Sterling Falls On EU Brexit Trade Deal Worries

Shares in London ended higher on Friday after the pound declined following UK Prime Minister Theresa May's Brexit speech, in which she proposed a two-year transition period and said the country will not seek to remain in the EU single market.

"The speech was big on [UK Foreign Secretary] Johnson-style rhetoric, with plenty of 'broad sunlit upland' stuff that spelled out how the UK wished to be a friend to the EU. But beyond that, little else," said IG chief market analyst Chris Beauchamp.

May, in the Italian city of Florence Friday afternoon, said neither the government nor the EU would be ready to fully implement new arrangements for Brexit on March 29, 2019, when the UK formally leaves.

She proposed an implementation period during which "the existing structure of EU rules and regulations" would apply - and people from the EU would continue to be able to "live and work" in the UK under a registration scheme.

May said there would be a "clear double lock" to the implementation period - giving businesses the certainty to plan for change and a guarantee that the temporary transitional arrangements "will not go on for ever".

In an attempt to break the deadlock over the UK's financial settlement, May promised the UK would honour its commitments under the existing budget period, which lasts until 2020, and continue to participate in some other programmes on areas including science, education and culture beyond Brexit.

The prime minister gave no detail on a payment of a so-called 'divorce bill', but did expand on the future trading relationship between the EU and the UK.

"The United Kingdom is leaving the European Union. We will no longer be members of its single market or its customs union. For we understand that the single market's four freedoms are indivisible for our European friends," said May.

"There is no need to impose tariffs where we have none now, and I don't think anyone sensible is contemplating this," she added.

Sterling hit an intraday low of USD1.3493 during her address, but recovered slightly to be quoted at USD1.3513 at the London close, down from USD1.3555 at the close on Thursday.

"The pound came under pressure when May stated the UK would be leaving the single market and customs union, but some of the losses were reversed when the Prime Minister talked about a transitionary period – even though no details were given," said David Madden, market analyst at CMC Markets.

"The pound's decline allowed the FTSE to jump half a percent, taking it back above 7,300 for the first time in over a week," said Spreadex analyst Connor Campbell.

The dollar-earner heavy FTSE 100 index closed up 0.6%, or 46.74 points at 7,310.64. The blue-chip index ended the week 1.3% higher.

The FTSE 250 ended up 0.5%, or 99.03 points, at 19,517.36, ending the week up 0.7%, and the AIM All-Share closed up 0.3%, or 2.94 points, at 994.67, ending the week flat.

The BATS UK 100 ended up 0.5% at 12,413.83, the BATS 250 also closing up 0.5% at 17,750.28, and the BATS Small Companies ended down 0.2% at 12,079.64.

In mainland Europe, the CAC 40 in Paris ended up 0.3%, while the DAX 30 in Frankfurt ended down 0.1%.

The euro was quoted at USD1.1965 at the close on Friday, having hit an intraday high of USD1.1998, up from USD1.1935 at the European equities close Thursday.

"The EUR/USD was given a boost by the strong French and Germany services and manufacturing numbers this morning. The PMI reports showed an acceleration in the growth rate of the sectors, and they all topped dealers estimates," said CMC's Madden.

The strong German figures came ahead of the country's federal election on Sunday, in which Chancellor Angela Merkel is bidding for a fourth term in office.

"German elections on Sunday are expected to proceed as forecast, with Merkel victorious once more. Markets should only give the event a passing nod, content that Europe's strongest pillar will remain a beacon of stability," said IG's Beauchamp.

Flash data from IHS Markit earlier on Friday showed Germany's private sector grew at the fastest pace in almost six-and-a-half years in September.

The composite output index rose unexpectedly for the consecutive second month in September, to 57.8 from 55.8 in August. This was the highest reading since April 2011, and it was forecast to fall to 55.7.

The manufacturing Purchasing Managers' Index, expected at 59, climbed to 60.6 in September from 59.3 in August. The sector logged the sharpest monthly improvement in business conditions since April 2011.

The services PMI improved to a 6-month high of 55.6 from 53.5 in August. The score was above the expected 53.7.

