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London stocks recouped more of last month's losses on Tuesday, underpinned by optimism over US-China trade talks, rumours of a delay to the Brexit date and bargain hunting by investors.
The FTSE 100 finished slightly off its earlier high, but still up 0.7% at 6,861.60, while the pound was flat against the euro at 1.1128 and down 0.5% against a strengthening dollar at 1.2717.
Lifting the mood in the background was reports of a productive round of talks between Chinese and US officials in Beijing, with a US trade delegation member saying talks had gone well and are set to continue on Wednesday. Follow-up cabinet-level talks are also expected later in January.
Earlier, President Trump said on Twitter that talks "are going very well".
Market analyst Joshua Mahony at IG said stock market gains have been "hugely influenced" by the reports of an extension to the talks. "No doubt, the substantial selloff in play over the past seven months has been hugely influenced by the economic impact of this trade spat, and thus there is reason to believe markets will rise and fall according to how talks progress."
On the home front, reports that the UK officials are looking at potentially getting an Article 50 extension were similarly boosting several domestic sectors, including construction and retail.
Market analyst Connor Campbell at Spreadex said: "If that is the case, it suggests that a) the government remains doubtful Theresa May’s agreement stands any chance of getting through parliament, and b) there really isn’t any appetite for a ‘no deal’ exit."
Earlier, a Daily Telegraph report suggested that Prime Minister Theresa May was in secret last-minute talks with EU leaders about possibly extending the 29 March Brexit deadline.
However, Brexit Secretary Stephen Barclay was quick to quash the report on Tuesday and stress that the government remains committed to leaving the EU in March. Barclay said he had not spoken to the EU about that and any delay would cause "some very practical issues".
On the economic data front, the latest housing figures from Halifax showed house prices surged past expectations in December, but the overall trend remained weak.
House prices were up 2.2% compared to a 1.2% decline the month before and well ahead of expectations for a 0.2% increase. On the year, house prices rose 1.3% after a 0.3% increase in November, comfortably beating expectations for a 0.4% jump.
Pantheon Macroeconomics economist Samuel Tombs said very little weight should be placed on the jump in Halifax’s house prices index in December, pointing out that it is three times as volatile as the Nationwide index. "Looking ahead, surveys indicate that buyer demand has begun to fall sharply again, primarily due to Brexit uncertainty, which should mean that sale prices undershoot asking prices by a greater-than-usual margin. But the decline in risk-free interest rates that Brexit uncertainty also has triggered will feed through to lower mortgage rates soon," Tombs said.
On the corporate front, paper and packaging companies DS Smith and Smurfit Kappa were topping the top-flight index as Jefferies saw an opportunity for a re-rating in the European packaging sector as the market is too negative.
After the stock market tumbles in the final quarter of last year, analysts were pointing out various bargains to investors, with Melrose Industries and Rotork both boosted by notes from Bank of America Merrill Lynch.
Electrocomponents was also on the rise after an upgrade from Jefferies, while Capital & Counties also got a boost from an upgrade to 'add' at Peel Hunt.
Pub operator Greene King rallied as it posted a 10.9% jump in like-for-like sales over Christmas and the New Year and expressed confidence over the full year, while Safestore rose as it reported a 135% increase in full-year pre-tax profit.
Broadcaster ITV gained as analysts at Liberum suggested that the signing of a five-year partnership between Sky and STV could make a tie-up between ITV and Sky more likely.
Retail was a mixed bag. High street stalwarts Next and Marks & Spencer seemed to be boosted by the Brexit news, while Morrisons - the first of the big four supermarkets to report its Christmas trading - was down in the dumps as wholesale growth over the festive period disappointed investors, despite the grocer beating retail forecasts and notching up its fourth consecutive Christmas of growth.
The shares also took a knock after data from Kantar Worldpanel showed the group was the second-weakest among its rivals. Morrisons saw its growth slow to 0.1%, with its market share dropping to 10.6% from 10.8%. Tesco and Asda were top of the big four, while Sainsbury's was bottom.
Analysts at Bernstein said the 0.6% LFL retail growth figure should be "reassuring" against high comparative growth the year before, slightly up versus consensus of 0.5% and "despite a very cautious UK consumer at the end of 2018". However, they noted that the contribution from wholesale missed consensus by 60 basis points, almost all of which was due to the McColl business being transferred after the deal signed early last year.
Elsewhere in the retail sector, sportswear specialist Footasylum slumped after warning that full-year earnings would be towards the lower end of analysts’ forecasts, while gross margin would be lower than current market expectations as a result of heavy discounting over Christmas. The FTSE Smallcap company said it had seen "some of the most difficult trading conditions in recent years" over the festive period, amid economic uncertainty and weakening consumer sentiment.
