November 21, 2016 / 10:32 AM / 3 years ago

FTSE lags after sterling surge

LONDON (Reuters) - Britain’s top equity index was steady on Monday, underperforming European markets after a jump in the value of sterling, which some attributed to talk of a transitional deal for Britain to leave the European Union.

A man walks past the London Stock Exchange in the City of London October 11, 2013. Shares in Britain's Royal Mail rocketed to a near 40 percent premium above their issue price in Friday's stock market debut, fuelling a debate about whether they had been priced too low in order to guarantee a successful privatisation. REUTERS/Stefan Wermuth (BRITAIN - Tags: POLITICS BUSINESS)

Britain's FTSE .FTSE ended flat in percentage terms at 6,777.96, lagging small gains for continental indexes.

It fell back sharply in a move that correlated with strong gains for sterling.

The pound has traded in a volatile way since Britain voted to leave the European Union. Some attributed Monday’s move to a delayed reaction to hints by Prime Minister Theresa May that she would address concerns that Britain’s companies were faced with a “cliff edge” when it came to Brexit.

Britain’s FTSE is priced in pounds with many companies deriving earnings from abroad, meaning it often moves inversely to the pound.

“It appears that May’s (attempted) reassurances that the government is working to avoid a Brexit ‘cliff edge’ for businesses, comments that perhaps suggest a transitional deal, have caused sterling’s resurgence,” said Connor Campbell, market analyst at Spreadex, in a note.

“This in turn dragged the FTSE back below 6,800, despite the chunky gains made in the oil and mining sectors.”

Defensive stocks were on the back foot, continuing the recent trend of a rotation to cyclical sectors. Pharmaceuticals and tobacco stocks were among the top sector fallers.

Gains in commodities stocks put a cap on the fall, however, with the UK mining index .FTNMX1770 and oil and gas index .FTNMX0530 rising 1.8 percent and 1.6 percent respectively.

The two sectors were supported by a rally in industrial metals on expectation of an increase in metals demand, and as oil prices hit a three-week high on hopes that oil producers might strike a deal to limit output.

Shares in Randgold Resources RRS.L, Glencore (GLEN.L), Antofagasta (ANTO.L), Fresnillo (FRES.L), Anglo American (AAL.L) and BP (BP.L) rose 1.9 to 3.7 percent. Seven of the top eight gainers in the FTSE 100 index were commodities-related stocks.

But mid-caps .FTMC fell 0.8 percent, underperforming the broader market following profit warnings by some companies in the index.

There was a 20 percent slump in Essentra (ESNT.L) after the supplier of speciality plastic and packaging components cut its full-year adjusted operating profit estimate for a second time this year.

Outsourcing firm Mitie (MTO.L) fell nearly 10 percent after issuing a second warning on its full-year results as customers delayed placing orders due to uncertainty following Britain’s vote to leave the European Union and as conditions in its government services business worsened.

“The UK economy is performing well but Mitie seems to be finding it very hard going. The firm had already seen its share price slump after warning on profits in September and today’s half-year trading statement confirms the outsourcer is in a mess,” Neil Wilson, analyst at ETX Capital, said.

Editing by Catherine Evans

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