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Brexit progress boosts pound but undermines FTSE

31 November 2017

Tags: Macro Economics


Sterling is moving higher against other major currencies amid reports of progress on Brexit negotiations. This is putting pressure on the FTSE 100 as it impacts the relative value of its constituents’ largely overseas earnings. At the close on Thursday (30 November) the index of leading UK shares was down 0.9% at 7326.67.

Next Monday (4 December) purchasing managers’ index (PMI) data for the UK construction sector is published. The market will be watchful of any deterioration or improvement on the previous reading of 50.8. The same day the Eurogroup meeting, made up of finance ministers and senior officials from the Eurozone is set to take place amid signs the economic area is thriving (see Economic update). On Tuesday (5 December) the UK services PMI release is out. The previously reported number was 55.6. Friday (8 December) sees the publications of US non-farm payrolls. Hugely influential given its status as the first release based on hard data to offer an insight on the health of the world’s largest economy, it may also offer clues into whether the US Federal Reserve will hike interest rates at its meeting on 13 December. 

 Sector in focus

For the fourth year in a row the Bank of England (BoE) has ran its checks this week to see how the UK banking sector would withstand another financial crisis. For the most part investors in the sector could breathe a sigh of relief. For the first time since 2014 no bank needs to raise cash in the wake of the stress test although Barclays (BARC) and Royal Bank of Scotland (RBS) would have fallen below their minimum capital levels in the scenario run by the BoE, which it says is equivalent to the worst possible outcome from Brexit. Top of the class is Lloyds Banking (LLOY) which would retain a sufficient capital buffer in the stressed scenario even before management action. Most shares in the sector traded modestly lower following the results of the tests on 28 November. Separately the BoE wants UK banks to hold an extra £6bn buffer to cover risks beyond Brexit including misconduct costs and global debt levels.

 Economic Update

Ahead of next Monday’s (4 December) Eurogroup meeting of Eurozone senior officials and finance ministers, recent purchasing managers’ index (PMI) data on the economic area shows jobs growth and manufacturing orders at 17-year-highs. The positive surveys suggesting the Eurozone economy could be growing faster than expected. The headline PMI figure from IHS Markit came in at 57.5 (any figure above 50 implies growth) with the upturn led by the manufacturing sector. PMI readings are considered to be reliable indicators for future economic growth because they are based on surveys of the people responsible for buying the goods and services required by a company.

 ETF Watch

Japan’s economy maintained its ‘moderate recovery’ for the sixth straight month according to the government’s latest assessment. Investors looking for exposure to Japanese stocks could consider HSBC Japan (HMJP) which tracks the share price performance of large and medium-sized companies listed in Japan for an ongoing charge of 0.19%.

Company Announcements 

6 December - There are high expectations for EasyHotel’s (EZH:AIM) full year results after it said in October that second half trading was ahead of the board’s expectations. Investors will now want income details and guidance on the company’s expansion plan as well as an update on how its newer hotels are performing.

7 December - Global packaging industry leader DS Smith (SMDS) continues to enjoy firm end demand as consumers increasingly buy products online. The company makes the robust, corrugated cardboard protective wrapping used by many popular internet retailers. The market will be paying close attention to input costs in these first half results and the company’s ability to pass them on to customers.

Writer: Tom Sieber Tags: Macro Economics

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