Last Week in the City

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped the UK equity markets this week (February 13th to 17th, 2017).

By Garry White in Companies and Markets, 17th Feb 2017 11:07am

Garry White

The FTSE 100 rose by 0.2% over the course of the week by mid-session on Friday, managing to close above 7,300 on Wednesday before easing back later in the week as markets reacted to an unusual press conference by US President Trump. Global equities, as measured by the MSCI World Index, hit a new all-time high. Corporate news was relatively thin on the ground.

Economics

Federal Reserve Chair Janet Yellen hinted at a hike in interest rates at the March meeting of the Federal Reserve, comments which boosted the dollar. Indeed, economic data was strong. Consumer prices saw their biggest rise in almost four years in January, which could signal a rise in inflationary pressures. The Consumer Price Index rose 0.6% last month after a gain of 0.3% in December. The January increase is the strongest since February 2013. Also, US retail sales rose more than expected in January, thanks in part to the purchase of electronic products. However, the second tranche of US numbers were softer, with January industrial production unexpectedly declining by 0.3% versus expectations for a flat reading. The Fed Funds futures market is currently pricing in the probability of a rate hike in May at 57.3%, with June at 77.1%.

Geopolitics

Tony Blair gave an interview in which he asked for people to “rise up” against Brexit. The UK will be “weaker” after leaving the “beautiful” EU, according to European Commission president Jean-Claude Juncker. In the US, Donald Trump denied his administration was in chaos in an unusual press conference following the resignation of his national security advisor, Michael Flynn, for unauthorised contact with Russia. The president also berated his own intelligence agencies over "un-American" and scandalous leaks. The North Korean regime kept itself in the media after it test fired a ballistic missile and Kim Jong-nam, the country’s leader Kim Jong-un's half-brother, was murdered in Kuala Lumpur.  

Bond markets

Fixed income markets were range-bound, awaiting more guidance from central banks. 

Mining

Gold was heading for its seventh weekly gain in eight weeks, as investors weighed the impact of accelerating inflation and pondered alleged “chaos” in the Trump White House. Spot gold prices rose 0.4% over the week by mid-session on Friday.  Copper prices eased after a recent rally as the union representing 2,500 striking workers at world’s biggest copper mine, Escondida, owned by BHP Billiton and Rio Tinto, were invited by Chile’s Labor Inspectorate to meet.

Consumer

Unilever shares jumped almost 15% on Friday as news emerged that US group Kraft has made a proposal to Unilever’s board for a combination of the two companies at a rumoured £40 per share.  The offer has been declined, but Kraft said that “we look forward to working together to reach an agreement”. The wording of Kraft’s statement suggests an enhanced offer may be forthcoming.

Energy

US crude oil and gasoline inventories soared to record highs last week, as refineries cut output and gasoline demand softened, the Energy Information Administration said. Oil prices were heading for their first weekly fall in five, but oil benefited from a report on Friday that said cartel Opec could extend its output cut to slash a global fuel-supply overhang. This means Brent crude futures were flat over the week by mid-session on Friday. Shares in power producer Drax slumped after the company reported a 17% fall in full-year annual earnings, slightly below analysts' estimates. Management blamed weak power prices and the loss of revenue from a green energy scheme. Shares in Japanese group Toshiba continued to slump after it announced a $6.3bn write down on the spiralling cost of two nuclear power station projects in America, following mass cost overruns and delays. There was some suggestion that the shares may need to be delisted.

Financials

Lloyds Banking Group is close to selecting Berlin as its base to build its European operations as it tries to secure market access to the European Union after Britain leaves the bloc, reports suggested. Royal Bank of Scotland is preparing to cut more than £800m of annual operating costs by eliminating 15,000 jobs and closing branches, reports suggested.  The majority hedge fund owned by Co-op Bank put itself up for sale four years after it almost collapsed as it continues to make significant losses. Find an assessment of the problems facing challenger banks here.  Deutsche Bank failed to get a US lawsuit dismissed that suggested it delayed foreign exchange trades to extract more profit at customers' expense.

Engineering

Rolls-Royce posted its largest-ever annual loss of £4.6bn, but its underlying earnings fell less than expected. Shares in troubled mid-cap defence group Cobham plunged after it issued its fifth profit warning in 18 months. Management admitted that its balance sheet was “clearly” not strong enough, which means a fundraising may be in prospect.

Retail

UK retail sales data for January was worse than expected. Month-on-month, the quantity bought is estimated to have fallen by 0.3%, compared with expectations of a rise of 1%. Shares in Laura Ashley fell sharply after the company, famous for its flowery designs, issued a profit warning following poor Christmas sales. The retailer posted a 29% drop in interim pre-tax profits, as cost continued to rise.

Technology

The latest SEC filing from Warren Buffett’s Berkshire Hathaway showed the investment group had increased its stake in Apple, ahead of the shares hitting an all-time high this week.

Travel

The competitive market in the airline industry, which is suffering from overcapacity, shows no sign of abating. Budget airline Wizz Air said it will open a new British base at Luton Airport, with three new routes flying from June to Tel Aviv, Kosovo and Georgia. British Airways cabin crew members working for the International Airlines Group’s mixed fleet are to strike for a further four days from February 22nd, trade union Unite said on Tuesday. Air France-KLM reported better-than-expected operating profit for 2016 and said it had made a “resilient” start to 2017 as it promised further cost-cutting efforts this year. Shares in package holiday group Tui jumped after the Anglo-German holiday giant narrowed its losses thanks to a strong performance in its long haul and cruise sectors. This followed disappointing figures in the previous week from heavily-indebted rival Thomas Cook.

Healthcare

There was positive news from AstraZeneca on its drugs pipeline. The company said patients treated with Lynparza showed a statistically-significant and clinically-meaningful improvement in progression-free survival.

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