Pound hits seven-week low and European shares slip after German factory orders suffer worst month since financial crisis

factory
Credit: Bloomberg

Pound slumps to seven-week low on Brexit uncertainities

The pound tumbled below $1.22 for the first time in seven weeks against the US dollar as investors awaited a second vote in the House of Lords on the legislation giving Prime Minister Theresa May the right to start formal Brexit talks with the EU. 

The  House of Lords will try to force the government to give lawmakers a greater say over the terms of Britain's exit from the EU and final approval of an eventual deal with the bloc. 

Analysts also said investors were weary ahead of tomorrow's Spring Budget. It put the local currency under selling pressure, dragging it down by more than 0.3pc to $1.2182, its lowest level since January 17. 

German January industrial orders suffer biggest monthly fall since 2009

A sharp fall in domestic and euro zone demand drove the biggest monthly slump in German industrial orders in eight years in January, data showed on Tuesday.

Contracts for 'Made in Germany' goods were down by 7.4pc on the month, the Economy Ministry said. That was the biggest monthly drop since January 2009 and was almost three times below the Reuters consensus forecast for a fall of 2.5pc.

The Economy Ministry said high demand in the fourth-quarter of 2016 resulted in the weak start to 2017. It expects industrial orders to rebound later this year. In December, orders rose by 5.2pc, the highest increase since July 2014.

Hogg's failure to disclose Barclays family links in 2013 'very serious' ​

 

Bank of England deputy governor Charlotte Hogg revealed in a letter to the Treasury Select Committee that she didn’t tell the central bank her brother worked for Barclays when she was hired as chief operating officer in 2013.

She wrote: "I had not formally declared my brother’s role at Barclays Bank plc to the Bank. The first time that I formally outlined my brother’s role was when I noted it in the questionnaire which I submitted to the Committee in advance of my recent hearing." 

Today, Anthony Habgood, the chairman of the BoE's Court of Directors told MPs that Hogg's omissions were "a very serious breach" of the BoE's compliance rules. 

Other highlights: 

  • FTSE 100 struggles for direction despite pound weakness
  • European shares fall for fourth straight day due to disappointing earnings 
  • Morgan Stanley expects pound to rebound to $1.45 by end of 2018
  • OECD hikes UK growth forecast 
  • Trump's tweet on lowering drug prices weighs on pharma stocks 

                                                                                                    

Market Report: Pharma stocks flounder after Trump's tweet on lowering drug prices

Pummeled by a tweet from the US President on lowering drug prices, pharma stocks dragged the blue chip index into negative territory.

Donald Trump said he was working on a “new system” to increase competition in the drug industry and bring down pricing.

His comments come a day after legislation to dismantle Obamacare was revealed by US Republicans, who called for ending health insurance mandates. Mr Trump has previously said drugmakers are “getting away with murder” on their pricing strategies.

Joshua Mahony, of IG, said: “Trump’s promise to control drugs prices highlights that the optimism felt in response to Hilary Clinton’s election loss was clearly misplaced, proving that the topic remains one rare bipartisan area of agreement.”

Shares in Shire tumbled 113p to £49.03, Hikma surrendered 36p to £21.15, AstraZeneca lost 45.5p to £47.17 and GlaxoSmithKline closed down 9.5p at £16.75. 

The FTSE 100 finished the day 11.13 points, or 0.15pc, lower at 7,338.99.

Bookmaker Paddy Power Betfair was also among the laggards despite reporting a 25pc jump in full-year earnings and predicting 2017 would be in-line with expectations. Liberum said shares were "fully valued".

Analyst Jason Holden said: “The valuation is rich and operational challenges in gaming are still evident.”

However, Ivor Jones, of Peel Hunt, said the share price decline reflected a misunderstanding about the strength of the business, flagging that each of the divisions delivered double-digit revenue growth last year. The FTSE 100 stock fell 515p to £82.70.

Meanwhile, insurer Direct Line posted a 22pc drop in full-year operating profit after the UK government last week changed the way personal injury claims are calculated. Shares slumped 10.2p to 338.2p.

Elsewhere, a slide in copper prices, due to a surge in warehouse stocks, weighed on miners. Antofagasta shed 21p to 781p, Glencore dropped 6.5p to 320p and Anglo American tumbled 11p to £12.27.

Separately, JP Morgan upgraded Glencore’s rating to “neutral” as it does not see “a strong catalyst for underperformance” over the next 3-6 months.