Lifestyle brand Joules defied the high street gloom, however, as it said it continued to trade well over the festive period, putting on course to achieve its pre-tax profit expectations for 2019.
Elsewhere, building materials group SIG dropped after saying it expects profit for 2018 to drop on the back of lower trading revenue amid challenging market conditions. Most of the construction sector was higher, however, boosted by Brexit hopes.
Kier was also surging and Babcock climbing after both groups won spots on the North West Construction Hub’s high-value framework. Kier was the only listed company to win spots on all three lots, trade magazine Building reported, while Galliford Try and Morgan Sindall were both been dumped by the procurement body from the £1.5bn bidding framework.
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Europe close: Stocks end higher, but off their best levels
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Somewhat positive news around the ongoing US-China trade talks buoyed shares on Tuesday, helping investors to brush-off the release of very weak readings on German industrial production and euro area business confidence.
In particular, markets were encouraged by Chinese President Xi Jinping's decision to send his top economic advisor, Liu He, to the second round of trade talks and by news that Chinese importers had carried out their third largest purchase ever of US soybeans.
By the end of trading, the pan-European Stoxx 600 index was up by 0.88% or 3.01 points to 345.89, alongside a jump of 1.15% or 54.10 points for the French Cac-40 to 4,773.27, while the FTSE Mibtel added 0.25% or 46.87 points to 19,000.14.
Traders appeared to be somewhat divided regarding the prospects for a US-China trade deal and some economists appeared to echo that caution, with Arend Kapteyn and Pierre Lafourcade at UBS saying: "Unfortunately, things have gotten worse, not better: the DM uptick has disappeared (the US looks stable at around 2.5% but the Eurozone was running close to 0% before the retail sales data), the bounce in Latam is faltering, EMEA is now in outright contraction, and Asia took a leg lower."
On a more constructive note, strategists at Deutsche Bank said they now saw 10% upside for European equities by June.
"Back then, we argued that PMIs were set to roll over, equities to fall, bond yields to drop and cyclicals & financials to underperform," they said.
"This has now played out. 2019 starts as a mirror image of 2018: PMIs have dropped, equities have corrected, bond yields have fallen and defensive sectors have outperformed. Just as early 2018 marked the peak in growth momentum, we think December 2018 was the trough."
Be that as it may, stockmarkets finished off their best levels of the session, following a late afternoon report that Beijing and Washington were not yet ready to reach a deal, although progress had reportedly been made.
On the economics front, according to the German Ministry of Finance, the country's industrial production shrank in November by 1.9% month-to-month, which was well below the consensus projection for an increase of 0.3%.
In year-on-year terms, production fell by -4.7% after a downwardly-revised increase of +0.5% for October. Net revisions to the month-to-month reading were -0.3 percentage points.
"This headline is much worse than we expected [...] We now think production fell 1.4% quarter-on-quarter in Q4, only slightly worse than the 1.7% plunge in Q3," said Claus Vistesen at Pantheon Macroeconomics.
"In other words, the German manufacturing sector was in recession in the second half of 2018, reflecting in part the fact that the industry hit capacity constraints earlier in the year and rising global uncertainty amid the trade conflict between the U.S. and China."
In corporate news, Airbus shares jumped after Reuters reported that the jet manufacturer had "operationally" hit its target for 800 deliveries in 2018.
Morrisons finished in the red even as it reported stronger-than-expected retail sales over the festive period. Investors were pleased with the company’s like-for-like sales growth but disappointed by another relatively weak performance form the core retail arm.
Richard Hunter, head of markets at Interactive Investor, said: "The shares have fallen foul of the wider and weaker market environment, having dipped 14% over the last six months, although over the last year the 2.5% decline in the price compares favourably with the FTSE100, which has dropped 11.5% in the corresponding period."
Shares of Swiss chemicals group Sika AG also declined, after the company's management tabled an offer to purchase mortar and construction materials maker Parex Ltd. for an enterprise value of €2.04bn.
Signify came under selling pressure as well, on the heels of a downgrade to 'neutral' from analysts at Bank of America-Merrill Lynch. Rotork was among the best performing issues after the same same broker upgraded the stock.
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US open: Positive open on the Street despite sombre jobs report
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US stock opened higher on Tuesday as investors grew hopeful that the latest round of talks between the US and China would ease trade tensions.
