Last Week in the City: Brexit clock ticks

Garry White, Chief Investment Commentator, looks at the events that have shaped UK equity markets this week (4 to 8 February, 2019).

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  1. Garry White

UK Prime Minister Theresa May attempted to talk the EU into reopening talks about the Withdrawal Agreement, but EU partners have stood firm.  Technology companies were once again hit by privacy concerns and growth fears caused the oil price to have its worst week so far this year. The FTSE 100 rose 1.2% over the week by mid-session on Friday. The FTSE 250 was up 0.2%.

After house prices soared over the last two decades, the under 45s stand to inherit more than £1.2 trillion in wealth. This inter-generational transfer of an astonishing amount of money has created a whole range of new issues that need to be managed. Charles Stanley believes this issue is so important that it is starting a debate. To discover more on this fascinating subject click here.

Brexit

Theresa May has told EU leaders she can get the Brexit deal through Parliament if they give her legally-binding changes to it. However, European Commission President Jean-Claude Juncker ruled out any changes. However, the two sides agreed to further talks to try and find a solution.

Bank of England governor Mark Carney warned that a no-deal Brexit was increasingly likely – and it could result in a recession.

Economics

The Bank of England expects growth this year to be the slowest since 2009 when the economy was in recession. It is forecasting growth of 1.2% this year, down from its previous forecast of 1.7% made in November. As expected, the Bank did not change interest rates at its meeting this week.

The European Commission also cut its Eurozone growth forecast to 1.3% for 2019, down from its previous estimate of 1.9%.

Activity in the UK's dominant service sector stagnated in January, with new orders down for the first time in two and half years. The latest IHS Markit/CIPS services purchasing managers' index (PMI) fell to 50.1 last month from 51.2 in December. A figure above 50 indicates expansion.

The UK construction sector also experienced a loss of momentum last month, with growth in activity slowing to its weakest rate for 10 months. The latest IHS Markit/CIPS construction purchasing managers' index (PMI) fell to 50.6 last month from 52.8 in December.

Geopolitics

Worries over the trade war continued after President Trump confirmed he will not meet with China's premier Xi Jinping before a 1 March deadline set by both governments to reach a trade deal. White House economics adviser Larry Kudlow also said that the US and China were still “far apart” on reaching a resolution to their trade spat.

France has taken the extraordinary step of recalling its ambassador from Rome. France blamed what it called baseless verbal attacks from Italy’s political leaders, which it said were “without precedent since world war two”.

Cryptocurrency

A Canadian digital coin exchange called QuadrigaCX said it cannot repay around $190m in client holdings after its 30-year-old founder Gerald Cotten unexpectedly died in India last month. Mr Cotten was the only person who knew the passwords to the exchange's systems.

Technology

Google-owner Alphabet beat Wall Street estimates in its fourth-quarter results, with advertising revenue up 20%. However, the shares edged lower following the release due to a sharp rise in costs.

Twitter shares plunged, despite the company reporting its first annual profit. The company said that it had 321 million monthly active users in the final three months of last year, down five million from the prior quarter and nine million from the same period a year ago. That marked the third consecutive quarter of user declines. And soon, the company will stop disclosing the figure entirely. It also downgraded guidance for the current quarter.

Apple reached a deal with France to pay an undeclared amount of back-dated tax, with French media putting the sum at around €500m.

Germany is moving to break up Facebook's dominant position in gathering data about social media users. The country's antitrust office ruled that the company is abusing its virtual monopoly in social media by combining data from Instagram, WhatsApp and third party websites. The social media group will now be required to seek German users' explicit consent to collect and combine such data.

Shares in Snap, the owner of the Snapchat app, soared after the company said it had halted a fall in users on Apple devices.

Music streaming giant Spotify says its most recent quarter was its best ever as the group posted its first quarterly operating profit. Monthly active users rose 29% to 160 million.

Shares in Japanese tech conglomerate Softbank leapt after the company unveiled a record $5.5bn share buyback and a jump in quarterly profits.

Energy

Oil saw its biggest weekly loss this year as pessimism over the prospects for global economic growth dampened the outlook for demand and US output stayed at record levels. Brent crude futures fell 1.8% over the week by mid-session on Friday to trade at about $61.60 a barrel.

BP shares rallied after the oil major smashed market expectations in its fourth-quarter results. Annual profits doubled, helped by its purchase of shale assets from BHP Group. Royal Dutch Shell, Exxon Mobil and Chevron all reported stronger-than-expected earnings in the prior week, driven by higher production in US shale basins where oil majors have invested billions.

The UK has no plans to review fracking regulation, according to the Department for Business Energy and Industrial Strategy (BEIS). Earlier in the week, UK shale gas groups Cuadrilla and Ineos called for changes, arguing that rules on earth tremors and when drilling must halt were too restrictive.