On the other side, Intertek rallied 171p to a five-month high of £37.65 after posting full-year revenue growth of 8.8pc and increasing its dividend by 19.3pc to 62.4p per share, while Convatec continued to gain momentum, up 2.7p to 257.7p, following a price target upgrade by Goldman Sachs.

Builders’ merchant Grafton Group bounced 50p higher to 657p on full-year profit growth of 12pc. Management has also guided for “an increase in profit in the year ahead”, with chief executive Gavin Slark telling Reuters he can’t see Brexit having a significant impact on Irish construction.

Meanwhile, its peer Travis Perkins enjoyed a leg up following a rating upgrade from Berenberg. The broker also added the stock to its “high conviction list”.

Analyst Olivia Peters said: “The group’s structural advantage should enable Travis Perkins to outcompete, outperform and offer returns ahead of peers.” Shares climbed 46p to £14.87.

Temporary power provider Aggreko lowered its pre-tax profit guidance for 2017, after posting a 3pc decline in full-year revenues, causing shares to plunge 137p to 921p. Michael Donnelly, of Panmure Gordon, noted the company’s valuation is “far too high” following a strong bounce in shares since their November nadir of 765p.

Finally, shares in Aim-listed Blur Group soared 118pc after it announced that it has entered into final talks with a global electronics company for a potential multi-million dollar roll out of its cloud software platform.

With that, it's time to close up for today. We're back again tomorrow from the earlier time of 7am, with all the latest ahead of the Spring Budget. 

Pound edges back above $1.22 

As the House of Lords debate rumbles on and Theresa May braces herself for another Brexit bill defeat, the pound has edged back above $1.22 against the US dollar. 

Earlier today, the local currency slumped to an intraday low of $1.2169. 

It is currently trading down 0.18pc at $1.2208.

Credit: Bloomberg

European bourses close in the red as pharma stocks weigh

European bourses ended the day in negative territory as pharma stocks slumped following Trump's tweet on lowering drug prices. 

At the close of play: 

  • FTSE 100: -0.15pc
  • DAX: -0.01pc
  • CAC 40: -0.48pc
  • IBEX: -0.15pc

 Joshua Mahony, of IG, said: "The FTSE has continued to tread water in a week that seems to be waiting for something to ignite volatility amongst European markets. Market volatility appears to be coming in the form of the commodity markets, with gold hitting a three-week low and crude prices reversing gains this afternoon. Donald Trump has ensured he remains the number one driver of volatility within the markets, with the President’s latest tweet dragging pharmaceutical firms lower today.

"Trump’s promise to control drugs prices highlights that the optimism felt in response to Hilary Clinton’s election loss was clearly misplaced, proving that the topic remains one rare bipartisan area of agreement." 

Snapchat owner plunges 21pc in just two days

After the fanfare over Snap's IPO last Thursday, investors have quickly fallen out of love with the Snapchat owner. So far this week, shares have plunged by more than 21pc. 

Yesterday, around $6.6bn was wiped off the company's market value. 

A group representing large institutional investors seeks to bar Snap and any other co that sell investors non-voting shares from stock benchmarks. 

Credit: Bloomberg

It's also worth noting that of the six analysts that have initiated coverage on the stock since its debut on the NYSE last week, no one has a "buy" recommendation. Four analysts hold a "sell" recommendation, while two are "neutral". 

Pound claws its way back towards $1.22

The pound has regained some momentum in afternoon trading, trimming its losses to just 0.29pc and changing hands at $1.22194.

Earlier in the day it fell to an intraday low of $1.2169 as investors awaited another defeat of the Article 50 bill in the House of Lords. 

Signs of a consumer slowdown were also appearing through the cracks, after s data from the British Retail Consortium and Barclaycard indicated consumers may now be feeling the pinch.

Credit: Bloomberg

US President causes headache for pharma stocks

Connor Campbell, of SpreadExweighs in on the move in pharma stocks this afternoon:

"The President once again caused a headache for the pharmaceutical stocks, tweeting that ‘pricing for the American people will come way down’ in regards to drugs. This helped prevent the Dow Jones from doing much after the bell, the likes of Merck and Pfizer both taking a hit. The dollar, on the other hand, remained strong, battering cable below $1.22 after taking nearly half a percent off of sterling, while keeping up its push for parity with the euro by robbing the currency of another 0.3pc." 

Personal injury rule change wipes £217m off Direct Line profits

Shares in Direct Line Insurance slumped towards the bottom of the blue chip index, down 3pc. Earlier today, it said it has taken a one-off hit to earnings after the UK government last week changed the way personal injury claims are calculated and the change should have little material impact on its 2017 profitsLucy Burton reports: 

Insurance company Direct Line has seen its pre-tax profits hammered by a Government move to change the way accident victims are compensated.  

