LONDON MARKETS: FTSE 100 Ends Choppy Session With Modest Gain, But Rate-cut Prospects Dim

By Carla Mozee, MarketWatch

U.K. government wins challenge to Brexit in court

U.K. stocks finished a choppy Friday session barely higher as a mixed round of new corporate earnings hit and investors contemplated the fact that further monetary stimulus may be on hold.

The FTSE 100 rose 0.1% to end at 6,996.26, but it bounced around throughout the session, rising as much as 0.3% and losing as much 0.9%. For the week, the FTSE 100 fell 0.3%.

"In one of the busiest periods for earnings, investors are readjusting portfolio weightings, leaving the broader market to trade sideways," said Jasper Lawler, market analyst at CMC Markets, in a note.

"A degree of caution has been evident with major macro risk events in the next two weeks. Next week sees four major central banks [deciding] interest rates, with the U.S. presidential election the week after," he said.

The FTSE 100 had tipped higher during the session when the pound dropped early Friday. That decline came after the U.K. government prevailed (http://www.marketwatch.com/story/uk-government-triumphant-in-first-of-legal-challenges-against-brexit-2016-10-28) in a legal challenge related to the U.K.'s pending exit from the European Union.

The lower pound has helped shares of many multinational companies on the FTSE 100. Pound weakness should translate to stronger demand for products from overseas clients, and to higher earnings when companies convert the money they've made abroad back into sterling.

Equities "managed to recoup early losses on Friday, gaining some comfort from a pause to the rout in government-bond markets," said Lawler, who said the yield on the U.K.'s 10-year gilt hit a new high since the Brexit vote, while German's 10-year bund yield rose to its highest since April.

The 10-year gilt yield late Friday rose 1 basis point to 1.25% as prices fell. It hit an intraday high of 1.312%, according to Tradeweb data.

Read: Here's why bond yields are rising around the world (http://www.marketwatch.com/story/heres-why-bond-yields-are-rising-around-the-world-2016-10-27)

Pondering policy: That rout in bond prices worldwide comes as investors foresee monetary policy makers slowing the pace of their respective stimulus programs.

Such talk in the markets picked up pace in part after U.K.'s gross domestic product rose 0.5% in the third quarter, beating estimates of a 0.3% expansion rate. Thursday's report form the Office for National Statistics reflected the first full quarter since the U.K. voted in June to leave the European Union.

The GDP rate was roughly double the pace the Bank of England had anticipated, said John Wraith, head of U.K. macro rates strategy & economics at UBS, in a Friday note.

"The scale of the drop in sterling, and uncertainty over how long and to what extent it may feed through to higher inflation, led [Bank of England] Governor Carney to warn that there are limits to the [Monetary Policy Committee's] willingness to look through an overshoot of inflation," Wraith said.

"These developments seem to have ended any lingering prospect of a further cut in [the] bank rate at next week's MPC meeting," he wrote.

See: Apple's U.K. price hikes add to consumers' post-Brexit pain (http://www.marketwatch.com/story/apples-uk-price-hikes-add-to-consumers-post-brexit-pain-2016-10-28)

Relief about how well the economy has performed since the Brexit vote "will likely be tempered by ongoing concerns about what may lie ahead for domestic demand in the U.K. economy in 2017 and beyond," Wraith said.

See: 'Not out of the woods yet' -- analysts play down U.K. GDP beat (http://www.marketwatch.com/story/not-out-of-the-woods-yet-analysts-downplay-uk-gdp-beat-2016-10-27)

(http://www.marketwatch.com/story/heres-why-bond-yields-are-rising-around-the-world-2016-10-27)Movers: A topsy-turvy session for Royal Bank of Scotland Group PLC (RBS.LN) (RBS.LN) shares left them down by 1.2%. The lender said it may miss its long-term financial goals (http://www.marketwatch.com/story/rbs-reports-loss-will-miss-long-term-targets-2016-10-28) after swinging to a third-quarter net loss, in part because of a provision for U.S. legal settlements.

"On the face of it, there are some reasons to be cheerful following this latest update. Pre-tax profit is significantly higher, the capital cushion has improved once more and lending continues to grow at a fair clip," said Richard Hunter, head of equities at Wilson King Investment Management, in a note.

But "RBS has yet to emerge from the weight of misconduct fines, restructuring costs, the distraction of the sale of the Williams & Glyn unit, the specter of the Government stake and the lack of a dividend payment," Hunter added.

RBS shares are down 40% over the past 12 months.

Other bank shares closed mixed Friday. HSBC Holdings PLC (HSBA.LN) (HSBA.LN) fell 0.5%, Barclays PLC (BCS) (BCS) was up 0.4%, Lloyds Banking Group (LLOY.LN) turned up 0.4% and Standard Chartered (STAN.LN) reversed losses to rise 0.3%.

Shares of British Airways parent International Consolidated Airlines Group SA (IAG.LN) jumped 5.9% as the company raised its interim dividend 10% over the year-earlier period even as IAG did issue a profit warning (http://www.marketwatch.com/story/british-airways-parent-iag-cuts-earnings-outlook-2016-10-28-2485428).

IAG's third-quarter operating profit declined, hurt by a drop in sterling after the U.K. voted to leave the European Union. But some analysts noted that operating profit for the quarter was in line with consensus estimates.

Sterling: The pound bought $1.2149 compared with $1.2173 late Thursday. It hit an intraday low of $1.2114, FactSet data showed, after the High Court in Northern Ireland decided (http://www.marketwatch.com/story/uk-government-triumphant-in-first-of-legal-challenges-against-brexit-2016-10-28)that the U.K.'s departure from Britain can happen without lawmakers giving it final approval.

The decision in Belfast is the first in a number of anti-Brexit legal challenges to be delivered.

(END) Dow Jones Newswires

October 28, 2016 12:24 ET (16:24 GMT)

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