LONDON MARKETS: U.K. Stocks Start 2018 On The Back Foot As Pound Rallies

Pound continues to climb, topping $1.3550

U.K. stocks slipped from record highs on Tuesday, as the pound ignored worse-than-expected British manufacturing data and rallied against the dollar.

What are markets doing: The FTSE 100 index fell 0.5% to close at 7,648.10, easing back from the all-time closing high scored on Friday (http://www.marketwatch.com/story/uk-stocks-set-to-finish-2017-at-record-high-2017-12-29), the last trading session of 2017. The London benchmark logged a 7.6% gain for the full year, for its second straight year of advances.

The pound rose to $1.3585, up from $1.3502 late Monday in New York, trading around its highest level since late September. Sterling's gain was largely due to broad-based dollar weakness (http://www.marketwatch.com/story/dollar-slumps-for-5th-straight-day-to-lowest-since-september-2018-01-02).

What's driving the market: The pound rally squeezed U.K. stocks and particularly weighed on the big multinationals in the FTSE. As around 75% of revenues for the index are made overseas, an appreciation in sterling hits profits when converted back into the U.K. currency. Sterling stayed higher even after data from IHS Markit/CIPS showed the U.K. manufacturing PMI dropped to 56.3 in December from November's 51-month high of 58.2. The consensus forecast called for a reading of 58, according to FactSet. A reading above 50 indicates expansion.

What are strategists saying: "Sterling strength has been the undoing of the FTSE 100 this [Tuesday], as three-month highs in GBPUSD prove detrimental to the highly international index," said Joshua Mahony, market analyst at IG, in a note.

"Interestingly, the strength we have seen in sterling comes despite a sharp downturn in the UK manufacturing PMI. The deterioration in today's U.K. manufacturing PMI, coupled with expectations of lower growth in 2018 has clearly been overshadowed by the deterioration in the U.S. dollar, coupled with expectations that the BOE could raise rates yet again should inflation recede,: he said.

Stock movers: Among big multinationals, Unilever PLC (ULVR.LN) (ULVR.LN) fell 2%, Reckitt Benckiser Group PLC (RB.LN) dropped 1.7% and British American Tobacco PLC (BATS.LN) (BATS.LN) gave up 1.6%.

BP PLC (BP.LN) (BP.LN) shares lost 1%. Earlier Tuesday, the energy giant said it expects recent changes to U.S. corporate taxes to boost its future earnings (http://www.marketwatch.com/story/bp-sees-us-tax-boost-but-warns-on-15b-charge-2018-01-02), but added that it will take a one-off $1.50 billion noncash charge due to the revaluation of deferred tax assets and liabilities.

Shares of Compass Group PLC (CPG.LN) gave up 1.3% after news the contract caterer's chief executive, Richard Cousins, had died in a plane crash in Australia.

International Consolidated Airlines Group SA (IAG.LN) added 2.7%. The British Airways parent said late Friday it is buying the assets of Austrian carrier Niki, an arm of defunct Air Berlin.

Marks & Spencer Group PLC (MKS.LN) (MKS.LN) ended up 0.4% after the store chain said it has sold its retail business in Hong Kong and Macau (http://www.marketwatch.com/story/marks-spencer-sells-business-in-hong-kong-macau-2018-01-02) to franchise partner Al-Futtaim Group for an undisclosed sum.

(END) Dow Jones Newswires

January 02, 2018 11:56 ET (16:56 GMT)