The UK insurance company reported a 30pc fall in profits to £353m for the year to December 31, with the recent reduction in the discount rate - used to determine the compensation paid to those suffering life-changing injuries - costing the firm £217m in profits.  

Direct Line had expected to see profit before tax fall between £215m to £230m on the back of changes to the so-called Ogden Rate. Without the change the company would have seen its profits rise 11pc for the year to £578.6m and was expected to pay out a special dividend.  

Read the full report here

Europe's healthcare index nears two-week low on Trump's comments

Trump's tweet is now weighing on healthcare stocks on this side of the Atlantic. Europe's healthcare index hit its lowest level in almost two weeks, down 1.4pc. 

Earlier today, Trump said he was working on "a new system where there will be competition in the drug industry". 

Credit: Reuters

Wall Street opens lower as healthcare stocks weigh after Trump tweet

US stocks opened higher as healthcare stocks weighed and investors prepared themselves for a possible Fed rate hike next week. 

At the opening bell: 

  • Dow Jones: -0.1pc
  • Nasdaq: -0.21pc
  • S&P 500: -0.17pc

Healthcare stocks stumbled after a US President Donald Trump tweeted that he was working on "a new system where there will be competition in the drug industry". 

It comes a day after legislation to dismantle Obamacare was revealed by US Republicans. 

US trade deficit jumps to five-year high

The US trade deficit jumped to a near five-year high in January as rising oil prices helped to push up the import bill, suggesting trade would again weigh on economic growth in the first quarter.

The Commerce Department said the trade gap increased 9.6pc to $48.5bn, the highest level since March 2012. December's trade deficit was unrevised at $44.3bn.

Consensus forecasts suggested the trade gap would rise to $48.5bn. When adjusted for inflation, the deficit rose to $65.3bn from $62bn in December. Both the inflation-adjusted exports and imports were the highest on record in January.

The wider trade gap added to weak data such as housing starts, consumption and construction spending in suggesting the economy struggled to regain momentum early in the first quarter after growth slowed to a 1.9pc annualized rate in the final three months of 2016.

The economy grew at a 3.5pc pace in the third quarter.

Trade slashed 1.7 percentage points from gross domestic product in the fourth quarter. The Atlanta Federal Reserve is forecasting GDP rising at a 1.8pc rate in the first quarter.

The Trump administration is eyeing trade as it seeks 4 percent annual GDP growth. President Donald Trump has vowed sweeping changes to U.S. trade policy, starting with pulling out of the 12-nation Trans-Pacific Partnership trade pact.

Trump also wants to renegotiate the North American Free Trade Agreement (NAFTA), which was signed in 1994 by the United States, Canada and Mexico. Economists, however, warn that the America-first or protectionist policies being pursued by the administration are a threat to the country's economic health.

Report from Reuters 

UK restaurant trade in 'rude health' as Just Eat posts huge rise in profits

Shares in Just Eat have jumped 6.4pc to 551.5p after posting in-line full-year results. Bradley Gerrard has the details: 

The rapid growth of the UK’s takeaway market will be maintained by the “rude health” of the country’s restaurant industry, according to Just Eat’s chief executive

David Buttress said the UK delivery takeaway market had ballooned to £6.1bn from £5.5bn in 2015 as the group reported a 42pc rise in orders to 136.4m for the year to December 31.

The online company allows consumers to order food from local eateries and get it delivered to their homes. Just Eat dealt with 88.1m such orders in the UK in 2016 and makes its money from a commission payment on all orders placed.

A sustained rise in the number of consumers using the Just Eat mobile app - up to 73pc of group orders from 66pc in 2015 - was a sign that customers are becoming “more loyal”, Mr Buttress said.

“The fact we are all busier too is a factor in people using delivery services more,” Mr Buttress said.

“There are no longer only three or four different types of food available - Just Eat has more than 100 different cuisines available.”

Read the full story here

US stocks expected to slip as investors assess Trump's policies

US stock markets are poised to join their European counterparts in the red as investors assess the potential impact of Trump's policies, including a plan to repeal and replace the Affordable Care Act. 

Investors are also positioning themselves for an all-but-certain rate hike by the Fed next week. 

Here's a look at the US opening calls courtesy of IG: 

Have markets got it completely wrong on the Fed? 

