Coutts Divestitoure Seems to Weigh on Footsie

The UK 100 index reached a new all-time high in May but has since traded mainly within a narrow range as investors adopt a wait-and-see approach following the national election and the BOE's expected rate cut while Royal Bank Coutts UK divestiture rumours weigh on.

FTSE Hit a New High in May

In May, the FTSE hitting a new all-time high appeared to have helped alleviate some concerns around shareholder movement away from the UK market. Earlier that month, it was disclosed that Coutts (fresh off controversy around Nigel Farage's account closure) intended to move £2 billion in client funds from the London stock market. The Royal Bank holds around 20% of its portfolio in UK stocks, moving it to 3-4% to align with global averages. Yet, this exacerbated worries around liquidity levels in the UK financial centre. While some point to Brexit effects, others suggest high interest rates from the BOE to curb inflation have reduced liquidity, making UK listings less attractive.

With the main UK stock index indicator essentially stagnant the past couple of months after pulling back, those concerns could resurface and potentially weigh further on future gains. Additionally, the latest data is not particularly pleasing. Inflation in the UK remained sticky in June, as reported on Thursday, though weaker retail sales data on Friday somewhat offset this. Inflation had hit the BOE's 2.0% target in May but failed to decrease further in June. This led investors to expect the first interest rate cut to shift from the initially anticipated September meeting to August.

Impact of New Government

On one hand, the certainty of the election results should help reassure markets that there will not be any major rule changes for companies in the near future. In fact, UK equities largely remained steady during the election period, despite Labour being the clear favourite in polls. With the pound rising, equities have not followed suit, largely as inflation concerns have again become a dominant theme in the City. The potential for higher government spending, albeit small, implies that inflation may increase and extension interest rates remain higher, reducing liquidity.

The Financial Conduct Authority (FCA) recently introduced new listing rule changes hoping to streamline UK listings and address company concerns about listing elsewhere or not coming to market in the UK. After companies like Flutter and Hargreaves said they would leave and Arm preferred listing in the US over the UK, the trend seems firms prefer moving across the Atlantic, not the Channel, searching for a more accommodating regulatory environment. Should the loss of major firms negatively impact the FTSE, a more pro-regulation Labour government is unlikely to alleviate those concerns much. Unless data strongly supports consensus moving back to an August interest rate cut, the all-time high in May may be the last for some time.

UK's 100 Index Still in Consolidation

The UK's FTSE 100 index is stabilising following a pullback from record highs in May, with 8050 being important for determining near-term price action. If the index maintains support at 8150, prices could increase to 8540, which is the measured-move projection of the triangle pattern completed at 7460. Conversely, a breakdown below 8150 may allow for further weakness towards 7750.

Source: SpreadEx / UK 100

Key Takeaways

The UK's FTSE 100 index has traded within a narrow range since May after reaching a new high as investors await developments from the election outcome and expected interest rate cut. Rumours that Royal Bank Coutts may divest UK stocks also weighed on the index. With inflation remaining sticky in June, keeping expectations for an earlier rate cut in August, the new government brings certainty but may also impact inflation if spending rises. Despite recent reforms aimed at streamlining UK listings, major companies still prefer US markets.