FTSE 100 drops as furlough scheme ends, Wall Street gets off to mixed start

  • FTSE down 59 points
  • Wall Street moves higher at lunch
  • Attention turns to macro data next week

5:05pm: FTSE 100 drops 59 points on first trading day of the month

Uncertainty weighed heavily on the FTSE 100 on the first trading day of the month and quarter. By the time markets closed Friday the UK blue chip index shed 59 points (0.84%) to hold at 7,027.

The slump has been attributed to the end of the furlough scheme and the nation’s energy woes, which have both been compounded by concern regarding global inflation and monetary tightening.

“There’s an enormous amount of uncertainty as we move into the end of the year and central banks removing stimulus, even raising rates, in the midst of that doesn’t inspire confidence,” Craig Erlam, senior market analyst at OANDA wrote in a Friday note.

Erlam went on to point out that policymakers deciding to tighten monetary policy amid the growing headwinds directly undermines their own message and will likely, “start to fall on deaf ears.”

“Nowhere is this more evident than the UK, which is facing a more severe energy crisis than most, an end to its furlough scheme and universal credit top-up, and a bizarre fuel crisis due to driver shortages and panic buying akin to the ridiculous toilet roll saga last year,” the analyst wrote. “And yet markets are pricing in three rate hikes by the end of next year while the pound is tumbling.”

4:17pm: US markets trend higher

US investors have found some confidence and all the main indices are moving higher, following economic data Stateside that was a bit of a mixed bag.

Inflation was broadly in line with expectations, with the core PCE deflator rising 0.3%, a bit above the consensus of 0.2%. Personal income rose 0.2%, in line with the consensus, and real consumption rose 0.4%, also in line with forecasts.

US manufacturing PMIs were mixed, with the headline numbers beating expectations but the employment sub-index not rebounding as much as hoped.

“There’s clearly still plenty of nerves in the markets at the moment, which is perfectly understandable under the circumstances,” said market analyst Craig Erlam at Oanda.

“There’s an enormous amount of uncertainty as we move into the end of the year and central banks removing stimulus, even raising rates, in the midst of that doesn’t inspire confidence.

“Policymakers can dress it up however they want, but if they push ahead with tightening monetary policy at a time when growth is slowing and headwinds are growing stronger, they’ll be undermining their own message and it will start to fall on deaf ears.”

Nowhere, says Erlam, is this more evident than the UK, where the energy crisis is combing with an end to the furlough scheme and universal credit top-up, and a drop in business and consumer confidence amid panic of petrol and probably some Christmas shopping, amid warnings of driver shortages hitting all sorts of industries.

“And yet markets are pricing in three rates hikes by the end of next year while the pound is tumbling,” Erlam exclaims.

READ: Energy customers feel the chill as new Ofgem price cap kicks in

“If the markets are correct, this is not the action of a central bank that thinks inflation is transitory, nor does it bode well for the economy going into the end of the year. An economy that remains below its pre-pandemic peak with unemployment still well above and likely to rise in the coming months. It just doesn’t add up.

“Investors have relied on central banks to be effective backstops for such a long time now. Low inflation has allowed them to be extremely patient in exiting emergency stimulus programs and tightening monetary policy.

“But they don’t have that luxury now and supply-side issues are creating unwelcome price pressures and it’s not clear how much of that will stick. For the UK, it’s being exacerbated by the proximity of the pandemic to Brexit, which is why we’re seeing the pound behaving the way it is.”

Erlam says investors may have to “cross their fingers and hope the next six months is kind to them”, including a warm winter, an easing of inflation and Covid.

“I’m not particularly optimistic,” he admits.

Meanwhile, Bitcoin has surged, breaking above $45,000 and accelerating above $47,200.

While it might have looked primed for correction, tests of the $40,000 level in recent weeks were resisted, as was a move above $45,000 though previous weeks, Erlam noted.