Here's a great graphic from ING on the possibility of a Fed hike this month: 

Food inflation doubles as discounters grab record grocery share

Industry figures from Kantar Worldpanel have shown that grocery inflation has doubled in the 12 weeks to the end of February. Our retail editor Ashley Armstrong has the details: 

The discount supermarkets grabbed a record share of the British grocery market last month as food inflation doubled, driven by the rising cost of tea, butter and fish.

Grocery inflation at the till - which has been the result of rising import costs from a weaker pound since the UK's EU referendum vote - doubled to 1.4pc in the 12 weeks to the end of February compared to the same period to the end of January, according to industry figures by Kantar Worldpanel. 

The rising prices helped supermarket sales to grow at their fastest rate since June 2014, up by 2.3pc compared to last year.

“Staples such as butter, tea and fish all saw prices rise by more than 5pc during the past 12 weeks, as fruit and vegetables – many of which are imported – also saw an uptick in price," said Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel. 

Read the full report here

This time tomorrow.... 

The HM Treasury is teeing up the big event tomorrow. Chancellor Philip Hammond will deliver his Spring Budget at 12.30pm. We'll be live blogging the entire event. Be sure to stop by! 

Yesterday, the Chancellor said the budget "will help make the most of the opportunities ahead and build a country that works for everyone".  

Hogg's failure to disclose Barclays family links in 2013 'very serious'

Bank of England deputy governor Charlotte Hogg has found herself at the centre of controversy after she failed to disclose that her brother worked in Barclays.

Hogg, who took over as the deputy in charge of markets and banking this month, revealed in a letter to the Treasury Select Committee that she didn’t tell the BOE her brother worked for the bank when she was hired as chief operating officer in 2013.

Here's some reaction to that revelation: 

When questioned by the parliamentary committee today, the chair of the BoE's supervisory body said Hogg's failure to inform him of her brother's role was "very serious". 

Anthony Habgood, the chairman of the BoE's Court of Directors, which is responsible for the central bank's strategy, told MPs that Hogg's omissions were "a very serious breach" of the BoE's compliance rules.

Habgood's deputy, Bradley Fried, said Hogg's errors did not amount to a "hanging offence" and should be considered in the context of her otherwise good performance at the central bank. 

Conservative MP Jacob Rees-Mogg said he was concerned by their response.

He said: "What's worrying me is that the Bank is, or the Court is, pretty complacent about this.

"It's that ... 'we wont' investigate it, we'll just say there's no conflict because the brother, he's probably like us, he's another good chap'.

"I've moved on from being concerned about Ms Hogg's error to being concerned about the Bank's reaction - and that the Bank's reaction has been pretty unrigorous, it's taking bland assurances and passing them on to us." 

Pound languishes below $1.22: What the experts say

The pound is down by 0.31pc at present, changing hands at $1.2192 against the US dollar. Here's what experts had to say about its latest slide: 

Paresh Davdra, CEO and Co-Founder of RationalFX, notes the move lower comes ahead of the debate in the House of Lords and the budget. 

"As parliamentarians seek further say in the terms of negotiation – the preparation to trigger Article 50 itself appears to have a negative impact on the local currency. The effect of the Brexit pound squeezing household budgets is now visible in the growth figures as decrease in consumer spending, which was one of the key drivers for sustaining the growth, is now reflected in February economic data which notes a deceleration from previous months.

"Political discourse is still the key driver this week and the event in focus will be the spring (Brexit) Budget tomorrow.”

Credit: Bloomberg

FXTM research analyst Lukman Otunuga reckons Brexit anxieties have haunted attraction to the local currency. 

He adds: "Investors seem edgy ahead of a second vote to Britain’s upper house of parliament on granting Prime Minister Theresa May the power to trigger the formal Brexit negotiations. Sterling weakness could be a recurrent theme moving forward with the buying sentiment towards the currency remaining frighteningly low ahead of the Article 50 invoke." 

Skidding below $1.22 earlier today, Otunuga thinks this has opened a path lower towards $1.21.

Theresa May braced for second defeat in the Lords as Archbishop of Canterbury warns a second referendum would be 'unwise' 

Head over to our live politics blog with political correspondent Laura Hughes as Theresa May braces herself for second Brexit Bill defeat in the Lords: 

The Government is bracing itself for a second defeat in the Lords as peers back an amendment to the EU (Notification of Withdrawal) Bill.

The amendment calls for the Lords and the Commons to be given an early vote on the Brexit deal and would give them the chance to stop Mrs May from walking away from the EU without a deal.

It would force Theresa May "not to conclude an agreement" with the EU on the UK's withdrawal "without the approval of both Houses of Parliament".