British energy provider SSE issued a profit warning, blaming a reduction in "contracted income from the capacity market" which is the means by which power stations are subsidised during the winter months.  

Mining

Iron ore prices rallied to their highest level since 2014 as the fallout from Vale’s tailings dam collapse continued. The Brazilian miner was forced to declare force majeure on some of its contracts. This is likely to benefit the Australian miners Rio Tinto, BHP Group and Fortescue.

Supermarkets

Ocado shares slid sharply following a major fire at the grocer’s flagship robot-powered warehouse in Andover, Hampshire. The site is where the company showcases its automated warehouse technology that it is trying to sell to retailers across the world. Investors keenly await news on the cause of the blaze. Earlier in the week Ocado posted a widening annual loss as it invested in its business.

Retail

Sports Direct’s Mike Ashley has been termed the “undertaker” of the UK high street after buying a number of failed UK retailers after they fell into administration. However, Mr Ashley missed out on HMV, which was saved from collapse by a Canadian music entrepreneur Doug Putman, who runs music retailer Sunrise Records. However, 27 stores in prime locations closed, including the site of its first store on London’s Oxford Street, which was originally opened by composer Edward Elgar.

Carpetright’s UK like-for-like sales fell in the three months to the end of January, but the rate of decline slowed compared to the first half of the year

Autos

Nissan abandoned plans to build a new model of its X-Trail SUV at its Sunderland plant, as it warned that uncertainty over Brexit was impacting businesses. In 2016, the Japanese car manufacturer announced it would be making the new version of the vehicle at the factory in north-east England after receiving assurances about Brexit from the government, but it will now be produced in Japan.

Sales of new cars in the UK dropped 1.6% in January, as demand for diesel vehicles continued to slump. New car registrations fell to 161,013, the fifth consecutive month of declines, according to the Society of Motor Manufacturers and Traders (SMMT). Diesel registrations were down 20%.

Shares in Tata Motors tumbled in Mumbai after the company posted a record quarterly loss. This was caused by issues at Jaguar Land Rover, which has been hurt by softer demand in China.

The three-way alliance of Renault, Nissan and Mitsubishi Motors is apparently planning a tie-up with Alphabet’s Waymo to jointly develop self-driving taxis, Japan's Nikkei newspaper reported.

Aurora Innovation, a self-driving car technology group founded by former Google, Tesla and Uber executives secured $530m in new funding that included a "significant" investment from Amazon. The funding valued the business at more than $2.5bn.

Aircraft, airlines and travel

A 5% fall in fares plunged Ryanair to its first quarterly loss since 2014 and Europe’s biggest budget airline said overcapacity was likely to continue driving ticket prices lower in 2019. The weak performance was already flagged after it cut its full-year profit forecast for the second time in three months.

Flybe issued an ultimatum to its shareholders, arguing if they did not back a takeover proposal the company would have to be wound up and shareholders would receive no money. The company admitted that the offer for the group was “disappointingly low”.

Norwegian Air, Europe’s third-largest low-cost carrier after Ryanair and easyJet, posted a net loss of 1.45bn kroner (£131m) for 2018, despite a 30% surge in revenue. The loss was down from 1.79bn kroner in 2017, however. Passenger numbers rose 13% to more than 37m.

Boeing made what it called a “significant investment” in supersonic business jet developer Aerion. Boeing will provide engineering, manufacturing and flight testing services for the group’s supersonic business jet, which is expected to make its maiden flight in 2023.

Troubled package holiday company Thomas Cook said it was conducting a "strategic review" of its airline as it seeks to find funds to invest more in its hotels business. Management stressed the review was at an early stage, but would consider "all options" including a sale.

Package holiday group Tui saw its share plunge after management cut earnings guidance for its full year, blaming the hot summer and the weaker pound.

Outsourcing

Interserve reached a deal with its creditors to prevent its collapse. The rescue plan involves cutting its debts from more than £600m to £275m by issuing new equity. Interserve provides probation, cleaning and healthcare services and is also involved in construction.

There was some good news for Serco after it won a £560m contract to providing healthcare for around 80,000 members of the Australian army for the next six years.

Healthcare

GlaxoSmithKline posted a 36% rise in pre-tax profit, underpinned higher sales of its shingles vaccine and respiratory disease treatments, but warned of lower earnings in 2019.

Indivior shares slumped after it lost a patent battle over its drug Suboxone. The company said it would lose market share "in the immediate future" after a US court refused to delay the release of cheaper generic versions of the opioid addiction treatment.

Financials

Royal Bank of Scotland shareholders approved a proposal that lets the bank to buy back up to £1.5bn worth of shares from the government, as it looks to deploy excess capital and speed up its privatisation. A total of 98.7% of investors approved the plan. The government, which still owns 62% of RBS, did not vote.

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