Stocks End Flat As UK Energy Cap Sinks Suppliers

Stocks in London ended broadly flat on Wednesday, as sterling rebounded following a better-than-expected UK services sector PMI reading following weak construction and manufacturing data earlier in the week, while energy suppliers were hit by plans for a price cap to be introduced in the UK.

The FTSE 100 index closed flat or 0.53 points lower at 7,467.58. The FTSE 250 ended flat, down 5.93 points, at 20,029.42, and the AIM All-Share also closed flat points 0.19 higher, at 1,015.36.

The BATS UK 100 ended up 0.1% at 12,697.98, the BATS 250 closed down 0.2% at 18,243.72, and the BATS Small Companies ended 0.4% higher at 12,391.27.

The pound was firm against the greenback quoted at USD1.3277 at the London equities close, compared to USD1.3249 at the London equities close Tuesday.

Sterling, having been knocked on Tuesday, was given a boost as UK services sector growth improved unexpectedly at the end of the third quarter, though slightly, survey data from IHS Markit and Chartered Institute of Procurement & Supply showed Wednesday.

The services Purchasing Managers' Index, or PMI, climbed to 53.6 in September from August's 11-month low of 53.2. Economists had expected the index to remain stable at 53.2. Any reading above 50 indicates expansion in the sector.

Among components, output grew at a sustained pace in September, while new business increased at the weakest pace in thirteen months. However, the rate of job creation eased only marginally from August's 19-month high.

The higher UK services PMI figures sharply contrasted to that of the construction sector which contracted in September, data showed on Tuesday.

The IHS Markit/Chartered Institute of Procurement & Supply construction Purchasing Managers' Index fell to 48.1 in September from 51.1 in August. The reading was expected to remain unchanged at 51.1.

"The pound was relieved by the better than forecast UK services PMI while still maintaining some concerns about the state of new business growth. The currency’s gains were also mitigated by a rather dovish comment from Standard & Poor's, in which S&P claimed it was 'sceptical' about how justified a Bank of England rate hike would be in the near future," said Spreadex analyst Connor Campbell.

In Paris the CAC 40 ended down 0.1%, while the DAX 30 in Frankfurt ended up 0.5%.

The euro was mostly unmoved, quoted at USD1.1758 at the European equities close, against USD1.1760 the prior day.

Stocks in New York were flat to higher at the London equities close. The DJIA was up 0.1%, while the S&P 500 index and the Nasdaq Composite were both flat. Moreover, the Dow managed to reach a new record intraday high in early trade.

"The Dow Jones registered yet another record high shortly after the open, but has retreated marginally since. The S&P 500 is a touch lower on the session, but is still relatively close to its all-time high. Just because the major US indices aren’t running away with themselves doesn't mean that sentiment has turned sour, its likely traders are catching their breath," said CMC Markets analyst David Madden.

Traders are also looking ahead to remarks by US Federal Reserve Chair Janet Yellen, who is to deliver the opening remarks at the Community Banking in the 21st Century Conference in St Louis, Missouri at 2015 BST.

Back in the UK, in her keynote speech at the Conservative Party conference in Manchester, Prime Minister Theresa May apologised to leading members of her party for a campaign that was "too scripted [and] too presidential" ahead of a snap general election in June. The election resulted in the Conservatives losing their parliamentary majority and fuelled speculation about her future as party and national leader.

"I called that election ... but we did not get the victory we wanted," May said in her speech at the close of the party's annual conference. "I hold my hands up for that," she added.

The prime minister also vowed to publish a draft bill next week on introducing a price cap on UK energy bills, hitting share prices in London.

In wake of the government's announcement energy supplier Centrica was the worst blue-chip performer, ending down 6.0%, having fallen to their lowest level since 2003 earlier in the day.

Around GBP638.0 million was wiped off the British Gas owner's total market value during Wednesday's trading alone. Fellow energy supplier SSE was also in the red closing down 2.7%.

May said the government will publish a draft bill next week outlining its intention to place a price cap on energy prices, impacting standard variable tariffs and other default tariffs in England, Wales and Scotland.

