Sterling pressure on FTSE isn’t here to stay

<p>Sterling is once again the major denominator of almost all eye-catching UK stock market moves on Tuesday afternoon as investors take Prime Minster Theresa May’s long-anticipated speech as the cue to end the FTSE 100’s longest ever winning streak.</p>

Sterling is once again the major denominator of almost all eye-catching UK stock market moves on Tuesday afternoon as investors take Prime Minster Theresa May’s long-anticipated speech as the cue to end the FTSE 100’s longest ever winning streak.

 

Companies whose shares were crushed in the wake of the referendum because of dependence on British revenues and customers are among the stock market’s best performers on its worst day since mid-December, because the pound is set for its biggest single-day rise against the dollar since 1998.  Consumer-facing firms, including retailers, are favoured, particularly those that have come to represent a likely inflection point where inflation could reach the High Street.

For example Next, having this month been forced to cut its profit outlook for the current year and warn of doing so in the next one. RBS, whose shares are among the top FTSE 100’s risers right now, would be in line for a much-needed revenue benefit if signs of a floor for the pound prove accurate. Likewise, easyJet could be on track to call off an alert of a £90m-sized hit to profits after a cratering pound swallowed £88m in its prior financial year.

At the red end of FTSE’s leader board, we find shares that were recent beneficiaries of sterling weakness, due to having costs in pounds, foreign currency revenues, or a combination of both. It’s no surprise to find shares of Britain’s biggest oil companies, miners and other multinationals here, like Burberry, whose near-60% gain in 2016 was almost entirely down to advantageous exchange rate effects flattering persistently sluggish sales growth.

It is quite significant, however, that a few of the best performers on the London Stock Exchange today have little to do with the injection of good sentiment into sterling from May. Rolls-Royce remains the day’s outperformer, as it was well before the PM began speaking. It said early on that it’s settled corruption charges around the globe. Standard Chartered is at No. 4 as I write, after a ‘blue-sky’ remark in a Bank of America Merrill Lynch note, suggesting third-party M&A interest.

Hargreaves Lansdown is also propelled by brokerage opinion today, in its case an upgrade by JPMorgan, enabling the shares to retain a gain of more than 4% even as the FTSE sell-off accelerates. The stock of Britain’s biggest investment fund seller had a lacklustre 2016, but has tracked the FTSE’s bounce since November, as investors get on board a story of consistent market share gains over the last five years backed by new initiatives to keep it.

In other words, whilst sterling’s lowest values for decades have correlated closely with one of the best stock market runs for decades, it obviously isn’t the only influence.

Like much else in markets, the pound’s effect is transmitted largely via investor expectations, and rarely by real-term impact on revenues and profits, which necessarily lag the pound’s sharpest dislocations by weeks or months.

Last Friday we warned that the FTSE 100’s ‘overbought’ state, gauged by measures like its Relative Strength Index (RSI), was verging on levels not seen since 1997, but the RSI subsequently rose further. Charts tell us that prices tend to consolidate in proportion to how overstretched they have been, suggesting the FTSE’s correction will be moderate, at least.

However, with such tailwinds as the continuing oil price rebound, resilient consumption, and even the moderation of strong-dollar concerns as the ‘Trump trade’ fades, the FTSE is more in line for a pause than a new downtrend. 

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.