“A break back above here was clearly a big moment and was immediately the catalyst for a surge towards $47,000. Comments from Fed Chair Jerome Powell on having no intention of banning cryptos has been attributed to the move but I think there’s probably more to it than that.

“The battle is not won yet though, with it running into resistance today around the 61.8% retracement of the September highs to lows. A move above here and $50,000 is suddenly looking very vulnerable.”

Looking at London’s equities, the FTSE 100 is down 51 points or 0.7% at 7034, while the FTSE 250 is nearing its best for the day, now down 0.2% at 22,982.

Biggest blue chip fallers include Evraz PLC (LSE:EVR), down 4%, followed by Hikma Pharmaceuticals, Lloyds Banking Group, Scottish Mortgage Investment Trust PLC, DS Smith, B&M European Value Retail, Tesco PLC (LSE:TSCO), Imperial Brands Group and AstraZeneca.

Some of those names are down as investors get out ahead of results next week, including Tesco and Imperial (read our week ahead preview for more).

3.10pm: Wall Street pick n’ mix

US stocks have got off to a mixed start, with the tech-led Nasdaq down 0.3% but the Dow Jones and the S&P 500 rising 0.5% and 0.1% respectively.

Merck & Co., Inc, Walt Disney and American Express led the Dow’s risers.

Merck was lifted by news that clinical trials showed its antiviral drug, molnupiravir (apparently named after Thor’s hammer, Mjollnir), significantly cuts the risk of hospitalisation or death from Covid-19.

The company says it is applying to the US Food and Drug Administration for authorisation to market the twice-daily pill to treat Covid, in what would be the first treatment of its kind.

Merck said today that early results from the trial showed that 7.3% of patients on the drug had died or been hospitalised, compared to 14.1% of those receiving a placebo.

Back in London, the FTSE 100 isn’t sure what to make of early US deals, and is walking in anxious circles, down 60 points or 0.855 at 7,026.

2.25pm: Stablising geniuses

BP PLC (LSE:BP.) says queues at its petrol stations “appear to be stabilising” and that petrol stocks across its network are recovering.

The oil giant, which last Thursday sparked a rush of panic buying from some motorists when it said it would have to shut some petrol stations due to a driver shortage, said the situation had started to improve over the last few days.

There are around 1,200 petrol stations in BP’s UK network, of which the company directly runs a quarter.

“Stabilising” was also the uninspiring word used by government minister Kit Malthouse used this morning too.

This runs counter yesterday’s report from the industry body, the Petrol Retailers Association, which said that 27% of its members’ were still out of fuel as of Thursday.

The PRA said independent stations, which total 65% of the national network, are “not receiving enough deliveries of fuel”, with “signs that it is improving, but far too slowly”.

“Until independents start getting frequent supplies, we will continue to see long queues at forecourts,” the PRA executive director Gordon Balmer said.

FTSE 100-listed BP, which said it was “working flat out” to bring petrol supplies around the country, saw its shares trim earlier losses but remain down 0.7%.

Similarly, the blue chip index as a whole is also down 0.7% at 7,038.

1.10pm: London lags Europe

Global stock markets continue the first day of the new month on the back foot, though European stocks have trimmed their losses – though not so much with the FTSE 100, which is now the worst performer.

London’s blue chip index is down 47 points or 0.7% at 7039, while the more domestically focused FTSE 250 has continued to trim its losses after joining its sibling in the early sell-off and is now down 0.3% at 22,956.

With China’s power issues blamed for some of the market’s worries over the past 25 hours, Julian Evans-Pritchard, senior China economist at Capital Economics suggested the crisis might not be as bad as has been made out.

He points to early data suggesting that recent electricity rationing “may be the result of power companies being unable to keep up with the strength of demand, rather than a substantial pullback in electricity supply.

“If so, then sharp falls in output across the whole of industry have probably been avoided. But the energy-intensive sectors that have been the focus of power restrictions are clearly under pressure.”

