Sector movers: Investors in 'defensives' breathing easier, at least for now

Defensive issues led the way higher on Thursday despite it being an up day for FTSE 350 stocks, possibly denoting underlying caution on the part of investors.

Investors in Tobacco stocks, in particular, were breathing easier, amid 'market chatter' referencing a bullish note out of Barclays, according to which the US Food&Drug Administration was unlikely to ban menthol cigarettes over the next 12 months.

Imperial Brands, the most beaten down stock in the space, saw the biggest jump, although British American Tobacco was right behind on the leaderboard, despite its shares having behaved substantially better in recent times.

Barclays was said to have based its analysis on over 150 similar past decisions by the regulator.

Analyst Gaurav Jain reportedly expected investors to return to the space as the regulatory headwinds eased, leading him to reiterate his 'overweight' stance for shares in British American, Imperial and US peer Altria.

Water utilities also put in solid gains, with shares in Severn Trent and United Utilities both to be found near the top of their 52-week trading ranges.

It was a similar story to that on the Continent, where the likes of Iberdrola or Nestle had in fact seen sharp price gains since the start of the year.

Should I stay or should I cut?

Not surprisingly, in the background it was another good day in fixed income markets across the Continent, as the European Central Bank pushed back on expectations for the earliest possible date for a first rate hike in the current cycle, to mid-2020, and cautioned that under certain scenarios it might have to restart its quantitative easing programme.

In the US as well, rate hike expectations had come down rapidly over the past month as the US-China trade war had heated up, although some observers - including the chairmen of UBS and Goldman Sachs, Axel Weber (an ex-Bundesbank President well known for his very hawkish views) and John Waldron, respectively - said at the Institute of International Finance's Spring Membership Meeting, on Thursday, that financial markets had gone too far in anticipating interest rate cuts from the Federal Reserve.

And yet Waldron reportedly thought that investors were being too optimistic regarding the chances of the US and China inking a trade deal in the near-term.

Also on Thursday, the Presidents of the Federal Reserve banks of Dallas and New York acknowledged that financial markets were signalling heightened downside risks for the economy, but also pushed back on rushing into any decision to cut.

For his part, in a research note sent to clients, John Lonski, chief economist at Moody's Capital Markets Research, said: "The implied probability of a fed funds rate cut at the Federal Open Market Committee’s July 31 meeting recently soared to 72% mostly in response to Jerome Powell’s apparent willingness to heed the recessionary warning of a possibly persistently inverted yield curve.

"The containment of inflation expectations provides the FOMC with the ability to respond quickly to a persistent inversion of the Treasury yield curve. The Fed’s quick cutting of interest rates in response to the yield curve inversion of the summer and autumn of 1998 prevented a recession. By contrast, the Fed's slow response to the inverted yield curves of 1989, 2000, and 2006-2007 facilitated the arrival of recessions."

Coincidence or not, as recently as 21 May the Bank of England was still pushing back on market expectations for a cut in Bank Rate, as per the BoE's annual report which was published on Thursday but dated from a fortnight ago.

"If the economy continues to perform as the MPC expects, upward pressure on prices is likely to build," Carney said in the report.

"That means the Committee is likely to have to raise interest rates further in order to keep inflation at target. Any rises in interest rates are expected to happen at a gradual pace and to a limited extent."

Perhaps, but on Thursday at least the yield on the benchmark 10-year Gilt ended the session down by four basis points to 0.83%.

Carney delivered the keynote speech at Thursday's IIF meeting.

Top performing sectors so far today

Tobacco 32,499.58 +3.67%

Gas, Water & Multiutilities 4,687.44 +1.87%

Oil & Gas Producers 9,153.31 +1.33%

Pharmaceuticals & Biotechnology 14,845.38 +1.21%

Industrial Metals & Mining 5,769.70 +1.10%

Bottom performing sectors so far today

Mobile Telecommunications 2,917.26 -3.61%

Forestry & Paper 18,524.21 -1.47%

General Retailers 2,108.38 -1.42%

Food Producers & Processors 7,577.38 -1.25%

Automobiles & Parts 6,108.44 -1.04%