The FTSE continued its advance this morning, buoyed by better-than-expected retail sales figures, a rally in BP shares and a successful Spanish bond auction.
The euphoria over the World Cup gave a boost to UK retail sales for May. The latest figures released from the Office for National Statistics showed a 0.6% increase in retail sales from the previous month, exceeding the median estimate of 0.1% from economists surveyed by Bloomberg. Year-on-year sales have increased 2.2%. Non-store retailing, which includes online and mail order shopping, had the largest increase in volume, jumping 11.8% from a year earlier, while non-food stores rose 5.4% in volume compared to a year ago. Investors will remain cautious over the future outlook for UK retail sales, however, with the Nationwide Consumer Confidence Index released yesterday pointing to a fall in optimism for the future, compounded by the uncertainty surrounding the impact of the upcoming UK emergency budget and ongoing sovereign debt issues in Europe.
As part of the new coalition government’s push to get UK’s finances in order, Chancellor of the Exchequer George Osborne confirmed today that the Financial Services Authority (FSA) will be dismantled and will become a subsidiary to the Bank of England (BoE). As part of the BoE, the FSA will be predominantly responsible for feeding intelligence to the newly formed Financial Policy Committee, which will be chaired by current BoE governor Mervyn King. A separate Consumer Protection and Markets Authority will be created to regulate individual banks, building societies and insurance companies. The move greatly increases the powers of the BoE to not only control monetary policy but to also prevent the build-up of risk within the financial system. As governor Mervyn King aptly put it, his enhanced role will be to ‘turn down the music when the dancing gets a little too wild’.
By 11:15am (London time), the FTSE 100 had gained 37.55 points (+0.71%) to 5275.47, while the broader FTSE 250 index rose 34.94 points (+0.35%) to 9894.89.
Propping up the FTSE 100 was a rally in BP shares, which rose as much as 9.7% this morning before settling at a 7.5% gain. The oil giant overnight agreed with US officials to set up a $20 billion fund to compensate victims of the oil spill. In order to set up the fund, BP will be scrapping the next three quarters of dividends and will have to sell some assets to ensure the financial stability of the company. BP shareholders will be hoping the decision to set up the fund and scrap dividends will appease US politicians and pave the way forward for the company to rebuild its reputation.
Also outperforming on the FTSE 100 this morning was the banking sector, with Barclays, Lloyds and Royal Bank of Scotland gaining between 3% and 4%. The more internationally exposed banks HSBC and Standard Chartered rose 1.33% and 1.85% respectively. Giving a boost to the banking sector was a successful bond auction in Spain today. The Spanish government was able to sell €3 billion in 10 year bonds and €479.2 million in 30 year bonds. The fact that the Spanish government is still able to obtain funding from the primary bond market suggests that investors have some confidence that the embattled nation can overcome its deficit burden and supports the recent claims that it will not need to turn to the European Union or International Monetary Fund for funding. However, investors did demand a greater return to purchase the bonds, with the 10 year yield rising to 4.864% from 4.045% from a similar bond sale a month earlier. Spain has recently announced that it will conduct its own stress test on banks which it plans to release in the near future.
The Spanish bond sale also bolstered the euro, which is trading at $1.2374 against the US dollar. Before the auction, the Euro looked like it was going to give back its gains for the week after reaching a low of $1.2243, but it spiked over 100 pips following the successful auction. Sterling followed a very similar path to the euro. It reached an intra-day low of 1.4646 against the US dollar this morning but soared 150 pips to $1.4792 following the bond auction and the release of the upbeat retail sales figures.
