The FTSE traded cautiously higher this morning, as Friday’s sharp sell-off may have enticed some investors back to the market in search of value.
Equity market confidence was boosted by a report showing a fifth straight monthly expansion in Britain’s dominant services sector; the UK Purchasing Manager’s Index (PMI) for the services sector rose to a reading of 55.3 in September, up from 54.1 in August. The larger-than-expected increase compares with Bloomberg’s median estimate of 54.5 and is the strongest level in more than two years.
Another encouraging report was released from the Confederation of British Industry (CBI), which revealed that UK financial firms experienced growth during the third quarter. The report reveals that financial companies are concerned about the sustainability of growth, however.
The CBI report has indicated that nearly 33% of 89 firms taking part in its survey reported a rise in business volumes in the three months to 2 September. This compares with 24% reporting a decline. For the first time in two years, firms reporting growth outnumbered those suffering a contraction. ‘After nearly two years of exceptionally tough operating conditions, signs of a brighter outlook are appearing in the financial services sector,’ CBI chief economist Ian McCafferty said today.
Also supporting sentiment was a bullish research note from Credit Suisse, which essentially stated that equity valuations still do not look extended. The report revealed that the outlook for earnings is good and that strong economic momentum and low inflation should support equities. The report also acknowledged that money market funds are still very large, making up around 29% of market capitalisation compared with their long-term average of 18%.This suggests that there is still a lot of money waiting on the sidelines that could potentially enter equity markets.
By 10.30am (London time) the FTSE 100 was up by 1.67 points (+0.03%) at 4990.37 while the broader FTSE 250 was 45.10 points (+0.51%) above its previous close at 8945.06.
Miners, which were mainly supported by slightly firmer copper prices and some positive broker comments, contributed the most points to the FTSE 100 index. The three best performing miners were: Kazakhmys, Eurasian and Antofagasta, up 3.9% to 1025p, 3.6% to 835p and 3.5% to 745p respectively.
Banks were also in positive territory, with Royal Bank of Scotland seen outperforming rivals, despite share issue talks. The Daily Telegraph newspaper reported that RBS will finalise a £4 billion share placing that will go towards reducing the cost of entering the government’s Asset Protection Scheme.
HSBC traded 0.30% higher at 688.5p, Lloyds Banking Group advanced 1.4% to 96.04p and Standard Chartered gained 0.6% to 1487p. In contrast Barclays fell 0.4% to 355.4p. Meanwhile, the Mail on Sunday reported that Barclays is planning to purchase Standard Life’s banking division for £250 million.
Life insurance companies were also in the red, with Aviva down 1.6% to 445.2p after confirming that it is planning to sell a minority stake in its Dutch insurance business Delta Lloyd via an initial public offering on the Euronext in Amsterdam. It is thought that Aviva could sell between 30% and 40% of Delta at a value of £4 billion.
BAE Systems also made the headlines today. It has been reported that the defence giant is prepared to settle the Serious Fraud Office’s bribery allegations, but will not do so ‘at any cost’. BAE’s shares gained 1.3% to 337.2p.
In the meantime, Chemring gained 2.9% to 2470p after announcing that it will supply the US Department of Defense with a range of military decoy flares. The 5-year deal is worth up to $804 million
Looking ahead to the US, Dow and S&P 500 futures contracts traded around 0.40% higher this morning, suggesting the market currently expects Wall Street to open in positive terrain this afternoon.
On the US data front, it is worth noting that the Institute for Supply Management non-manufacturing index for September is scheduled for release at 3pm (London time). Reuters expects the reading to rise to 49.9 from 48.4 in August.
Meanwhile, New York University Professor Nouriel Roubini, who predicted the financial crisis, uttered some bearish remarks over the weekend. ‘Markets have gone up too much, too soon, too fast,’ warned Professor Nouriel Roubini. ‘I see the risk of a correction, especially when the markets now realise that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year,’ he added.
A separate report has revealed that US federal officials were not completely honest about the health of the first 9 financial firms that received federal bailouts. Neil Barofsky, the bailout special inspector general, said the Treasury Department painted an overly rosy picture, creating ‘unrealistic expectations,’ when they called the first bailout banks ‘healthy’ institutions that would be able to lend more with government help.