Back in London, Smiths Group ended as the worst performer in the FTSE 100, down 5.6% after the engineer saw profit rise in its recently ended financial year, though underlying revenue decreased by 1%.

Smiths said reported revenue for the financial year to the end of July rose 11% to GBP3.28 billion from GBP2.95 billion last year, though declined by 1% on an underlying basis.

Reported pretax profit soared to GBP601.0 million from GBP346.0 million, aided by the positive effects of foreign currency translation which amounted to GBP421.0 million, bringing a gain on profit of GBP71.0 million. Smiths lifted its dividend 3% to 43.25 pence.

"The progress delivered in executing our strategy ensures that we're well positioned for the group to return to growth in 2018. As in previous years, we expect group performance to be weighted towards the second half," said Chief Executive Andy Reynolds Smith.

However, Smiths Group provided no update regarding a permanent appointment for its chief financial officer position.

AstraZeneca was at the other end of the blue-chip index, closing up 3.4% after Bernstein raised the drugmaker to Outperform from Market perform.

Johnson Matthey ended up 2.3% at 3,468.00 pence as it extended gains made on Thursday, with Credit Suisse raising its price target on Friday for the platinum and specialist chemical firm to 3,700p from 3,500p.

The stock closed up 14% at 3,390.00p on Thursday.

Johnson Matthey had said on Thursday constant currency sales growth is expected to be around 6% year-on-year for the full year. It also said it is planning to make a further GBP50 million in savings over three years beginning in financial 2019. This is in addition to the GBP25 million in savings it announced in June.

The firm also said it will make an initial investment of GBP200 million in battery material technology. This will "drive growth" in a market which it predicts could be worth more than USD30 billion once battery electric vehicles penetration increases to 10%, the firm said.

Pets At Home ended as the best mid-cap performer Friday, up 6.0% at 206.26p after Goldman Sachs raised the pet goods retailer's price target to 188p from 180p, keeping its Neutral rating on the firm.

In other company news, US-based ride-hailing app Uber will lose its licence to operate in London from September 30, the British capital's transport regulator said on Friday.

Transport For London said it has decided that Uber "will not be issued with a private hire operator licence" once its current licence expires on September 30.

It said an investigation concluded that Uber was "not fit and proper" to operate in London, citing concerns over public safety and security, including background checks on drivers.

Uber has faced a series of controversies in recent months, including complaints about sexual harassment, discrimination, and workplace culture.

Stocks in New York were lower at the London equities close. The Dow Jones, S&P 500 index and the Nasdaq Composite all down 0.1%.

Flash data from IHS Markit showed the US manufacturing index climbed to 53.0 in September from 52.8 in August, in line with expectations, while the services index declined to 55.1 from 56.0, having been seen at 55.9.

The composite index for September was 54.6, down from 55.3 in August. Any reading above 50 indicates expansion in the sector.

Also in the US, Federal Open Market Committee members Esther George and Steven Kaplan are due to give speeches at 1430 BST and 1800 BST, respectively.

"Gold is higher on the day, but the bounce back has been slipping, and the metal may turn over on itself. Gold has been in decline for the past two weeks, momentum is with the sellers. The Federal Reserve are keeping the option of an interest rate hike in December on the table, and while traders fear they may keep their promise, the price of gold could remain under pressure," said CMC'S Madden.

Gold was quoted at USD1,295.21 an ounce at the close on Friday, up against USD1,292.25 at the London equities close on Thursday but far below its September highs of USD1,357.17.

Brent oil was quoted at USD56.73 a barrel at the close on Friday, from USD56.22 at the same time the prior day.

In the corporate calendar on Monday, water and waste firm Pennon Group is due to release a trading statement, while housebuilder MJ Gleeson, advertising agency M&C Saatchi, and South America-focused oil and gas producer Amerisur Resources will publish half-year results.

In the economic calendar, the UK CBI and PwC quarterly financial services survey is at 0001 BST, flash manufacturing PMI for Japan is released at 0600 BST, while German Ifo business climate figures are at 1000 BST.

Attention turns to the US in the afternoon, with the Chicago Fed national activity index at 1330 BST and the Dallas Fed manufacturing business index at 1500 BST.