Yesterday the Prime Minister warned that Conservative peers who force the Government into giving Parliament a meaningful vote on Brexit will "incentivise" the European Union to offer Britain a "bad deal". 

Lord Heseltine, the former Tory Cabinet minister, is ready to lead the rebels - said by sources to number in the "low teens" - in the vote expected late this afternoon.

Follow our live politics blog here:  Theresa May braced for second defeat in the Lords as Archbishop of Canterbury warns a second referendum would be 'unwise' 

Half-time update: European shares spend fourth day in the red on disappointing earnings

European shares remained in the red this afternoon weighed down by disappointing corporate earnings. 

Just after midday, here's the current state of play: 

  • FTSE 100: +0.09pc
  • DAX: +0.07pc
  • CAC 40: -0.28pc
  • IBEX: -0.25pc

Looking ahead to the US opening, Connor Campbell, of SpreadExsaid: "By the looks of things the US open won’t have much to offer in the way of excitement, the Dow Jones set to stumble out of the starting blocks with a 20 points fall. Since Trump’s speech in front of Congress, and the initial market explosion, the Dow has been at a bit of a loss what to do, gradually trickling lower as focus shifts from the blowhard President to Yellen and co." 

External factors weigh on the FTSE 100

Despite the slump in the pound, the FTSE 100 has struggled for direction so far today, up just 7 points, or 0.1pc, at 7,357.24. 

David Cheetham, of XTB, says external factors have contributed to the blue chip's index sluggish start to the week. 

He points to the reemergence of concerns surrounding Deutsche Bank and Donald Trump’s ability to act in a manner befitting high public office at the forefront of investors’ minds.

He added: "When you throw in an abysmal data point for German factory orders this morning - the largest drop since 2009 - there is plenty of reasons that could be seen as a cause for concern.

"Having said that stocks remain close to their record highs and with a further show of confidence in the global economy expected from the Fed next week, with markets are expecting another rate hike, it would be premature to start making calls for an end to the current bull run. The recent trade appears more likely a pullback against the prevailing trend higher rather than the beginning of a correction."

Bank of England deputy governor Hogg apologies for breaching  Bank's internal code of conduct

Well this is awkward, Bank of England deputy governor Charotte Hogg has written to Chairman of the Treasury Committee Rt Hon. Andrew Tyrie apologising for breaching the Bank's internal code of conduct. 

Last week, Charlotte Hogg came under pressure from MPs due to her family links to Barclays. However, it turns out Hogg had not formally declared her brother's role at Barclays to the central bank. 

Hogg's brother works for Barclays in a job planning the bank’s long-term strategy. Last week, she told the Treasury Select Committee: 

“My brother is part of Barclays’ strategic planning group, he has been for some number of years.

“I don’t discuss work with him and he doesn't discuss it with me. We mostly talk about his children.”

This week the Bank of England deputy governor in a letter to Chairman of the Treasury Committee Rt Hon. Andrew Tyrie said: 

“I had not formally declared my brother’s role at Barclays Bank plc to the Bank. The first time that I formally outlined my brother’s role was when I noted it in the questionnaire which I submitted to the Committee in advance of my recent hearing.

"As Barclays Bank pic is reguiated by the PRA, under the Bank's internal code of conduct and personal relationships policy, I should have formally declared my brother's role when I first joined the Bank. I did not do so and I take fuil responsibility for this oversight. I have now added a full record of my brother's role in the Bank's HR systems.

"Regrettably, my oversight means that my oral evidence to the Committee in this respect was not accurate. I write now to correct that evidence at the earliest opportunity and to place on record my sincere apologies to the Committee.

"During my hearing I committed to discussing this further as appropriate: I have spoken subsequently with both the Secretary of the Bank and the Chair of the Bank's Court of Directors. Both the Secretary and the Chair acknowledge that no actual or potential conflict of interest has arisen to date in relation to any decisions taken in my role as the Bank's Chief Operating Officer and that the perception of conflict would have been most unlikely."

Paddy Power Betfair claims merger success despite profit hit

Shares in Paddy Power Betfair slumped to the bottom of the blue chip index, down 5.2pc this morning, after it posted 2016 earnings up 35pc and predicted 2017 would be in line with expectations. Bradley Gerrard reports: 

Online-focused bookie Paddy Power Betfair has insisted it is already seeing the benefits of its merger despite taking a multimillion-pound hit to its profits from the high costs of the tie-up.

Chief executive Breon Corcoran said the combined company would gain from shifting Paddy Power to Betfair's superior technology platform, helping it lower costs and speed up the pace of new product launches. Around 60pc of its software engineers are working on the upgrade, which could take up to nine months.

