Garry White, chief investment commentator, looks at the market-moving events that have shaped the UK equity markets this week (14 to 18 May 2018).
UBS has used its City analysts predictive firepower to try and work out the winner of the upcoming World Cup in Russia – and England came surprisingly high in its league table. The analysis showed that England was the fourth-most likely team to lift the trophy, with an 8.5% chance, while Germany took the top spot, with a 24% likelihood of winning. Brazil (19.8%) and Spain (16.1%) were in second and third place respectively. Reassuringly for Britains pub operators such as JD Wetherspoon, Punch Taverns and Greene King, UBS calculated that England has a 35.1% chance of reaching the semi-finals.
The FTSE 100 hit a new record closing high of 7,787.97 on Thursday, as oil majors were boosted by the oil price surging to a four-year high. Politics was high on the agenda for market watchers as trade war rhetoric continued and the likely members of a new Italian coalition government took aim at the European Union and its strict fiscal rules. The FTSE 100 rose 0.7% over the week by mid-session on Friday.
Geopolitics
Progress in the plan to denuclearise North Korea appeared to hit a rocky patch after comments from hawkish US national security advisor John Bolton, who said he favoured the “Libya option”. In 2003, Muammar Gaddafi agreed to give up his nuclear programme in exchange for a lifting of sanctions. However, he was killed by Western-backed rebels in 2011, so the parallel appeared to alarm Kim Jong-un. President Trump, however, said that the North Korean leader would have “very strong” protections if he agreed to scrap his missile plans.
Rhetoric on trade also continued to cause concern, after President Trump said that China was “very spoiled on trade” ahead of talks in Washington. Danish shipping company Moller-Maersk warned that any trade war would have a significant impact on its business, sending its shares down almost 10%. The US is also being “flooded” by German cars according to President Trump. Here, John Redwood, Chief Global Strategist, comments on the German trade surplus in his latest video blog.
EU Council President Donald Tusk branded President Trump selfish and capricious as EU leaders met to count the likely economic damage US trade policies would have on the bloc. "Someone could even think 'with friends like that, who needs enemies?'" Mr Tusk said.
Political angst in Italy hit markets, with bank stocks in the country bearing the brunt of a sell off. Italys anti-establishment Five-Star Movement and the far-right League are nearing a government coalition deal that would bring together two parties that both want to challenge European Union limits on government borrowing and spending. John Redwood looks at why investors dont like populism here.
Following on from his astonishing interpretation that high interest rates create inflation, Turkish President Recep Tayyip Erdogan issued a stark warning to his countrys central bank. If he wins a presidential parliamentary election next month, he says hell clamp down on central bank independence to keep interest rates low, comments that once again spooked investors and sent the lira to yet another historic low.
Foreign exchange
The US dollar continued to strengthen this week, as the prospect of interest rate rises in the US boosts the currency. US Treasury yields hit a seven-year high and emerging market currencies were under pressure. For a look at the market impact of a rising dollar click here.
The pound rose following reports the UK could stay in the Customs Union beyond 2021.
Technology
Full-year results from mid-cap cyber-security group Sophos were well received, after they showed strong growth in billings and adjusted operating profits.
Blue-chip software group Micro Focus has revealed that a revenue slump predicted in a profit warning two months ago had not been as bad as first feared, sending its shares higher.
Facebook confirmed its chief executive will meet leading members of the European Parliament to discuss privacy concerns in Brussels. The date of the meeting with Mark Zuckerberg has yet to be fixed.
Finnish listed Rovio, the gaming company responsible for the Angry Birds franchise, saw its first-quarter profits jump 88%. This was a remarkable turnaround after the shares had floundered since its IPO in September 2017.
Energy
Crude prices hit four-year highs on concerns that US sanctions against Iran and the fallout from Venezuelas economic slump will lead to tighter energy markets. Brent crude futures were up 3.4% over the week by mid-session on Friday, trading at about $79.80 a barrel.
Mining
The global diamond may be picking up after Russian group Alrosa, the worlds largest diamond producer by output, saw net profits jump 40% in the first quarter of the year. Management said this was largely due to “improved market conditions. Alrosa and Anglo-Americans De Beers control about half the global diamond market.
Consumer
It was a mixed week for gambling companies. Shares in UK players soared earlier in the week after the US Supreme Court has struck down a law that made sports-betting illegal in most US states, creating a substantial opportunity across the Atlantic. However, the government confirmed that permitted stake on controversial fixed-odds betting terminals (FOBTs) will be cut from £100 to just £2. The move had been expected. William Hill shares rose around 16%, Paddy Power Betfair was up 19% and GVC added 11% over the week by mid-session on Friday. For a deeper look at the US decision click here.
