• FTSE 100 falls 55 points

  • US indices also down

  • Sterling drops against the US dollar

5.10pm: FTSE 100 finishes the day lower after Brexit talks stall

The FTSE 100 index ended in the red on Tuesday as the pound sank after Brexit talks stalled between the UK and EU.

At the close, the UK blue chip index fell 54.7 points at 7,143.15, a 0.8% decline, and the pound lost 0.7% against the dollar to US$1.22.

“The pound has slumped into the lowest level seen in over a month, as the blame game continues amid leaks of a conversation which saw Angela Merkel lay out a plan that involves Northern Ireland remaining within the customs union,” said Joshua Mahoney, senior market analyst at IG.

“If proven correct, these comments point towards a rejection of Johnson’s plans of a customs zone, only to propose an unthinkable plan to split Northern Ireland away from mainland trade deals and standards.

“The big question is whether this is the official stance of the EU, with confirmation essentially pointing towards a likely no-deal Brexit. It looks likely that the electorate will have to decide between a conservative-led no-deal Brexit and a Corbyn-led second referendum; neither of which the markets would take particularly well to,” Mahoney added.

The Footsie wasn’t the only index suffering on Tuesday. Around London’s close, on Wall Street, the Dow Jones Industrial Average was down around 314 points to 26,164, while the broader S&P 500 index dropped 39 points to 2,899, and the tech laden Nasdaq Composite retreated 101 points to 7,856.

2.45pm: FTSE 100 in the red; US stocks open sharply lower

US indices have taken a bath at the outset of trading as the preparation work by junior officials gets underway for Thursday’s US-China trade talks.

The Dow Jones was down 260 points (1.0%) at 26,228 while the S&P 500 was off 30 points (0.1.0%) at 2,909, following the release of US producer prices (PPI) data for September. The FTSE 100 shed 12 points (0.2%) at 7,186.

The consensus forecast had been for a 0.1% increase but in fact the index fell 0.3%; the core index also fell 0.3%, versus expectations of a 0.2% increase.

“A 1.0% out-of-the-blue plunge in the ‘trade services’ component, which measures wholesale and retail profit margins, explains about half the undershoot in the core,” revealed Ian Shepherdson, the chief economist at Pantheon Macroeconomics.

“Services dominate the core PPI, but core goods prices also dipped in September, by 0.1%. This is consistent with the steep downshift in China’s PPI for manufactured goods.

“Overall, PPI inflation remains under control, though the September numbers overstate the extent of the downward pressure. The upturn in some of the healthcare components, however, needs to be watched,” Shepherdson said.

Sterling suffers

The trade-weighted dollar index is virtually unchanged on the day following the figures, despite gaining four-fifths of a cent to US$1.2210 against sterling.

“Sterling is moving lower this morning after reports that Johnson and Merkel spoke on the phone first thing with a rather frosty outcome from both sides, quickly followed by a rather irate sounding tweet from Donald Tusk suggesting Boris is more interested in the ‘blame game’ than what’s really at stake. The pound has lost ground against all the major currencies over the course of the day so far – only the Canadian dollar has performed worse in the last week,” observed John Goldie, a forex dealer at Argentex Group.

“[France’s president] Macron suggested that a decision would be made by the end of this week on whether a deal would be possible and after today’s headlines, we don’t see any chance of anything being agreed. Therefore, we revert back to No Deal vs. Extension outcome this month,” Goldie said.

Andy Scott, an associate director at JCRA, said sterling’s decline today was not a surprise, since it “all but confirms” a withdrawal agreement will not be reached before the current Brexit date.

“Today’s reports presumably mean the government will have to request an extension – to which the EU have said they will agree. An extension would allow for a general election and a new government to decide the next steps. More telling is Sterling’s implied volatility in the FX options market, which acts as a market gauge of expected movement in a currency’s price, has fallen for one month’s time, but increased for both three and six months. This suggests that traders expect less movement in Sterling over the current Brexit date, and more in three and six months’ time,” Scott said.

“The fact that Sterling hasn’t fallen back to its recent lows also points to expectations that the Benn Bill ensures an extension is highly likely. Could the market be mispricing the risk that a no-deal Brexit could still happen, either by a technical legal measure the government found to avoid requesting an extension, or that the EU refuses one? The Halloween timing is certainly apt, as a no-deal outcome could be truly frightening!” he added.

Commons foe

Back in the House of Commons, yah-boo politics continued with Michael Gove, the cabinet office minister in charge of no-deal planning, Sir Keir Starmer, Labour’s Brexit minister, going at it hammer and tongs.

Gove said the government wanted a deal but also maintained that delaying Brexit would let down the 17.4mln people who voted for a deal.

Starmer cast doubts on the government’s appetite for a deal, given that the UK’s plans for a replacement to the Irish backstop “were never going to work”.

Gove responded that Starmer should have voted for a deal if he was so keen on not leaving without one, rather than voting against the deals that former prime minister Theresa May presented to the House of Commons.