Mr Corcoran added that he was confident the company could maintain its heady double-digit wagering growth, which has come under increasingly scrutiny from analysts.

Read the full story here

Worldpay promises jobs boost as profits soar

Shares in Worldpay fell by as much as 4.2pc this morning to a three-month low after it reported lower-than-expected revenue, hurt by weakness in its US business. Lucy Burton has the details: 

UK payment processor Worldpay plans to create more technology jobs in the UK, its chief executive has vowed, after posting soaring pre-tax profits in 2016.

The FTSE 100 company, which was London's largest listing in 2015, reported a leap in profits from £19m to £264m in the year to December 31.

It processed 15 billion transactions during the year, a 14pc hike, helping drive a 15pc rise in revenue to £4.5bn.

Philip Jansen, chief executive, said that the firm's global footprint meant that the UK's decision to leave the EU last year did not impact the  firm the way it might have hurt others, noting that in 2016 the company won more new business than ever before. 

He added that the firm would be creating further technology jobs in the UK, a point echoed by chief financial officer Rick Medlock who said that there would "absolutely" be job creation in the country.

Read the full story here

OECD hikes UK growth forecast

The OECD has lifted its UK growth forecast. It now expects GDP to rise by 1.6pc this year, up from its previous estimate of 1.2pc.

In its latest healthcheck on the economy, the OECD said: "In most other major advanced economies, growth is projected to continue around the current modest path. In the United Kingdom, the pace of expansion in 2016 was lower than in previous years, despite support from resilient household spending, actions by the Bank of England and adjustment to the fiscal stance following the Brexit vote.

"UK growth is expected to ease further as rising inflation weighs on real incomes and consumption, and business investment weakens amidst uncertainty about the United Kingdom’s future trading relations with its partners." 

Other key points from the Paris-based group's latest update include: 

  • Estimated global economic growth would run at 3.3pc this year before reaching 3.6pc in 2018, unchanged from November's estimate;
  • A modest recovery underway in the global economy is at risk from economic nationalism and diverging central bank policies;
  • Higher interest rates in the United States could unleash damaging volatility on financial markets;
  • Financial markets were becoming disconnected from economic reality (as consumer spending and business investment remains weak);
  • Exchange rate swings could be expected if Fed hikes rate;
  • US economy would grow 2.4pc this year as domestic demand firms, up from 2.3pcin its last forecasts from November;
  • Eurozone growth was seen steady this and next year at 1.6pc. 

Pound drops below $1.22 for the first time since January 17

The pound has dropped below $1.22 for the first time since January 17 this morning, down 0.3pc at $1.2195. 

It comes ahead of a second vote in the House of Lords on legislation that will trigger the UK's exit talks with the EU. 

Meanwhile, Ipek Ozkardeskaya, of London Capital Group, said the pound is expected to "remain under selling pressure" ahead of the UK’s budget announcement. 

Credit: Bloomberg

Morgan Stanley: FX is having the greatest influence on UK equities in 20 years

One effect of the UK referendum last June has been that FX has become a much more importance influence on UK equities than previously, Morgan Stanley said in a research note this morning.

The US investment bank points out that the correlation between the pound and the relative performance of FTSE100 vs 250 has moved to its most significant level in over 20 years. 

Credit: Morgan Stanley

 If the pound strengthens as Morgan Stanley predicts (targets $1.45 by end of 2018), it will favour UK mid-caps over UK large-caps. 

According to data from Morgan Stanley's Global Exposure Guide:

  • Around 65pc of UK mid-cap revenues come from the UK;
  • Just 18pc of mega-cap and 37pc of large-cap revenues are domestically sourced.

Lillian Huang, of Morgan Stanley, explains: "Given the FTSE 100's greater overseas exposure, it tends to benefit from pound weakness, given the translational impact on earnings, while, consequently, pound strength favours mid and small cap stocks from a relative perspective." 

Credit: Morgan Stanley

 As such, the bank says it would "selectively add" to UK domestic names. While UK domestic cyclical stocks stand out as "being attractive on the valuation front", there are risks that economic activity will slow through the year as real disposal income growth moderates and business investment weakens, it said. 

Morgan Stanley's overweight-related stocks in its UK domestic exposure basket include: AA, Autotrader, Lloyds, Marks & Spencer and Whitbread. 

Those that have the highest correlation to the EURGBP include Lloyds, Aviva, Prudential, B&M and St James's Place. 