Data for the first 23 days of the month showed magnitudes of falls that “don’t point to coal-generated power supply being withdrawn to any significant degree. In fact, it’s quite common for coal consumption at power plants to decline by more than this in September due to the seasonal impact of the Mid-Autumn Festival holiday”, he said.

Meanwhile, the recently launched emissions trading scheme, which currently only applies to power companies, “suggests that demand for CO2 permits has remained fairly stable in recent weeks. If power companies were cutting back on electricity output one would expect to see a more pronounced decline in the price of CO2 permits.”

He said the need to ration out supply has meant that local officials, with an eye toward their environmental targets, chose to focus power restrictions on the most highly polluting parts of industry which led to the output prices of some materials jumping in recent weeks.

With Chinese markets closed until Friday for the National Day holiday, Evans-Pritchard said the weeklong break “could give power plants some much needed breathing room to help replenish their inventories of coal”.

12pm: Wall Street expected to continue sell-off

After paring losses, the Footsie has sunk back to a 1% deficit so far today, just struggling to tread water above the 7,000 level.

Traders are mulling September’s manufacturing PMI survey, which fell to 57.1 from 60.3 in August, which is well above its long-run average but the weakest reading since lockdown time back in February.

Martin Beck, senior economic advisor to the EY ITEM Club, says: “In the same period, output growth slowed for a fourth successive month in September, partly as a result of input shortages, while growth in new orders slowed to a seven-month low.

“Although the IHS Markit/CIPS survey has only loosely linked to the official manufacturing output series through the pandemic, the latest results suggest the official series could weaken further in the remainder of Q3 and into Q4.”

The PMI survey also hinted that the recent surge in energy costs and shortages of carbon dioxide intensified constraints in the sector, said Pantheon Macroeconomics, with a sub-index for suppliers’ delivery times revised down, while shortages also led to the work backlogs index rising higher.

The UK PMI was actually not as bad as expected, but market analyst Walid Koudmani at XTB said markets are reacting to wider worries about the future of the global economic recovery, adding that the final trading session of the week “could see some increased volatility as investors await some key data from the US in the afternoon”.

With the UK energy crisis still rumbling, National Grid (LSE:NG.) has flagged up that a new subsea electricity interconnector with Norway is opening today, which is expected to provide a more secure energy source.

Looking across the pond, US shares are expected to continue their falls when Wall Street opens, with the Dow Jones, S&P 500 and Nasdaq all seen sliding between 0.4% and 0.5%.

The eleventh-hour signing of a funding bill by President Joe Biden is expected to keep government agencies running until early December. However, treasury secretary Janet Yellen warned that if the debt ceiling is not raised by October 18, the US may not be able to service its debt.

Also, said Daiwa Capital Markets analyst Emily Nicol, investors are also likely to be pondering the lack of progress in moving forward the bipartisan $550bn infrastructure bill – scheduled to have been voted on yesterday but pulled by House Speaker Pelosi – and a planned $3.5trn budget bill that one Democrat senator has said he would like to cut to $1.5 trillion “doubtless emboldening his Republican counterparts”.

10.57am: Business confidence battered

Confidence in stock markets has taken a dip today, in sync with a report that UK business confidence has fallen off a cliff in recent weeks.

The IoD’s economic confidence index has dropped back to negative levels last seen in February, at the height of the country’s third lockdown.

The index, which measures the net positive level of optimism in the UK economy amongst directors, recorded a value of -1% in September, down from the highs of June and July above 20%.

Three-quarters of directors expect costs to be higher in the next 12 months compared to the previous dozen, much more than the 57% that expect revenues to be higher.

Kitty Ussher, the IoD’s chief economist, said: “The business environment has deteriorated dramatically in recent weeks. Following a period of optimism in the early summer, people running small and medium sized businesses across the UK are now far less certain about the overall economic situation and the IoD Directors’ Economic Confidence Index fell off a cliff in September.”

