Last Week in the City: Middle-class horror as Ocado dumps Waitrose

Garry White, Chief Investment Commentator, looks at the events that have shaped UK equity markets this week (25 February to 1 March, 2019).

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Progress appeared to have been made on Brexit this week, but whether there will be a parliamentary majority for Theresa May’s Withdrawal Agreement remains unclear. Donald Trump finally got to visit Vietnam for denuclearisation talks with North Korea’s Kim Jon-un, after the US president escaped the draft in the Vietnam War because of “bone spurs” on his heels. However, a wave of horror gripped some Ocado customers after it was announced it would switch from selling Waitrose products to those from Marks & Spencer next year.  

The FTSE 100 fell 0.9% over the week by mid-session on Friday as the pound strengthened on Brexit positivity. The FTSE 250 was up 0.5%.

Brexit

The UK government continued negotiations in Brussels aimed at securing changes to the Northern Ireland backstop as it tried to get a Brexit deal that can make it through the Commons. There will be another vote on the deal by 12 March at the latest. If the deal is rejected again, MPs will vote by 13 March at the latest on whether they want a no-deal departure from the EU.

Some staunch Brexiteer MPs, including Jacob Rees-Mogg and Dominic Raab appeared to soften their opposition to Theresa May’s Brexit deal. The pound hit a seven-month high on the optimism.

Spanish foreign minister Josep Borrell said the country will aim to protect the rights of the thousands of British citizens living there in the event of a no-deal Brexit.

Index changes

Food delivery group Just Eat and insurer Phoenix Group will joining the FTSE 100 share, replacing gaming group GVC Holdings and oil services company Wood Group, which will be demoted to the FTSE 250. The changes will come into effect on Monday 18 March.

Promoted to the FTSE 250are: Kier Group; and Pets At Home.

Deleted from the FTSE 250 are: Aveva Group; Edinburgh Dragon Trust; Halfords; Superdry.

Economics

The US economy expanded by 2.6% in the fourth quarter - beating analysts' expectations of 2.2%, although it still slowed compared to the previous quarter. Growth was helped by a 2.8% rise in consumer spending, but that's a slower rise than 3.5% in the third quarter.

The Federal Reserve will stop shrinking its $4 trillion balance sheet later this year, Chairman Jerome Powell said. This is in line with the bank’s more-dovish recent tone.

A private survey on China's manufacturing sector showed that factory activity shrank for a third-consecutive month in February, but markets reacted with optimism as it bounced off lows. The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) came in at 49.9. However, this was higher than January's reading of 48.3, and better than consensus expectations of 48.5.

Euro-area factories suffered their biggest drop in orders in almost six years in February amid mounting concern over trade tariffs and Brexit. Led by Germany and Italy, manufacturing output in the 19-nation bloc contracted last month, with a Purchasing Managers’ Index falling to 49.3.

Geopolitics

US officials are preparing a final trade deal that President Donald Trump and his Chinese counterpart Xi Jinping could sign in weeks, reports suggested.

Since Donald Trump started his trade war, cyberattacks from China have increased, a new study suggests. I look at the new online cold war here.

President Trump’s second summit with North Korean dictator Kim Jong-un collapsed yesterday, following demands to lift US sanctions entirely. Although talks ended abruptly and in failure, both sides expressed optimism that progress had been made and the door was left open for further dialogue.

Donald Trump's former attorney Michael Cohen called the US president a racist, conman, and cheat during his opening statement before the House Oversight Committee.

The US trial against Huawei for alleged fraud, trade secrets conspiracy and other charges will start in March 2020, the Justice Department announced.  The US has accused Huawei of stealing technology from US telecom company T-Mobile. A separate suit also says that the company misled the US about its dealings with Iran.

Former US Federal Reserve Chair Janet Yellen has said in an interview with Marketplace she does not think US President Donald Trump understands economic policy.

Justin Trudeau, Canada’s prime minister, is facing the biggest political scandal of his administration. There are allegations that his former attorney general, Jody-Wilson Raybould, was improperly pressured by some of his closest advisers to prevent the prosecution of a large Canadian engineering company over accusations of fraud and bribery.

Technology

Satellite company Inmarsat’s shares jumped on renewed bid speculation. The CTFN news website said rival US satellite group EchoStar was expected to renew its interest in the company "very soon".

Switzerland’s Swatch Group filed a complaint against Samsung saying it infringed its trademark on designs for downloadable smart watch faces.

 

Autos

Data from the Society of Motor Manufacturers and Traders (SMMT) showed that the number of cars made in the UK fell for the eighth month in a row in January.

Investors drove shares in Aston Martin Lagonda to their lowest level since their flotation in October last year after the group reported a pre-tax loss of £68m. The shares lost nearly a fifth of their value.

Tata Group is exploring strategic options for its Jaguar Land Rover unit, including a potential stake sale in the struggling luxury carmaker, reports suggested.

Tesla is closing all of its stores in a cost-cutting measure, so it can lower the starting price of its Model 3 to $35,000. Founder Elon Musk said that a shift to selling online only was essential to make it financially viable to lower the current starting price of $42,900. Also, US financial regulators asked a New York judge to hold Mr Musk in contempt for violating a settlement over social media comments. The move by the Securities and Exchange Commission (SEC) comes after he tweeted about the car group’s production. Last year, Mr Musk agreed that he would not make statements about Tesla's financial performance without prior agreement with the company.

