FTSE jumps on weaker pound rallying oil

The FTSE gapped higher on the open and retained its strength, providing a strong start to September. The 1% rally in the FTSE was thanks to a weaker pound and a bounce in heavily weighted commodity stocks, both of which ensured the FTSE outperformed its peers on mainland Europe.

Oil stocks gave the biggest boost to the FTSE, with the likes of BP and Shell trading 1.2% and 1.5% higher respectively, as they traced the price of oil northwards. Oil rallied as oil exports from Iran, OPEC’s third largest producer, are falling faster than expected and this is before the second wave of sanctions from the US have started; when they do, in November, fears are growing that we will see a supply crunch which is inevitably pushing the price higher. Brent is up some 10% over the past 2 weeks. However, increased output from OPEC and North America kept the rally capped today at 0.8%.

 Looking ahead, the demand for oil could in fact be dented should trade tensions continue to increase between the US and other nations, such as China. Manufacturing activity in China expanded at the slowest pace in over a year in August, whilst export orders declined or a fifth straight month, highlighting the damage that the trade spat with the US is having on the Chinese economy.

Pound gives up last week’s gains
The weaker pound also provided a lift to the FTSE, boosting earnings for multinationals. The pound gapped lower on the open overnight as Brexit concerns reared their head again. Clashing comments from Chief EU negotiator Michel Barnier and UK Prime Minister Theresa May rapidly unraveled sterling’s gains from last week. 

UK manufacturing activity slows by most in over 2 years
Losses in the pound were then extended after data showed that manufacturing activity in the UK slowed more than expected. Manufacturing PMI fell to 52.8 in August, down from 53.8 in July. This was the lowest reading in 25 months as export orders fell, most likely to due a slowing pace of growth in the global economy. Moving towards Brexit the UK needs orders from abroad to remain resilient to support the economy when consumer spending could weaken but given the growing trade tensions potentially slowing global growth, this is looking less likely as highlighted by today’s figures.

Construction PMI to pull pound lower?
Pound traders will now look towards the construction pmi figures due for release tomorrow. The expectation is for construction activity to have slipped in August to 54.9 from an impressively strong 55.8 in July. A disappointment to the downside could push the pound further back towards $1.2800, and weigh further on house builders, which were one of the few sectorial losers in today’s session.