She said the higher proportion of directors expecting costs to rise than those expecting revenues to rise “is not helped by the government’s recent decision to raise employers’ national insurance contributions, which acts as a disincentive to hire just when the furlough scheme is ending”.

Over in Europe, headline inflation picked up a 13-year high of 3.4% in September from 3.0% in August, marginally above the consensus forecast.

“With yet another surge in headline inflation, the heat is on for the European Central Bank’s December discussion on whether a pure recalibration of asset purchases is enough or whether a more significant rewinding would be better,” say economists at ING Bank.

Among individual shares in London, meat producer Cranswick (LSE:CRW) has fallen to levels not seen since March amid lots of news stories about pigs and a potential pigs-in-blankets shortage at Christmas.

The chairman of the National Pig Association warned that the problem with a lack of butchers and abattoir workers “has got very considerably worse over the last three weeks. We are within a couple of weeks of actually having to consider a mass cull of animals in this country” in a BBC radio interview.

Overall, the FTSE is down 65 points or 0.9% at 7022.

10.10am: Furlough’s end

The Office for Statistics has released some data to coincide with the end of the UK furlough scheme, aka the Coronavirus Job Retention Scheme, which had its last day yesterday and was withdrawn completely today.

Under the scheme, one in four people employed during the pandemic have received support at some point between March 2020 and June 2021, the ONS revealed.

The data shows that 8% of people who have ever been furloughed were no longer employed in the three months to June.

“There will be plenty of employers hoping that Friday does finally deliver the anticipated flood of labour back into the market but in reality, nobody really knows for sure how many of those listed as still on furlough at last count have been welcomed back into their old jobs,” said analyst Danni Hewson at AJ Bell.

She added that the 1 October deadline may enable the true picture of the UK jobs market without the safety net, but its unlikely a true picture will emerge until early next year.

“Companies are already factoring in what rising prices mean for their outlook, profit margins will be squeezed and if the winter is as dire as some headlines predict, those early unemployment predictions might still be on the cards.”

She said, “many recovering businesses won’t want to lose skilled workers from the fold and for them the timing of furlough’s end might provide a solution. Christmas is rapidly approaching and names like Amazon, John Lewis and Next are already jostling to pull in the temporary staff they’ll need to keep deliveries flowing over the all-important golden quarter. It might not be the solution furloughed staff had been hoping for but taking a cut in hours would at least give them hope that their career path is still heading in the right direction, even if it has to take a little detour. And with sign-on bonuses or perks like free food being dangled like carrots, a cut in hours does open up opportunities at least in the short term.”

One company that seems to need to pick up a few more staff is JD Wetherspoons (LSE:JDW), which said labour shortages are making it difficult to find staff in some parts of the UK.

9.41am: Losses pared

Although still firmly in the red, London’s blue chip shares are off their worst levels and now the least-worst performer among the main European indices.

Banks and cyclicals are bearing the brunt of the initial sell-off sparked by similar moves by US stocks overnight, while utilities are the only sector in the green as investors look for defensive options.

Lloyds Banking Group PLC (LSE:LLOY) is bottom of the FTSE list, with the index down 58 points or 0.8% at 7,029.

Looking at the Wall Street catalyst last night, the S&P 500 dropped steeply into the close to ensure the index’s worst month since March 2020, said market analyst Neil Wilson from Markets.com.

He notes that the S&P 500 has broken below its 100-day simple moving average and is well south of its 50-day line, about 6% off the all-time high.

Wilson said stagflation is at the heart of the market’s selloff: “We can pin it on worries about persistent inflation, supply chain trouble making things more expensive, labour shortages in key areas because no one wants to work, central banks tightening to avert inflation becoming unanchored and slowing growth.

“It’s recalibration for a macro outlook that seems to be less optimistic than it was in the first half of the year.”

