems to be informing the index's early decline, especially since it comes so soon after the Carillion collapse," he added.

Which stocks are in focus?

Shares of Capita PLC (CPI.LN) tanked 43% on the FTSE 250 index after the outsourcing company said it'll suspend its final dividend (http://www.marketwatch.com/story/capita-suspends-final-dividend-plans-share-issue-2018-01-31-3485857) and plans to issue shares as part of a restructuring plan. The announcement comes after contractor Carillion PLC (CLLN.LN) earlier in January collapsed after failing to reach an agreement (http://www.marketwatch.com/story/carillion-collapses-after-rescue-talks-with-creditors-uk-government-fail-2018-01-15) with lenders to restructure its debt.

Also on the FTSE 250 index, shares of Wizz Air Holdings PLC (WIZZ.LN) lost 2.1% after the low cost airline said pretax profit fell 56% in the third quarter of fiscal 2018 (http://www.marketwatch.com/story/wizz-air-profit-falls-56-on-higher-costs-2018-01-31), as higher costs offset rising revenue.

Back on the FTSE 100, housebuilders posted some of the biggest losses. Shares of Taylor Wimpey PLC (TW.LN) dropped 1.7%, Berkeley Group Holdings PLC (BKG.LN) lost 1.6% and Persimmon PLC (PSN.LN) gave up 1.4%.

Among miners, shares of Anglo American PLC (AAL.LN) fell 0.6% and Rio Tinto PLC (RIO)(RIO) (RIO) lost 0.5%.

 

(END) Dow Jones Newswires

January 31, 2018 04:43 ET (09:43 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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