11th Oct 2013 16:19
LONDON (Alliance News) - London stocks have closed decisively higher for the second consecutive day, closing out a week of two halves on a positive note, with the FTSE 100 hitting a two week high.
At Fridays close, the FTSE 100 closed up 0.9% at 6,487.19. The FTSE 250 closed up 0.5% at 14,969.83 and the AIM all-Share closed up 0.7% at 786.25.
Having dropped sharply for the first three days of the week, weighed down by fears that the US would breach its debt ceiling and potentially default on debts in a matter of days, equity markets turned around on Thursday on the expectation that a deal will be made in Washington to raise the debt limit, at least on a temporary basis. The turnaround in sentiment allowed all of London's main indices to regain losses from the first half of the week, with the FTSE 100 posting its first weekly gain in three weeks.
Royal Mail dominated news flow on Friday as new shares in the 501-year-old institution began conditional trading. The shares were priced at 330p by the government but immediately jumped more than a third above that price on open, with some 102 million Royal Mail shares changing hands within the first hour of trading. Shares have now closed at 455p, up 38% valuing the company at about GBP4.5 billion against the GBP3.3 billion initial market capitalisation set by the government.
Inevitably, the sharp rise has led to criticism of the UK government for undervaluing the business, but ministers and analysts are urging critics to let the stock settle for a couple of weeks before rushing to a judgement on a difficult pricing call.
"It's difficult, because if the shares were priced too highly, it would of gone the other way," CMC Markets Chief Market Analyst Michael Hewson told Alliance News. "Obviously over the last few weeks, the IPO has generated a bandwagon of interest, and right now its order book is weighted heavily."
"You get an enormous amount of froth and speculation in the aftermath of a big IPO of this kind," Business Secretary Vince Cable told the BBC. "What matters is where the price eventually settles in three or six months' time."
Despite a general increased sentiment over the possibility of a rise in the US debt ceiling, the ongoing government shutdown is starting to have a noticeable impact on companies that rely on US government contracts. Aerospace & Defence is the biggest falling FTSE 350 sector Friday, down 1.2%. Chemring Group closed down 23% after the builder of defence systems issuing a profit warning, due both to the US shutdown and an unfavourable move in the sterling-dollar exchange rate. BAE systems also is losing as the shutdown continues, down 2.7%. Shares in the aerospace and defence giant are under performing following Thursday's announcement that it is still trying to renegotiate a better price for its deal to sell 72 Typhoon jets to Saudi Arabia.
Banks were amongst the best performers on the London market, the sector closing up 1.4%. Lloyds gained 1.5%. Following an upgrade earlier in the week to Buy from Investec, on the back of the perceived benefit to the banking group from stage two of the Help to Buy scheme, Lloyds announced Friday that it has sold its Australian operations to Australian bank Westpac. Australia was probably the worst example of "adverse asset selection" in the entire ill-fated HBOS international debacle, says Investec analyst Ian Gordon. Barclays confirmed Friday that it will join the other big banks that have already agreed to take part in the Help to Buy housing scheme, the bank closed up 1.4%.
Gold has softened to it cheapest level since mid-July, currently USD1269.115 per oz, giving more signs of improved investor sentiment as politicians in Washington appear to move closer to a deal over the debt ceiling.
Following a meeting between the President and Republicans late on Thursday the White House issued a statement calling it a "good meeting" and said Obama looked forward to making continued progress with both Republicans and Democrats. Eric Cantor, the House Republican majority leader, told reporters at the Capitol that "the president said he would consult with the administration folks and hopefully we can see a way forward after that."
"The consensus is that a deal will be done, that it represents a de-facto capitulation by the Republicans as a result of voters blaming them for the stalemate, and that the temporary deal will become permanent before Thanksgiving," said Societe Generale strategist Kit Jukes following the meeting.
There has been radio silence from Washington since then, but US stocks continue to trade positively on hope a deal will be reached. As London closes for the weekend both the DJIA and the S&P500 are up about 0.3%.
The August data releases out this week largely disappointed, which had brought the pound down from the USD1.6250 highs a week previously. A huge decline in UK industrial production numbers on Wednesday came as a particular disappointment, declining 1.1% in August against expected growth of 0.4%. The pound slipped slightly again Friday to finish the week at USD1.5950.
Elsewhere in the forex market, the euro gained slightly against the dollar, currently trading at USD1.3560, while the Chinese Yuan hit a record high against the dollar, reaching 6.1020, buoyed by the positive news about the US debt ceiling and optimism that the Federal Reserve will keep it's monetary stimulus loose, devaluing the dollar.
The Yuan's gain may also be partially on speculation ahead of China's economic data releases. The National Bureau of Statistics is scheduled to release trade and inflation data for September on Saturday and Monday, respectively.
A light day in the data calendar to come on Monday. No data releases are expected from the UK or the US, which will be celebrating Columbus day, although the NYSE will be open as usual.
AIM listed technology company Nanoco are scheduled to release full year results Monday, while management statements are expected from Essentra and McBride.
By Jon Darby; [email protected]; @jondarby100
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