Energy

US President Donald Trump called on Opec to ease its efforts to boost crude prices, which he said were “getting too high”. However, Saudi Arabia’s Energy Minister Khalid Al-Falih said that the cartel and its allies may continue output cuts. Brent crude futures fell 0.8% over the week by mid-session on Friday to trade at about $66.50 a barrel.

Mining

Rio Tinto announced a $4bn special dividend alongside its full-year results, following the sale of the company’s interest in Grasberg, the world’s second-largest copper mine. Earnings in 2018 were slightly ahead of market expectations.

Shares in gold miner Centamin slumped after it disappointed investors with its 2019 production guidance.

North American cannabis

US lifestyle guru Martha Stewart announced plans to join Canadian cannabis producer Canopy Growth as an adviser to help deliver a new line of products. Shares in Sequential Brands Group, which owns the Martha Stewart brand, jumped by almost a third following the news.

US legislators are discussing allowing banking facilities for cannabis businesses. This would mark another step in the legitimisation of the industry. I explain why here.

Financials

Shares in troubled challenger bank Metro plunged again after it unveiled plans to raise £350m from investors to plug a funding gap left by an accounting error. The bank revealed last month that it had underestimated the risk level of some of its commercial loans. The price of the bank's existing shares fell by 16% on Tuesday, followed by a further 20% in Wednesday trading.

RSA Insurance’s 2018 results were disappointing. Its operating profits fell sharply after it was hit by problems in its specialist commercial insurance business.

Insurer Hiscox announced its profits trebled last year as it returned to growth in its London market for the first time in three years.

Emerging-markets focused trade bank Standard Chartered will step up its restructuring by cutting another $700m in costs and pulling back on some activities in markets including India and Indonesia. This followed a fall in 2018 profits.

Property

UK house price growth was muted in February, growing 0.4% year-on-year, according to Nationwide.

Property website Rightmove defied a slowdown in the housing market, revealing a 10% rise in revenue along with an 11% increase in operating profits for last year. However, the number of estate agent branches using the website fell by 2% and the shares moved lower.

The value of its portfolio of property at shopping centre operator Hammerson fell by almost 6% in 2018, as the retail sector continues to struggle.

Industrial property developer Segro continues to benefit from the rise of online shopping. Management revealed it raised around £450m via a share placing to invest in a pipeline of UK and European projects. Results in 2018 were strong.

Profits at house builder Persimmon topped £1bn for the first time in 2018, boosted by the government’s Help to Buy programme. However, the company’s inclusion in the Help to Buy scheme is now under review after the government became "increasingly concerned" by Persimmon's practices, including its use of leasehold contracts, the quality of its buildings and its leadership.

Greg Fitzgerald, the current chief executive at house builder Bovis Homes has managed to improve the build quality of the company’s new houses after problems led to a series of profit warnings. As a result, 2018 results showed an improvement in margins and the company posted record profits.

Taylor Wimpey said that demand for its homes remained strong at the start of the year and management said it was committed to returning cash back to shareholders in 2020 and beyond.

Travel

Full-year results from International Consolidated Airlines Group, which owns British Airways, Iberia, Vueling and Aer Lingus, were slightly ahead of City expectations and management announced a special dividend payment.

The Netherlands bought a 14% stake in Air France-KLM in a bid to strengthen its influence, according to Dutch finance minister Wopke Hoekstra. The Dutch government wants the same size stake as the French government’s 14.3% as the two countries grapple over the airline’s strategy. Delta owns 8.8%, China Eastern 8.8% and employees 3.9%.

Brazil’s aircraft maker Embraer approved the sale of 80% of its commercial jet operation to Boeing. Boeing made its bid following a similar deal between Airbus and Canada’s Bomardier, which saw the European group take a majority stake in the C-Series jets, which compete directly with Embraer.

Retail

Marks & Spencer plans to launch a rights issue and cut its dividend by 40% to fund a joint venture with online delivery group Ocado. M&S will pay Ocado £750m for a half share in the venture, which will trade as Ocado.com. The online grocer’s deal with Waitrose ends in September 2020.

Ted Baker shares plunged after it issued a profit warning. In an unscheduled update the fashion chain, which is facing pressures from a tough consumer environment and misconduct inquiry against its chief executive, said a series of costs had hit its bottom line.

Consumer

Advertising group WPP posted a better-than-expected set of full-year results, but management repeated its warning about a challenging 2019.

Professional information company RELX’s shares came under pressure when the University of California announced that it has cancelled all of its journal subscriptions with Elsevier, after contract negotiations broke down. The financial impact for RELX is relatively immaterial. However, this is part of a much bigger issue around ‘open access’ (a move to make all academic articles free for readers worldwide) and the main risk is that other universities take a similar stance.

Full-year results from Merlin Entertainments, which owns attractions including Alton Towers and Madame Tussauds, showed a recovery at its theme parks and management said its outlook for 2019 was “positive”.

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