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LONDON MARKETS : FTSE 100 Flounders As Weak Construction Data Offsets Next Rally

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01/03/2018 | 12:22pm CEST

By Sara Sjolin, MarketWatch

U.K. construction PMI declined more than forecast in December

U.K. stocks swung between small gains and losses on Wednesday. The major London benchmark was being pulled one way by a rally for the retail sector after an upbeat trading update from Next PLC, and in the other by concerns over slowing construction activity.

Weakness in the pound failed to boost the British stock market, with sterling still trading close to a more-than three-month high.

What are markets doing: The FTSE 100 index was marginally lower at 7,646.20, adding to a 0.5% loss from Tuesday, the first trading session of the year.

The pound fell to $1.3577 from $1.3589 late Tuesday in New York, when sterling traded around its highest level since late September.

What is driving the markets: The pound had fetched as much as $1.3614 earlier on Wednesday, but erased its gain after a disappointing reading on the U.K. construction sector. The construction purchasing managers' index from December fell to 52.2 from 53.1 in November, missing forecasts of a 52.9 print. A level above 50 signals expansion.

The report follows a weaker-than-expected manufacturing PMI out on Tuesday, which slipped to 56.3 last month from November's 51-month high of 58.2. The services PMI for the U.K. is due on Thursday.

Even with the pound weakness on Wednesday, the U.K. currency was still trading close to its September high and is up 2.5% against the dollar over the past three month. A strong sterling tends to weigh on the FTSE's big multinationals, as around 75% of revenues for the index are made overseas.

Retailers helped stem losses for the FTSE on Wednesday after Next PLC (>> Next) said its pre-Christmas sales got a boost from the cold weather . The clothing and home goods company said online sales performed particularly well in the 54-day period to Dec. 24, jumping 13.6% on the year. Total sales for the period rose 1.5%.

The upbeat trading update also included a boost to Next's guidance. The retailer said it now expects to report pretax profit of GBP725 million ($983 million) for the year to January 2018 -- an improvement on its previous guidance of GBP717 million.

Next shares rallied 6.8%, topping the list of FTSE advancers.

What are strategists saying: "The disappointing U.K. construction PMI forms the second disappointing U.K. PMI survey in as many days, with the pound drifting marginally lower as a result," said Joshua Mahony, market analyst at IG, in a note.

"Unfortunately, the weaker pound has done little to help the FTSE, which has been dragged lower thanks to yet another poor showing from the miners thanks to ripples in the recent gold and copper resurgence story. The U.K. services PMI reading is due on Thursday morning, and a third disappointing survey would provide yet another reason to sell the pound," he added.

Stock movers: Among retailers, shares of Marks & Spencer Group PLC (>> Marks & Spencer Group) (>> Marks & Spencer Group) added 1.1%, while Primark-parent Associated British Foods (>> Associated British Foods) (>> Associated British Foods) rose 2.%.

Among pound-sensitive companies, shares of tobacco major Imperial Brands PLC (>> Imperial Brands PLC (ADR)) (>> Imperial Brands PLC (ADR)) fell 1.3%, consumer-goods giant Reckitt Benckiser Group (>> Reckitt Benckiser) (>> Reckitt Benckiser) lost 0.4%, and British American Tobacco PLC (>> British American Tobacco) (>> British American Tobacco) dropped 0.6%.

Outside the FTSE 100, Carillion PLC (>> Carillion) lost 4% after the construction company said it is being investigated by the Financial Conduct Authority in connection with the "timeliness and content of announcements" made by Carillion between December 2016 and July 2017.

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