Morgan Stanley predicts the pound will rebound to $1.45 by end of 2018

Morgan Stanley has turned bullish on sterling. The US investment bank's FX strategists predict the pound will hit $1.28 against the dollar by the end of this year and $1.45 by the end of 2018.

They argue that the pound is currently around 15pc undervalued and that Brexit risks are already largely in the price.

Lillian Huang, of Morgan Stanley, said: "Brexit-related uncertainty has abated somewhat recently as the government has largely navigated the path to triggering Article 50 by end 1Q-17,helping the UK's policy uncertainty index to drop back from its peak in July 2016.

"However, overall macro uncertainty is likely to remain elevated and thus we expect the UK market to stay sensitive to currency moments."

Credit: Morgan Stanley

Morgan Stanley also points out that a stronger pound is usually accompanied by price and EPS underperformance of UK equities relative to other regions. 

"Therefore, if our FX strategists are correct with their stronger GBP view, it points to a higher probability of UK underperformance from here." 

UK annual house price growth slows to weakest since July 2013

Annual British house price growth cooled to its weakest since July 2013 in February, data from Halifax showed this morning. 

House prices rose 5.1pc in the three months to February compared with the same period a year ago. That compares to growth of 5.7pc  in January and is below consensus forecasts of 5.3pc.

Halifax housing economist Martin Ellis said: "A sustained period of house price growth in excess of pay rises has made it increasingly difficult for many to purchase a home.

"This development, together with signs of reduced momentum in the jobs market and squeezed consumer spending power, is expected to curb house price growth during 2017."

More than 800 jobs to be lost as Budgens closes 34 stores 

Budgens will close 34 stores resulting in more than 800 jobs losses. Sam Dean reports: 

Hundreds of supermarket workers will lose their jobs after one of the retailers behind the Budgens chain revealed it would be closing more than 30 of its stores.

Food Retailer Operations Limited (FROL), which operates 34 Budgens stores in the UK, has gone into administration less than a year after it bought the stores from the Co-op.

Credit: PA

Administrators said they had been unable to find a buyer for the stores, which employ more than 800 people across the country, from Dorset to Scotland.

Nine of the stores were shut at the weekend, with the remaining 25 to be closed over the next fortnight.

PwC were appointed to handle FROL’s administrators last month. Mike Denny, joint administrator, said: “Unfortunately, we have been unable to find a buyer and it is not commercially viable to continue trading the stores.

“We are working closely with the Co-op, USDAW (the Union of Shop, Distributive and Allied Workers) and the relevant government agencies to ensure that all employees receive the maximum levels of practical and financial support through the redudancy process.”

Read the full story here

Pound slumps to seven-week low as Lords to vote on Brexit bill for second time

The pound has slumped to a seven-week low against the dollar this morning, down 0.2pc at $1.2206 against the US dollar. 

The latest move lower comes ahead of a second vote in the House of Lords on legislation that will trigger the UK's exit talks with the EU. 

Anthony Cheung, of Amplify Tradingnotes in his morning briefing that if the pound drops below $1.22, "the bias is to the downside". 

German factory orders: Monthly volatility was amplified by weak demand for big-ticket items

Germany factory orders: Horrible, but too volatile in month-on-month guise to make any firm conclusions

Factory orders in Germany crashed 7.4pc month-to-month in January, well below the consensus for a 2.5pc fall. 

Claus Vistesen, of Pantheon Macroeconomics, makes a great point although the figures are "horrible" the data is "too volatile" month-on-month to make any firm conclusions. 

"It’s difficult to stay sane when analysing the volatile month-to-month fluctuations in these data. This is undoubtedly a grim headline which more than reverses the 5.2pc jump in December, but we caution that revisions are possible."

Credit: Pantheon Macroeconomics

Mr Vistesen notes that the main hit came from a 9.9pc month-to-month plunge in capital goods orders—driven by a 16.3pc crash in domestic capital goods orders—but intermediate and consumer goods orders also slipped.  Meanwhile, domestic orders overall fell a staggering 10.5pc, reversing a 7.4pc increase, while foreign orders fell a more “modest” 3.7pc. 

He adds: "These data suggest that demand for German manufacturing goods ground to a halt at the start of the year, following a strong finish.

"Overall, the crash in new orders is inconsistent with upbeat survey data, but we need to see more data and revisions to get a clearer picture. Our assumption remains that the German manufacturing sector is growing. It is also critical to smooth these data to get a sense of what is going on." 

No panic: German factory orders do not determine the short-term economic development 

But not everyone is worried. Speaking to Reuters, Andreas Scheuerle of Deka Bank said there was no need to be anxious, pointing to strong indicators for the broader economy.

