London close: FTSE edges up, sterling gains on Truss energy plan

dl city of london st pauls cathedral millennium bridge commuting pedestrians river thames square mile financial district trading finance working unsplash — Sharecast / Jonathan Chng via Unsplash

London stocks ended a little higher on Tuesday, while sterling was boosted by news that new prime minister Liz Truss is planning to freeze energy bills.

The FTSE 100 closed up 0.2% at 7,300.44, while the pound was firmer versus the dollar and the euro amid reports that Liz Truss has drafted plans to fix annual electricity and gas bills for a typical UK household at or below the current level of £1,971.

According to Bloomberg, Truss has settled on a mechanism that will avert the big jump in energy bills that is due to kick in at the start of next month under the existing pricing system. The policy could cost as much as £130bn over the next 18 months.

Energy bills were due to rise 80% from October to £3,548 a year for the average household. Under the plans drawn up by Truss’s team, that pricing regime will effectively be abolished and the energy regulator Ofgem will be sidelined, Bloomberg said. Instead, ministers will set a new unit price that households will pay for electricity and gas.

Joshua Mahony, senior market analyst at IG, said: "The pound has outperformed many of its peers today, with Liz Truss delivering a much-anticipated shock and awe announcement aimed at bringing energy prices under control.

"In a week that is dominated by central bank announcements from the RBA, BoC, and ECB, it should be noted that monetary policy’s ability to bring inflation under control in the face of weakening currencies and soaring energy prices is somewhat limited. The decision to freeze UK energy prices ahead of next month’s widely anticipated spike will arguably provide a greater impact on inflation expectations than a 75bp hike in interest rates.

"The dramatic Covid spending package enacted under Rishi Sunak looks to be just the beginning, with this package costing up to £130 billion over the coming 18 months. For the near-term this seems and effective way to bring greater certainty and relieve the pressure on the Bank of England, but the long-term consequence will undoubtedly result in another pile of debt that will ultimately need paying through higher taxes."

Investors were also digesting the latest reading on the UK construction sector, which showed that activity contracted again in August amid cost pressures and economic uncertainty.

The S&P Global/CIPS construction purchasing managers’ index nudged up to 49.2 from 48.9 in July, but remained below the 50.0 mark that separates contraction from expansion. Analysts had been expecting a decline to 48.0.

Andrew Harker, economics director at S&P Global Market Intelligence, said: "The UK construction sector looks set to be in for a challenging period, according to the latest PMI data. Not only did construction activity fall for the second month running, but a range of indicators from the survey pointed to further weakness ahead. New orders slowed to a crawl, while concerns about the sector and the wider economy led to a drop in confidence.

"Price and supply pressures showed further signs of easing as waning demand throughout the sector lifted pressure on suppliers. Meanwhile, the main positive from the latest survey was a solid increase in employment. That said, hiring at least in part reflects an ongoing catch-up following the pandemic. If activity continues to fall, firms will likely soon feel that their staffing capacity is sufficient and pause hiring."

In equity markets, Berkeley Group gained after saying it was on track to meet full-year profit guidance despite a "volatile" operating environment. Taylor Wimpey and Persimmon also rose.

British Gas owner Centrica was up following a Financial Times report suggesting the energy supplier is in talks to secure billions in additional financing amid rising collateral demands.

Retailers and pub chains rallied on news of the potential energy price freeze, with JD Sports, Next, B&Q owner Kingfisher, Marks & Spencer, Dunelm, Mitchells & Butlers and Wetherspoons all up. Domino’s and Greggs also gained. The hope no doubt is that lower energy bills will mean consumers have more money available for discretionary spend.

On the downside, equipment rental company Ashtead fell despite posting a rise in revenue and profits for the three months ended 31 July, driven by "ongoing momentum" in supportive end markets.

BT was also weaker after a downgrade to ‘hold’ from ‘buy’ at Berenberg.

Market Movers

FTSE 100 (UKX) 7,300.44 0.18%
FTSE 250 (MCX) 18,820.84 1.03%
techMARK (TASX) 4,250.65 0.16%

FTSE 100 - Risers

Hargreaves Lansdown (HL.) 835.00p 4.64%
Centrica (CNA) 81.94p 4.17%
Lloyds Banking Group (LLOY) 45.23p 4.10%
Rightmove (RMV) 616.60p 4.01%
Howden Joinery Group (HWDN) 574.60p 3.87%
Taylor Wimpey (TW.) 108.00p 3.85%
Berkeley Group Holdings (The) (BKG) 3,573.00p 3.66%
Smith (DS) (SMDS) 272.00p 3.42%
St James's Place (STJ) 1,107.00p 3.41%
Barratt Developments (BDEV) 421.90p 3.33%