• FTSE 100 rises 58 points 

  • UK services PMI weaker than expected

  • UK potentially poised for a general election

 

IHS Markit’s chief economist Chris Williamson thinks the likelihood of the UK falling into recession has increased after PMI surveys indicated a contraction of business activity in August.

The seasonally adjusted all sector output index – which measures output from manufacturing, construction and services sectors – fell to 49.7 in August from 50.3 in July. 

“The August decline in the all-sector PMI has pushed the surveys further into territory that would normally be associated with looser monetary policy,” Williamson said. 

“Such weak PMI readings have in fact never been seen before in over 20 years of history in the absence of either recent or imminent stimulus such as rate cuts or quantitative easing.

“Our view is that, even if a no-deal Brexit is avoided, the uncertainty relating to the UK’s trading position with the EU will spill into 2020, dampening demand, exports and investment.

“We therefore remain unconvinced that the Bank of England will be in any position to hike interest rates at least until 2021, and the deteriorating data flow raises the possibility that, whatever happens in terms of Brexit, the next interest rate could be a cut.”

10.00am: UK services PMI falls by more than expected

The UK services sector expanded in August but at a slower pace than expected. 

The IHS Markit/CIPS purchasing managers’ index fell to 50.6 in August from 51.4 in July, missing analysts’ forecasts of 51.0. 

A reading above 50 signals an expansion in activity while a level below that indicates a contraction. 

“Business activity in the service sector almost stalled in August as Brexit-related worries escalated, curbing spending by both businesses and consumers,” said Chris Williamson, chief business economist at IHS Markit.

“So far this year the services economy has reported its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants, and business-to-business services.”

It caps off a series of weak PMI reports for August with data for manufacturing and construction revealing a contraction in output for both sectors. 

8.50am: FTSE 100 edges higher 

The FTSE 100 kicked off in positive territory with traders choosing to overlook Tuesday night’s parliamentary maelstrom.

In fact, there was a kicker for the pound, with the chances of No Deal Brexit receding – even if PM Boris Johnson seems intent on steamrollering the Remain rump in the commons.

In all 21 Tory rebel MPs completed a kamikaze mission that will see the ends of their political careers to defy the whip and back emergency legislation designed to stop the UK crashing out of the EU without a settlement.

As the Financial Times pointed out, it leaves the Conservative Party in the brink of disintegration and the UK potentially poised for a general election, most likely on October 15.

It is unclear whether Labour will play along with the election call, said Markets.com analyst Neil Wilson.

“Do they fall into the ‘elephant trap’, or do they prefer to watch the new Tory regime implode? With rebels having the whip withdrawn the government benches are now very much in the minority.

“However, the threat of no-deal remains high. An election has to happen sooner or later – surely it is better to happen now? Even if Parliament gets its anti-no-deal legislation on the statute book before an election, a new Parliament would be free to revoke.”

While Westminster was in turmoil, London’s other city, the Square Mile, was anything but with the index of blue-chips opening 24 points higher at 7,292.22.

The selling pressure finally eased for Marks & Spencer (LON:MKS) – but probably a few weeks too late. The retailer’s shares rose 2.5% the day after its relegation from the FTSE 100 was confirmed, ending a 35-year run in the top flight.

A great Brexit contra-indicator is the housing sector in the sense that every time No Deal looms, the building stocks take a hit. The assumption is this: Britain’s exit from Europe will rain down economic chaos, derailing consumer sentiment and therefore hurting the industry.

However, as Richard Hunter, analyst at Interactive Investor, pointed out: “The tailwinds for the sector have long been in place, with historically low interest rates, ample mortgage availability and the general housing shortage all playing a part.”

His comments coincided with a very strong set of results from Barratt Developments (LON:BDEV), which were greeted with the market equivalent of a ‘raspberry’ as the shares fell 2.9%.

6.50am: FTSE 100 tipped to open higher after BoJo defeat

The FTSE 100 is tipped to open higher on Wednesday, while the pound has been given a lift following moves on Tuesday night to block a no-deal Brexit.

Spread-better IG expects the FTSE 100 to open 35 points higher after closing down 14 points at 7,268 on Tuesday.

Traders seem to have gained optimism following a vote by MPs on Tuesday night, which provided Parliament with a chance to pass a law blocking a no-deal exit from the EU, which is due to be debated in today’s session.

Although the uncertainty is likely to continue, with Boris Johnson saying he will table a motion for the country to go to the polls before the planned exit date of 31st October, having opposed the move to take no-deal off the table in negotiations.

“It is worth keeping in mind that a snap election is a risky bet for Boris Johnson. If he loses, he will be the shortest serving PM in the country’s history, and more importantly, the Labour Party would opt for a second Brexit referendum to make sure this is what Brits really, really want”, said Ipek Ozkardeskaya, senior market analyst at London Capital Group.

Away from politics, currency traders will also be looking to the UK’s services PMI, due today, which could hint at slower expansion for the sector in August, while the composite PMI is also likely to confirm softer growth across sectors after construction and manufacturing PMI contracted faster than expected.

However, Ozkardeskaya said political developments would remain the “major driver” of market prices in the coming days and weeks.

On Wednesday morning, the pound was 0.15% higher at US$1.2102 against the dollar and up 0.15% at €1.1026 against the euro.

US markets fell overnight as new tariffs in the trade war with China began to kick in, while a gauge of the US manufacturing sector also signalled a contraction in activity.

The Dow fell 1.08% on Tuesday while the S&P 500 dropped 0.69% and the Nasdaq fell 1.11%.

It was a more positive story in Asia on Wednesday, with Japan’s Nikkei 225 up 0.25% and Hong Kong’s Hang Seng 1.32% higher after an improvement in Chinese service sector activity in August.

Significant events expected on Wednesday September 4:

Finals: Barratt Developments PLC (LON:BDEV), Dunelm Group PLC (LON:DNLM), Frontier Developments PLC (LON:FDEV)

Interims: Inspired Energy plc (LON:INSE), Just Group PLC (LON:JUST), Oxford Biomedica PLC (LON:OXB)

Trading update: Halfords Group PLC (LON:HFD)

Economic data: Caixin China PMI composite, Markit UK services PMI, MBA US weekly mortgage applications

Around the markets:

Sterling: US$1.2102, up 0.15%

Brent crude: US$58.48 a barrel, up 0.38%

Gold: US$1,543.7 an ounce, down 0.15%

Bitcoin: US$10,564.3, up 1.6%

City headlines:

  • Boris Johnson suffered a humiliating defeat in his first Commons, losing control of Brexit last night, as MPs paved the way for an extension of the 31 October deadline – Times
  • Marks & Spencer is to drop out of the FTSE 100 for the first time; the retailer was a founding member of the leading City share index – Guardian
  • GKN to cut 1,000 jobs at its aerospace division as cost-cutting measures after its £8.1 billion hostile takeover by turnaround investor Melrose take hold – Telegraph
  • Amazon paid a total of £220 million in direct taxes in the UK last year despite its total revenues from doing business in the country amounting to £10.9 billion – Times
  • A group of leading academics has warned that an abrupt departure from the EU would bring significant disruption to life in the UK, with a “highly probable” recession – Financial Times