Although government bond yields are down, with the US 10-year Treasury back below 1.5%, which incidentally coincided with US tech stocks falling less than peers, yields have just picked up in the early European session again, Wilson pointed out.

“It’s all rather messy, volatile and indicative of a kind of negative rotation taking place. Gold rallied as yields pulled back and the dollar treaded water for a second day after Wednesday’s big rally.”

8.26: Big fall to start

The FTSE 100 fell 1.1% in the opening exchanges, briefly dipping its head below the 7,000 level, as China’s energy crisis reverberated around the world.

Chinese state-owned companies have been told to secure fuel supplies at any cost in order to avoid winter blackouts, according to the financial news service Bloomberg.

“It is probably a strong signal about how concerned China is regarding keeping industry going, and more importantly, the winter that is just around the corner,” said Jeffrey Halley, Asia-Pacific analyst at Oanda.

“I’m fairly sure it still isn’t enough for ‘that’ phone call to be made from Beijing to Canberra.

READ: ESG, anyone? Coal and oil prices soaring as China squeeze and supply chain chaos hits everything

“And if Chinese steel and aluminium smelters are going to be shutting down for extended periods, you can be sure that will reverberate through global supply chains. Don’t expect global PPI data to show ‘peak stagflation’ anytime soon.”

On the market, IAG, down 3.5%, was the major early casualty as investors booked profit on an investment that has advanced by more than a quarter in value since mid-September.

On the FTSE 250, the big casualty was online retailer AO World, off 12.6% after it said its business had been hit by the national driver shortage.

6.50 am: Investors braced for sharp fall

FTSE100 was tipped for a hefty fall when UK markets open following sharp drops overnight in the US and growing concerns about the energy situation in China.

Financial spread betters were pencilling in a near eighty point drop for London’s blue-chip index a couple of hours before the opening bell to follow a lacklustre end to the third quarter yesterday.

Footsie closed the day down around 21 points at 7,086.

Oil markets might be a key mover today after a Bloomberg story that China’s Vice Premier Han Zheng had ordered the country’s energy groups effectively to buy anything that burns to keep the lights on and steel factories open.

Jeffery Halley at Oanda notes that spot gas prices in Asia are already at the equivalent of US$180.00 a barrel of Brent crude.

Gas prices in the UK hit another record yesterday and if China does plan to hoover up any spare supplies “at all costs”, any respite seems unlikely.

Big coal and oil producers such as Glencore, BP and Shell might get some benefit today though speculation about the OPEC+ meeting next week might dampen some enthusiasm with talk of production limits being raised,

In the US, all three indices closed lower as bond default sabre-rattling continued.

UK news today sees results from pub group JD Wetherspoon (LSE:JDW).

Consensus is for turnover in the year to July 2021 of around GBP799mln and a loss of GBP129mln, but the market’s attention will be focused on the FTSE 250 group comments about the pace of recovery.

Rival pub chains have been reporting sales are back to 90% of pre-pandemic levels and ‘Spoons too should have seen customers steadily return say analysts.

How Britain’s manufacturers are faring is also in focus with Markit’s monthly PMI survey.

Consensus is for no change on last month’s 56.3 number indicating some expansion but that might be optimistic given the supply chain issues, with some components reportedly impossible to get, and the ongoing HGV driver chaos.

6.50am: Early Markets – Asia / Australia

Asia-Pacific markets were mostly lower on Friday, with shares in Japan leading losses.

The Nikkei 225 slumped 2.2% and South Korea’s Kospi fell 1.53%.

Australia’s S&P/ASX200 dropped sharply by 2.05% to 7,181.80 after NSW State Premier Gladys Berejiklian resigned as the ICAC investigates her conduct while in a relationship with former MP Daryl Maguire.


Hong Kong’s stock markets are closed for a holiday on Friday, while mainland China’s markets are closed for the Golden Week holiday from Friday till October 7.


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