At 1530 GMT, the Dow Jones Industrial Average 0.62% higher at 23,677.77, while the S&P 500 moved ahead 0.38% to 2,559.40 and the Nasdaq traded 0.24% firmer at 6,839.73.
The Dow opened more than 270 points higher but lost some of its earlier momentum as a key report revealed job openings across the US had fallen to its lowest level since the beginning of summer.
However, investors remained hopeful and carved out some gains as the second day of talks between Chinese and US officials was set to kick-off in Beijing later on in the day.
Early reports out of Beijing state American and Chinese negotiators had reportedly made progress in talks, including on purchases of US goods and services, but the two sides were said to still not be ready to finalise a deal.
According to Dow Jones Newswires, citing sources, follow-up cabinet-level talks were expected later in January.
Earlier, the US President himself had tweeted: "Talks with China are going very well!"
Of the boost in sentiment coming from the talks, Spreadex analyst Connor Campbell said there's every chance markets could be setting themselves up for a disappointment "given that there isn’t exactly a lot behind Tuesday’s rally - as in a lack of concrete detail leaking out of the meeting rooms in Beijing."
"Investors appear to be clinging onto US Commerce Secretary Wilbur Ross’ claim that there is a ‘very good chance’ can agreement can be reached before the end of the ceasefire on March 1," he added.
The government shutdown, which has entered its third week, was also on investors' minds as Donald Trump was due to make a speech later from the Oval Office, in which he is expected to argue that an immigration crisis requires his Mexican border wall.
In energy news, West Texas Intermediate was 2.14% higher at $49.56 a barrel, while Brent Crude was 1.80% higher at $58.36.
On the corporate side of things, Boston Scientific was up 1.22% after the release of its fourth-quarter sales figures and Union Pacific was trading 9.04% firmer after it announced that former Canadian National executive Jim Vena had taken over as COO.
On the data front, the latest survey from the National Federation of Independent Business showed that small business confidence in the US remained near historically-high levels in December amid signs of strength in hiring and in companies' inventory planning.
But some analysts said the stable headline index masked underlying weakness and rising price pressures.
The NFIB's small business confidence gauge slipped by just 0.4 points from the month before to reach 104.4, versus consensus expectations for a reading of 103.5. Meanwhile, a sub-index linked to job openings hit a fresh record high and according to the NFIB plans for inventory investment surged.
However, those positives were offset by a decline in expected real sales growth and expected business conditions.
Reports of higher worker compensation remained near record levels too, NFIB said.
According to the business lobby group: "Critics of the Federal Reserve are popping up everywhere. They say that the Federal Reserve is not paying attention to what financial markets are telling us about the economy.
"However, the stock market does not reflect the entire economy. The small business sector represents the other half and it continues its two-year run of record high performance levels, an important consideration."
Still, Ian Shepherdson at Pantheon Macroeconomics believed a further decline in business optimism was likely in January.
In particular, Shepherdson noted the four point decline seen in the sub-index for companies' capital expenditure plans, which he described as a "big blow", although it remained to be seen if the drop would "stick" or even drop further.
Elsewhere, the number of job openings fell to 6.9m in November, according to the Bureau of Labor Statistics.
Over the month, hires edged down to 5.7m, quits edged down to 3.4m, and total separations were broadly unchanged at 5.5m.
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Vodafone: RBC Capital Markets downgrades to underperform with a target price of 125p.
easyJet: Berenberg reiterates sell with a target price of 1,010p.
Wizz Air Holdings: Berenberg reiterates buy with a target price of 3,600p.
Next: HSBC reiterates buy with a target price of 5,900p.
BT: Deutsche Bank reiterates hold with a target price of 238p.
Dunelm: JP Morgan reiterates neutral with a target price of 635p.
Aviva: JP Morgan reiterates overweight with a target price of 493p.
Legal and General Group: JP Morgan reiterates underweight with a target price of 239p.
Prudential: JP Morgan reiterates neutral with a target price of 1,522p.
Joules: Liberum reiterates buy with a target price of 420p.
Carnival: Shore Capital Markets upgrades to buy.
Footasylum: Liberum resumes hold with a target price of 30p.
Greene King: Canaccord reiterates buy with a target price of 600p.
Harworth Group: Canaccord reiterates buy with a target price of 140p.
Unilever: UBS downgrades to neutral with a target price of 4,400p.
Ashtead: UBS upgrades to neutral with a target price of 1,800p.
Electrocomponents: Jefferies upgrades to buy with a target price of 700p.
WM Morrison Supermarkets: Bernstein reiterates outperform with a target price of 280p.
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