The Department for Business, Energy and Industrial Strategy released a statement confirming that the bill will provide for a safeguard tariff to be set by regulator Ofgem.

The cap is intended, according to the government, to protect consumers and maintain incentives for switching, and to encourage suppliers to innovate, compete and finance their business.

However, Ofgem would consult on how the cap will operate. The safeguard tariff would be a "temporary measure" and the need for it would be kept under review, with a backstop date set for removal of the cap, the government said.

Earlier this year, Ofgem laid out plans to introduce a safeguard tariff for the most "vulnerable" customers in the UK, following pledges made by the Conservatives during the UK general election to crack down on rising energy costs.

After pledging to introduce a price cap on the standard variable tariffs used by 17 million UK households, the Conservatives then watered down the proposals when they released their manifesto simply commissioning a review of the about how to bring costs down, abandoning its previous commitment to introduce a cap of GBP100 per customer per year.

"Centrica, the poster-child of the sector, took the news hard, as investors scramble to work out the ramifications of a potentially earnings-squeezing cap, with the most obvious impact being a cut to dividends. Income investors will have to cross the sector off the list, although National Grid’s relative resilience shows that it could remain a way of gaining exposure to the sector with reduced risk of further regulatory interference," said IG Group analyst Chris Beauchamp.

Tesco ended the session as the second worst performer, down 3.5% despite stating both revenue and profit rose in the first half of its financial year, prompting it to declare its first dividend in three years. Fellow grocers J Sainsbury and WM Morrison Supermarkets closed down 2.7% and 2.3% respectively.

Tesco said its turnaround is "firmly on track" as it attempts to put its accounting scandal behind it. The retailer overstated its expected profits to the tune of GBP326 million in 2014.

The UK's largest supermarket chain's revenue for the half year, which ended August 26, rose to GBP28.35 billion from GBP27.34 billion, whilst pretax profit surged to GBP562.0 million from GBP71.0 million.

The jump in profit was largely due to a GBP235.0 million fine recorded in the comparison period last year resulting from the company's accounting scandal.

Tesco said it decided to restore the dividend, "reflecting the improved performance in the business". The interim dividend was set at 1.0 pence per share, and Tesco said it anticipates a broadly one-third, two-third split between the interim and final dividends, implying a 2.0p final dividend and 3.0p for the full year.

However, it also said UK like-for-like sales grew by 2.1% in the recent half-year. As it had reported 2.3% sales growth in the UK on the same basis in its first quarter trading update, this implies a slowdown in growth during the second quarter.

"Some analysts are starting to worry that even solid like-for-like sales growth aren't enough to cover rising fixed costs like wages. Tesco did see some of its profit gain come from sales of commercial property; this is a one off gain, so if sales can’t keep pace in the second half of this year, profit growth may only be illusory," said Kathleen Brooks, research director at City Index.

In the FTSE 250, Bodycote was the best performer, closing up 4.1%, after Barclays started coverage on the heat treatments, metal joining, hot isostatic pressing and coatings services supplier at Overweight.

At the other end of the midcap index, OneSavings Bank ended down 5.7% at 374.10p, after funds advised by JC Flowers & Co sold around an 8% stake on Tuesday in the challenger bank, or 20 million shares, for a total of GBP75 million.

Meanwhile, 888 Holdings ended in the red after JP Morgan Securities said The O Shaked Shares Trust has sold 46.3 million shares in the online gaming company on Tuesday at a price of 243.00 pence each, for a total of around GBP112.0 million. The stock closed down 5.4% at 244.70p.

Brent oil was quoted at USD55.90 a barrel at the equities close from USD56.13 at the London equities close Tuesday.

Gold was quoted at USD1,274.03 an ounce against USD1,273.43 at the London equities close Tuesday.

The economic events calendar for Thursday has US trade data and initial jobless claims at 1330 BST and US EIA natural gas storage change figures at 1530 BST. Markets in China remain closed for the National Day holiday.

The UK corporate calendar for Thursday has September traffic statistics from blue-chip carrier easyJet, third quarter production results from midcap miner Ferrexpoand full year results from sofa retailer DFS Furniture.