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UK Stocks Struggling for Direction

Sun, 26th May 2019

UK stocks struggled to find their direction on Wednesday, as investors were made to feel uneasy by the struggles at Capita.

Outsourcing company Capita disappointed investors after issuing a profit warning. While the company is not in a situation as bad as Carillion’s, the warning left investors questioning the future of the company, and was another blow to the sector.

The markets are in a difficult situation. The FTSE 100 started the day on a downward trend, and is on track for a 1.3 percent loss for the month as a whole, wiping out a portion of the 4.9 percent rally seen in December. The pound rose by $1.4188 percent, which also negatively impacted the FTSE 100. The UK’s leading index includes a heavy weighting towards companies that take their earnings in foreign currency, and when the pound is strong this negatively impacts the earnings of those companies when they are converted back into Sterling.

The index driven partly by the strength of the pound, partly by US bond yields and also by the strength of the individual sectors. The financial and commodities sectors are cyclical, and the current round of profit taking is normal. However, when combined with rising bond yields - which are tempting investors towards fixed income assets - it’s easy to understand why the index is falling back to 2017 levels. Capita is not a part of the FTSE 100, but its plunge is enough to leave investors feeling fearful about the health of the UK’s economy.

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