FTSE 100 falls as sterling rebounds and energy shares slide

LONDON (Reuters) - Britain’s top share index fell on Thursday, as initial gains fizzled out following a jump in sterling sparked by data showing a recovery in UK manufacturing, while oil stocks also lost ground.

People walk through the lobby of the London Stock Exchange in London, Britain August 25, 2015. REUTERS/Suzanne Plunkett/File photo

Sterling gained more than 1 percent to trade above $1.33 for the first time in four weeks after data showed one of the sharpest monthly rebounds on record for the British manufacturing sector.

The Markit/CIPS Purchasing Managers’ Index (PMI), a closely watched gauge of factory activity, jumped to a 10-month high of 53.3 in August, recovering from the three-year low it hit in July after Britain’s June 23 vote to leave the European Union.

That in turn weighed on the blue-chip FTSE 100 index, since a weaker sterling typically benefits many of the FTSE’s internationally-focused and export-oriented companies.

The FTSE 100 closed down 0.5 percent at 6,745.97 points.

Shares of oil majors Royal Dutch Shell and BP also weakened in tandem with lower oil prices.

“The index is being squeezed on two fronts this afternoon. Firstly the pound’s post-PMI push has sapped most of the FTSE’s positive energy. Secondly its oil stocks are suffering,” said Spreadex financial analyst Connor Campbell.

In contrast, the FTSE 250 index of mid-sized stocks, more sensitive to the domestic UK economy than the blue-chip index, rose 0.7 percent after the relatively strong manufacturing data.

FTSE 100 engineering stock GKN also outperformed with a rise of 4.8 percent. Traders cited vague market talk of bid interest for the company, which said it had no comment to make on the speculation.

The FTSE 100 is up around 10 percent so far in 2016, although the U.S. dollar value of UK shares has been impacted by a drop in sterling in the immediate aftermath of June’s Brexit vote.

Additional reporting by Kit Rees; Editing by Raissa Kasolowsky and David Holmes