The boss of Toby Carvery owner Mitchells & Butlers, warned that more operators in the casual dining industry will fail. Phil Urban cautioned that a number of restaurant groups had been using more-aggressive discounting to pull in customers amid increased competition and weaker consumer confidence. Its pre-tax profits fell 8% to £69 million in the 28 weeks to 14 April.
The popularity of superhero films helped revenues at Cineworld jump 10% in its latest financial year. Black Panther and Avengers: Infinity War are two of the highest-grossing superhero movies of all time, raking in more than $1.3bn and $1.9bn respectively.
Supermarkets
Ocado shares hit an all-time high after the group unveiled an exclusive deal with the USs second-largest supermarket Kroger. But with the shares trading on very high earnings multiple, questions over profits remain. However, the gains resulted in the market value of Ocado leapfrogging high-street stalwart Marks & Spencer. For a more detailed look click here.
The Competition and Markets Authority started its scrutiny of the proposed merger between supermarket giants Sainsbury's and Asda, owned by US-listed Walmart. First-quarter earnings from Walmart managed to beat Wall Street expectations following a 33% jump in sales through its e-commerce channel.
Other retail
UK online retail sales went from strength to strength in April, in stark contrast to the situation on the high street. The latest figures from IMRG and Capgeminis monthly e-Retail Sales Index showed online retail sales jumped 18.8% year-on-year, the biggest increase since November 2016.
Burberry shares were back in fashion after management unveiled plans to return £150m to shareholders. However, full-year revenues fell 1% as new management try to bring the brand more upmarket, stopping distribution to outlets that are deemed down-market.
Carpetright formally announced a fundraising that forms part of its turnaround plan approved by creditors last month. The company plans to raise £60m through a rights issue, with the shares sold to existing investors at a 16% discount to its share price.
Shares in Mothercare soared after it unveiled its rescue plan, involving the closure of 50 high street shops. In a move that raised eyebrows across the Square Mile, the babyware retailer also said it would rehire its former chief executive, Mark Newton-Jones, after he was sacked by chairman Alan Parker 36 days ago. Mr Parker quit the ailing retailer on 18 April.
High street suit seller Moss Bros saw another drop in sales in the first few months of the year, but the retailer said the declines had eased. Brian Brick, chief executive, said Moss Bross trading had “begun to improve” but warned the situation on the high street “remains tough with a fragile consumer environment”.
The tough high street environment is hitting controversial retail magnate Sir Philip Green, as it was revealed that turnover at privately-owned Arcadia Group, which owns fashion brands including Topshop, Topman and Dorothy Perkins, fell 5.6% to £1.9bn last year.
Healthcare
AstraZeneca shares fell following its first-quarter earnings report, as generic competition to cholesterol-buster Crestor coupled with higher costs hit earnings. Sales for its latest products cancer treatment Imfinzi and Fasenra for severe asthma rose a modest 3%, helped by a weaker dollar.
Property
Shares in house builder Crest Nicholson fell sharply after it warned that its margins will be squeezed by flat house prices and rising business costs. Full-year margin will now be at the bottom of its guidance range of 18% to 20%.
News from peer Taylor Wimpey was better. At an investor meeting, management said market conditions remained stable. The builder will boost its ordinary dividend to at least £250m a year from 2019, or roughly 7.5% of its assets. This is an increase from at least £150m, or 5%, at present. It also said it would pay a special dividend of £350m in 2019.
Smaller builder Countryside was also upbeat as it ended the first half of its financial year in a better cash position than expected. Margins edged higher and pre-tax profits jumped 22%. Management also announced plans to build its own modular housing factory in a bid to drive its growth, as it increasingly focuses on building affordable homes for the rental market. Indeed, this appears to be a mounting trend as…
…British Land also said it would build more homes for rent and expand its own serviced office brand to shore up its portfolio against weakness in the retail sector. Chris Grigg, chief executive, said the build-to-rent sector, where British Land has traditionally not had much of a presence, was a particular area of growth.
London-focused estate agency Foxtons issued a gloomy trading update ahead of its annual general meeting, revealing that revenues fell almost 15% in the first three months of the year. Management said the London housing market remained “very challenging”.
Travel
Short-haul airline easyJet said it planned to expand its holiday business and set up a new loyalty scheme as it sharply narrowed its loss in the first half of the year.
Thomas Cook shares fell after its interim results in what was deemed a bout of profit taking after a strong performance over the last few months. The first half is traditionally loss-making ahead of the peak summer season. The company also said it was ditching its raucous Club 18-30 brand to target an image-conscious audience wanting more stylish holidays that were “Instagrammable”.
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