"No panic: orders do not determine the short-term economic development and the early indicators are brilliant - it should continue uphill," he said. 

Reaction: German industry is having more problems returning to full speed

Here's some reaction to German industrial orders data, which fell 7.4pc in January, it's worst month since 2009: 

Speaking to Reuters, Carsten Brzeski of ING Diba said even though the fall could be explained by seasonal effects and a technical correction after a December surge of 5.2pc, the size of the drop suggests that German industry could be struggling to gain speed.

"Today’s disappointing data is also a good reminder that the German industry is having more problems returning to full speed than buoyant sentiment indicators have been suggesting," he said. 

Meanwhile, the German economy ministry said the drop in January was expected after a strong fourth-quarter in 2016. In December, factory orders hit its highest level since July 2014. 

German factory orders post biggest fall since January 2009

A sharp fall in domestic and euro zone demand drove the biggest monthly slump in German industrial orders in eight years in January, data showed on Tuesday.

Contracts for 'Made in Germany' goods were down by 7.4pc on the month, the Economy Ministry said. That was the biggest monthly drop since January 2009 and was almost three times below the Reuters consensus forecast for a fall of 2.5pc.

The Economy Ministry said high demand in the fourth-quarter of 2016 resulted in the weak start to 2017. It expects industrial orders to rebound later this year.

In December, orders rose by 5.2pc, the highest increase since July 2014.

A breakdown of the January data, showed that domestic demand fell by 10.5pc, foreign orders by 4.9pc, driven by a 7.8pc fall in demand from the euro zone.

Report from Reuters

European shares dip for fourth straight session 

European bourses struggled for direction in early trade, with shares dipping into the red for a fourth straight session due to disappointing corporate results. 

Here's a look at the current state of play: 

Credit: Reuters

 Mike van Dulken, of Accendo Markets, said: "Calls for gains at the open are in spite of a negative US close but in line with a largely positive session in Asia overnight. Sentiment buoyed by US futures rallying from their lows, as well as a USD rally putting helpful pressure on GBP (back to Friday’s lows) for the FTSE’s international contingent, although fresh EUR strength means Germany’s DAX underperforming." 

Consumer boom at an end as prices rise and shoppers cut back 

Data this morning from the British Retail Consortium has showed that food spending in the three months to February was up 0.6pc. Tim Wallace reports: 

Britain's consumer boom could be at an end as shoppers cut back their spending last month, paying more for their food as prices started to rise but making savings by splashing out less on clothes and home accessories.

It is the first time non-food spending has dropped since mid-2012 and economists fear this means the economy is now slowing down - since the Brexit referendum household spending has been a big driver of growth, so a slump in spending will dent economic prospects.

Food spending in the three months to February was up 0.6pc compared with the same period a year ago, according to the British Retail Consortium, as higher prices forces shoppers to spend more on essentials.

Inflation is kicking in as the weak pound pushes up the price of imported goods.

But non-food spending fell by 0.4pc, the first drop in more than four years.

Spending on stationery, household appliances, clothes, shoes, home accessories, health and beauty products, and luxuries such as watches and jewellery all dropped.

Households did spend more on toys and baby equipment, house textiles and furniture, however.

Read the full story here

Agenda: Germany January factory orders post biggest fall in eight years

Good morning and welcome to our markets coverage. 

Overnight in Asian trading, Hong Kong stocks were firm, buoyed by tech stocks. Sentiment was also lifted by a sharp rebound in rate-sensitive property stocks.

Data this morning from the British Retail Consortium has showed that food spending in the three months to February was up 0.6pc compared with the same period a year ago. 

Elsewhere, attention shifts to Germany after data showed the biggest monthly slump in German industrial orders in eight years in January, driven by a sharp fall in domestic and eurozone demand. 

Contracts for 'Made in Germany' goods were down by 7.4pc on the month, the Economy Ministry said. That was the biggest monthly drop since January 2009. 

At 10am, the OECD will release its healthcheck on the global economy. 

Also on the agenda: 

Full-year results: Servelec Group, SDL, Intertek Group, Paddy Power Betfair, Aggreko, LSL Property Services, Just Eat, Headlam Group, Escher Group, Apax Global Alpha, Direct Line Insurance, XLMedia, Worldpay, Autins Group, Shawbrook

Interim results: Ashtead, St Ives

Trading update: McCarthy & Stone

Economics: Halifax HPI m/m (UK), NIFB small business index (US), trade balance (US), consumer credit m/m (US), factory orders m/m GER), revised GDP q/q (EU)

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