Last Week in the City: August rate rise now less likely
Garry White, chief investment commentator, looks at the market-moving events that have shaped the UK equity markets this week (16 to 20 July 2018).
The chances of an interest rate rise at the Bank of England’s August meeting appeared to recede this week after inflation data was more subdued than expected and retail sales data from June made gloomy reading. There was more bad news on the high street after Poundworld said it would close all its stores and steak restaurant group Gaucho collapsed into administration. The FTSE 100 rose 0.4 per cent over the week by mid-session on Friday, helped by a falling pound.
John Redwood, Charles Stanley’s chief global strategist, looks at persistent market worries despite the good performance here.
Marks & Spencer decided to forego its usual trading update at its recent AGM, with management arguing this will allow it to take a longer-term view of its business. Is Marks & Spencer right about short-termism? Garry White takes a look here.
Economics
The pound fell below $1.30 on Thursday, hitting a ten-month low, following disappointing retail sales data. In June, retail sales sank 0.5 per cent, worse than the 0.2 per cent pencilled in by economists. The Office for National Statistics says that football fever and the heatwave may actually have kept people out of the shops, but the hospitality sector is likely to have seen a boost from the tournament. UK inflation also came in lower than expected in June. Core inflation rose 0.1 per cent compared with expectations of a 0.3 per cent gain. Both these pieces of news make a UK interest rate increase in August less likely.
US President Donald Trump launched a rare attack on the US’s central bankers, indicating that he wasn’t happy with their plans to raise US interest rates. Trump claimed that the Federal Reserve risked undermining all his good work strengthening the economy. He said higher borrowing costs would drive up the dollar, especially as other central banks are keeping policy loose.
Chinese GDP slipped to its lowest level since 2006, rising 6.7 per cent in the second quarter compared with 6.8% in the first three months of the year.
Geopolitics
UK Prime Minister Theresa May narrowly survived an attempt by pro-European Conservatives to keep Britain in a customs union with the EU after Brexit. There was also some speculation the Article 50 time limit could be extended.
US President Donald Trump appeared to accept Russian leader's Vladimir Putin’s denials of interference in the 2016 presidential election over the assessments of his own intelligence services in a news conference in Helsinki. He has since rowed back on the statement following outrage in the US. However, he caused more consternation later in the week by extending an invitation to Mr Putin to come to the US for a second summit.
Technology
Shares in Facebook, Amazon, Microsoft and Google-owner Alphabet all hit fresh all-time highs this week.
Amazon became the second company ever to cross the $900bn market cap milestone this week. Apple’s market cap is currently about $935bn, with the two companies apparently locked in a battle to see which business will be the first company to hit the $1 trillion milestone.
Netflix shares were weak after subscriber growth disappointed.
Taiwan-based TSMC, which supplies chips to iPhone maker Apple, said it expected a slight improvement in smartphone sales in the second half of the year. It also reported strong sales of chips to cryptocurrency miners.
Energy
The oil price fell as oversupply fears mounted as output restarted in Libya following a hiatus. However, the falls stabilised after Saudi Arabia indicated that it would not export oil beyond its customers’ needs, easing fears that it may flood the market. Brent crude futures fell 3.2 per cent over the week to trade at about $72.90 a barrel at mid-session on Friday.
Tullow Oil was ordered to pay out an extra $50m to Kosmos Energy, its project partner in Ghana, after losing a dispute with its rig contractor last month. A London court said Tullow must pay $140m to Seadrill after breaking off its contract at the end of 2016, and a separate tribunal ruled that Kosmos is not liable for its $50.8m share of the cost.
Mining and commodities
BHP Billiton’s shares were boosted after management said it aimed to increase iron ore output this year by 3 per cent.
US aluminium giant Alcoa cut its full-year earnings outlook, blaming the fall out of tariffs on imported aluminium and higher energy costs.
Sirius Minerals took a step closer to building the UK’s first potash mine in more than 40 years by signing binding supply agreements with two Chinese customers that will add another 1 million tonnes a year to its existing potash offtake agreements. The mine is located in North Yorkshire, near Whitby.
Trade war tensions resulted in Copper futures falling below $6,000 a tonne for the first time in a year. The price is heading for its biggest monthly drop since 2015.
Gold hit its lowest level in a year after Federal Reserve Chair Jay Powell said again that further gradual interest rate rises were needed.
Retail
Profits at Mike Ashley’s Sports Direct slumped by almost three quarters after the retailer took an £85m hit on its investment in struggling department store Debenhams. Results last year were also boosted by the sale of its stake in JD Sports and its Dunlop business. Earlier in the week Debenhams was forced to deny that it had a “cash crisis” after some credit insurers refused to cover new suppliers to the group.
Poundworld has announced the closure of its remaining 190 stores with the loss of 2,339 jobs. The discount goods retailer, which went into administration in June, said the stores would close by 10 August. Also, steak restaurant chain Gaucho Group fell into administration, with the loss of 540 jobs.
Property
British Land revealed the extent to which the high street crisis has impacted its business. Company voluntary arrangements (CVAs) and administrations have weighed on contracted rents to the tune of 1.6 % since April last year. Occupancy of retail space is now at 96.4 per cent.
Consumer
Makers of Dove soap and Lipton tea Unilever saw its first-half profits fall, which it blamed on currency fluctuations and a trucking strike in Brazil. Net profit fell to €3.2bn from €3.3bn (£2.94bn) in the first half, with sales down 5 per cent.
French advertising giant Publicis saw its shares slump almost 10 per cent after it posted an unexpected drop in sales in the second quarter. The news hit shares in London-listed rival WPP.
Leisure
Airline easyJet raised its profits forecast after soaring revenues in the spring, despite air traffic control strikes and the unusually hot weather dampening demand. Third-quarter revenues rose 14 per cent to £1.6bn.
GVC, the owner of Ladbrokes and Coral betting businesses, received a boost from the World Cup tournament in Russia, with interim net gaming revenue up 8 per cent.
Media
US conglomerate Comcast abandoned its plan to take over rival 21st Century Fox. Comcast says it will focus on its attempt to acquire UK broadcaster Sky, which Fox is also trying to buy. This leaves Disney clear to pursue its own deal to buy Fox.
Shares in embattled broadband company TalkTalk jumped after the group added 80,000 new customers in its first quarter. The main gains were in its wholesale operation, which provides services to businesses.
Engineering
Shares in defence outsourcer Babcock International slumped after the group cuts its full-year revenue growth guidance. Its marine division has been hit by UK government spending delays relating to submarines.
Financials
Insurer Beazley saw interim profits fall by almost two thirds. Management said that rising US interest rates had hit its investment returns.
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