12.25pm: Dog bites man and other predictable headlines: Brexit talks headed for collapse

A briefing from 10 Downing Street on the progress – or lack of it – in the Brexit negotiations has sent sterling into retreat.

The pound was down three-quarters of a cent at US$1.2214 after a Downing Street sources said Brexit talks in Brussels are close to breaking down following a discussion this morning between Britain’s prime minister, Boris Johnson, and Germany’s chancellor, Angela Merkel.

According to Sam Coates, the deputy political editor at Sky, a Downing Street source claimed the call with Merkel showed the EU has adopted a new position.

“She made clear a deal is overwhelmingly unlikely and she thinks the EU has a veto on us leaving the Customs Union,” the source was quoted as saying.

“She said that Ireland is the government’s special problem and Ireland must at least have a veto on NI (Northern Ireland) leaving,” the statement continued.

Sir Keir Starmer, the shadow Brexit secretary, said the briefing from Downing Street was an attempt to sabotage the Brexit talks.

“Boris Johnson will never take responsibility for his own failure to put forward a credible deal. His strategy from day one has been for a no-deal Brexit.

“It is now more important than ever that parliament unites to prevent this reckless government crashing us out of the EU at the end of the month,” Starmer said.

Despite sterling’s dive, London’s blue-chips are lower on balance, with the FTSE 100 down 23 points (0.3%) at 7,175.

10.20am: Traders reluctant to commit ahead of this week’s Sino-US trade talks

The Footsie is back to square one, reinforcing the suspicion that traders are reluctant to commit themselves ahead of Thursday’s US-China trade talks.

In mid-morning trade, the FTSE 100 was up just 2 points (0.0%) at 7,200.

“Driven by domestic nationalist forces and the need to save face, US President Donald Trump and his Chinese counterpart, Xi Jinping, have continued to escalate the bilateral trade war, despite their shared interest in resolving it before the end of the year. To make a deal, both sides need to start taking substantive steps immediately, writes Kevin Rudd at ING.

“The next round of negotiations could be the last real chance to find a way through the trade, technology, and wider economic imbroglio that has been engulfing both countries.

“Failing that, the world should start preparing for its rockiest economic ride since the 2008 global financial crisis. There is a real risk that America will slide into recession, and that the global economy will experience a broader decoupling that will poison the well for Sino-American relations far into the future. There is also a widening window of opportunity for nationalist constituencies in both countries to argue that conflict is inevitable,” Rudd argued.

Cheerful stuff…

“On the subject of talks going nowhere,” says IG’s chief market analyst, Chris Beauchamp, making a seamless segue to Brexit negotiations, “it looks like both the EU and UK expect their negotiations to be wrapped up by the end of this week.

“A comment from a ‘source’ in Downing Street has helped illuminate the government’s strategy, pointing to a potential showdown with Parliament and the Supreme Court from 18 October over the issue of extensions. Confirmation of the hard-line approach has put fresh pressure on sterling, which is steadily heading back to last week’s lows,” Beauchamp noted.

On the home front, the Office for National Statistics (ONS) reported that labour productivity as measured by output per hour fell by 0.5% in the second quarter of this year from the same period of last year.

The preceding two quarters had seen zero growth.

Both services and manufacturing saw a fall in labour productivity of 0.8% and 1.9% respectively, compared with the second quarter of 2018.

8.45am: Progress made despite the millstone of the LSE

The Footsie has got off to a positive start despite London Stock Exchange PLC (LON:LSE) dragging down the index after the HKEX bid collapsed.

London’s index of big cap shares was up 20 points (0.3%) at 7,217, despite a 6.1% fall for the London Stock Exchange.

Although most in the City thought the proposed bid by the Hong Kong firm was dead in the water there had been some talk of institutional investors petitioning for an increase of 20% or more in the offer price with a larger cash element.

“A concerted charm offensive failed to pay off for the Hong Kong group as investors balked at the anti-trust, regulatory and deliverability issues that the tie up implied and, not least, LSE is fully committed to the Refinitiv deal,” observed Neil Wilson at markets.com.

“Finally, the premium on offer, though chunky, was not enough to compensate shareholders. There was never a cash element, just new shares in a HK-listed group,” he added.

The FTSE 250, meanwhile, was up 3 points (0.0%) at 19,423, despite recruiters being about as welcome as a stubbed toe in a Trappist monastery after a couple of profit warnings from operators in the sector.

PageGroup PLC (LON:PAGE) was down 7.3% at 387p after its gloomy trading update, dragging down sector peer Hays PLC (LON:HAS) with it by 5.6%.

Robert Walters PLC (LON:RWA) slumped 50p to 440p as it said it no longer expects to deliver profit growth this year after trading conditions softened across a number of its markets in the third quarter.

6.45am: Footsie to pick up the baton from firmer Asian markets

The FTSE 100 will continue to tiptoe higher on Tuesday, traders reckon, joining in with the wider European and Asian trend.

