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Oct. 12, 2016, 1:16 p.m. EDT

FTSE 100 closes in the red with oil prices yanked lower, Fed in focus

Insurers rise as U.K. bond yields increase

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By Carla Mozee, MarketWatch


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U.K. stocks slumped Wednesday, as oil prices fell and Brexit-related pound gains pinched the blue chips.

The FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX +1.54% fell 0.7% to close at 7,024.01, marking a second-straight loss.

The index on Tuesday fell 0.4% but scored a record intraday high as the pound dropped to fresh three-decade lows before Wednesday’s bounce. See: FTSE 100 notches intraday high as pound punishment persists.

The FTSE 100 is packed with multinational companies that draw the bulk of their revenue from overseas, so weaker sterling typically bolsters demand for their goods and services.

But the FTSE 100 on Wednesday ended at session lows as oil prices were swiped down more than 1%, leaving West Texas Intermediate /zigman2/quotes/209727031/delayed CLX26 0.00% fighting to stay above $50 a barrel. Oil prices were hurt by growing uncertainty over Russia’s willingness to cut production even as global oil supplies increased in September.

Oil majors Royal Dutch Shell PLC /zigman2/quotes/204253697/delayed UK:RDSB +2.40%   /zigman2/quotes/207682964/composite RDS.B +1.80%  and BP PLC   /zigman2/quotes/207305210/composite BP +2.26%  fell 1.1% and 0.4%, respectively.

Dollar-denominated oil prices were also hit as the dollar /zigman2/quotes/210598269/delayed DXY +0.02%   leapt before the release of minutes from the Federal Reserve’s September meeting, due at 7 p.m. London time, or 2 p.m Eastern U.S. The greenback has been buoyed by U.S. economic data, seen as solid enough to encourage the Fed to lift interest rates this year.

New York Fed President William Dudley on Wednesday said a “gentle” pace of rate hikes could help sustain economic growth.

The pound eventually pared its gain to around $1.2202.

Insurers: The prospect of a Fed rate hike helped lift U.S. bond yields /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y +3.01% . At the same time, the yield on the U.K.’s 10-year gilt /zigman2/quotes/211347177/realtime BX:TMBMKGB-10Y +8.79%  rose above 1% for the second consecutive session.

London-listed insurance stocks were simultaneously pushed higher. Insurers and pension funds use earnings from longer-term assets to meet their long-term liabilities. Direct Line Insurance Group PLC /zigman2/quotes/201952264/delayed UK:DLG +0.91%   bounced up 3.3% and Aviva PLC  rose 1.9%.

Legal & General Group PLC /zigman2/quotes/201125471/delayed UK:LGEN +1.37%  moved 1.1% higher and Prudential PLC /zigman2/quotes/200530572/delayed UK:PRU +2.76%  was lifted up 0.8%.

U.K. yields have been battered recently on concern about the pound’s tumble.

Sterling: The pound /zigman2/quotes/210561263/realtime/sampled GBPUSD -0.0076%  on Wednesday hit an intraday high of $1.2327 after falling to $1.2132 late Tuesday. The rise came after U.K. Prime Minister Theresa May late Tuesday backed down and is seen allowing members of parliament to scrutinize the government’s strategy over the U.K. leaving the European Union.

That “could potentially limit the prospect of a ‘hard Brexit’ taking the UK out of the single market, which has been a major concern for some investors and the business community in recent days,” said Kathleen Brooks, research director at City Index, in a note.

But there are barriers to a sustained recovery in the pound, Brooks said. These include low interest rates in the U.K. and strength in other currencies, such as the yen and the U.S. dollar, ahead of a potential rate increase by the Fed in December.

“We also need to wait for the U.K. earnings season later this month for further direction for the FTSE 100. If U.K. companies have managed to eke out profit gains in a difficult market, then the U.K. index could see further upside,” she added.

Sterling is now at its lowest level ever against a basket of currencies , according to the Bank of England

Miner moves: Mining shares ended mixed as rising bond yields and dollar strength pressured dollar-denominated metals prices. Rising interest rates can be negative for precious metals, which don’t bear a yield. Also, a higher dollar can dull the attractiveness of those metals to buyers using other currencies.

Fresnillo PLC shares /zigman2/quotes/201300065/delayed UK:FRES -0.50%  closed down 0.7% even as the precious metals miner backed its full-year production forecast as it logged an increase in quarterly gold and silver output.

Randgold Resources PLC ended 0.4% lower but commodities producer and trader Glencore PLC  /zigman2/quotes/201400686/delayed UK:GLEN +2.50%  turned up by 6.4%.

Click to Play

Brexit vote makes luxury goods cheaper in the U.K.

Since the U.K.'s vote to exit the European Union in June, the cheap price of luxury goods in Great Britain has attracted shoppers worldwide. WSJ's Saabira Chaudhuri has details on Lunch Break with Tanya Rivero. Photo: Bloomberg

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Carla Mozée is a reporter for MarketWatch, based in London. Follow her on Twitter @MWMozee.

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