The Footsie is predicted to add 11 points to its closing point of 7,197.88, according to spread betters on the IG platform.

Chinese stocks resumed trading on Tuesday after a week’s holiday, looking as though they weren’t sure if they missed it. The Shanghai Composite was up 0.75%, though lagging the Nikkei’s 1.1% gain.

Judging by equities alone, it seems China is more sanguine about the trade talks that begin later this week, while there were also Middle East tensions and Donald Trump’s legal issues weighing on Wall Street trading overnight.

Ahead of trade talks in Washington in a few days’ time, this subject will be a major theme and lead to more volatility towards the latter end of the week

Arguably expectations are relatively low, said Chris Beauchamp, market analyst at IG, which he says will provide plenty of room for surprises on the upside to boost markets: “with ‘no progress’ now the base case, anything resembling progress will be gratefully received by investors keen to see this pernicious issue dealt with. 

“All other events this week will likely pale into insignificance, especially as investors await the start of earnings season and the next Fed meeting. But equities are now into the strong final three months of the year, and at present it promises to be much more pleasant experience for investors than the final months of 2018.”

Brexit remains the subject everyone is thinking about but trying not to talk about, though it will be on everyone’s lips at the Scottish Court of Session on Tuesday where an appeal will seek to ensure Boris Johnson complies with the Benn Act and seek a Brexit extension if he cannot agree a deal with the EU.

Middle East politics is another subject with no right answer, though most were in agreement that President Trump’s shock withdrawal of US troops was the wrong one. Turkey began almost immediate air strikes against Kurdish forces in northeast Syria.

Analysts at Rabobank wondered: “what are the multi-dimensional consequences if Turkey does move in this time? And what are the longer-term global consequences if Turkey indeed moves in and there are no short-term consequences?”

The immediate market consequence was a drop in the Turkish lira.

Easy does it

In company news, it’s hard to know if it will be an easy day ahead for EasyJet PLC (LON:EZJ) as it touches down with a pre-close update, as recent forecasts have been mixed and come as the wider travel industry remains buffeted by turbulence after Thomas Cook’s collapse.

The budget airline reported a record £275mln loss for its first half, back in May, but analysts reckon it could be on course for a record profit in the second half.

Even so, full-year earnings will still be well below 2018’s number, as higher costs offset a surge in sales.

Non-fuel costs will be a key area of focus for investors following a 4% drop in the third quarter, while the impact of a spike in oil prices in September following a military strike on Saudi Arabian oil fields will also be eyed.

Analysts at UBS expect the airline to confirm its full-year profit guidance of between £400-440mln.

Economics lessons with Electrocomponents

We will also hear from industrial and electronic products distributor Electrocomponents PLC (LON:ECM), which is expected to report a continuing softening in sales growth during the second quarter as analysts advised keeping an eye on the company’s links to wider macroeconomic data.

The first three months of its financial year saw like-for-like (LFL) revenue growth weakening to 4% from 8% in the previous quarter due to softer electronics performance, offset by stronger numbers in industrial.

Management acknowledged the more uncertain external macro environment may weigh on the second quarter but felt the group was well positioned to deliver progress in the year.

UBS expects LFL growth from the FTSE 250-listed group will slow to 3% between July and September, although the Swiss bank expects numbers to pick up from the second half onwards.

Electrocomponents predicted broadly stable gross margins for the full year, with the first half likely to be impacted by efforts to diversify the portfolio by investing into broader electronics offerings.

Investors will focus on commentary around the market environment in the trading statement, which may also include comments on the financial year outlook against general consensus.

Higher or fire for recruiter?

The third-quarter trading update from Robert Walters PLC (LON:RWA) will show whether the FTSE 250 recruiter is working hard, or hardly working.

The last time we heard, the firm was complaining that UK employers were holding off hiring more staff due to Brexit uncertainty, with profits dipping 8% to £25.2mln in the second quarter.

Analysts at AJ Bell said the trading statement should make for interesting reading at a time when low jobless rates appear to be stoking some wage growth.

“The danger is that unemployment is a lagging indicator, owing to the lead times involved in firms feeling confident enough to hire and then the process of finding the best candidate.”

Investors will also be looking at the split between permanent and temporary hires after Robert Walters reported in the second quarter that fees from temporary hires rose faster than those from permanent ones for the first time since 2017.

“Generally the more confident employers are the more likely they are to take on full-time staff, while they may favour temps if the outlook is a bit less certain,” they said.

Fellow recruiter PageGroup PLC (LON:PAGE) is releasing its third quarter update on Wednesday.

Significant announcements expected for Tuesday 8 October:

Finals: YouGov PLC (LON:YOU)

Interims: Air Partner PLC (LON:AIR)

Trading statement: EasyJet PLC (LON:EZJ), Electrocomponents PLC (LON:ECM), Hollywood Bowl Group PLC (LON:BOWL), Robert Walters PLC (LON:RWA)

Economic data: US producer prices, US NFIB small business optimism, Powell speaks again