The Weekly Note

21 November 2017

The Weekly Note, brought to you by our ALPHA: r² Managed Portfolio Service team.

Market News

Political uncertainty is back at the forefront of investors’ minds this week after coalition talks in Germany collapsed, leaving the door open to a second election. Both the Free Democratic Party and the Social Democrats have declined to make a deal with Chancellor Angela Merkel, who has said she would prefer another vote to forming a minority government - both scenarios would be unprecedented for Germany. A re-run would carry the risk of the nationalist Alternative for Germany gaining more seats. On Monday, the euro fell as much as 0.6% against the US dollar.

There is concern that a change in the status quo in Germany could make it harder for Brexit negotiators to strike a deal in time, given Merkel’s relatively supportive behaviour towards Theresa May and the UK. Concurrently, chief EU negotiator Michel Barnier gave a speech on Monday saying that the EU may not ratify a trade deal if the UK does not choose to “stay close to the European model”.

Sterling rallied yesterday, however, as reports emerged that May is prepared to increase the Brexit ‘divorce bill’ offer in a bid to advance talks onto trade matters. It is thought the Prime Minister has persuaded her Cabinet that the offer should be increased from £20bn towards £40bn (unofficial figures). 

Currency movements overshadowed quiet equity markets yesterday as the major indices started the week cautiously, having fallen last week as investors monitored tax discussions in the US.

Meanwhile, Phillip Hammond will announce the UK Budget tomorrow, which is expected to focus on helping young people onto the property ladder, as well as revealing a redesign of business rates and strategic spending in areas of technology where the UK has potential to compete globally. 

China has announced a set of rules aimed at curbing financial risk in the asset management industry, such as prohibiting guarantees of rate of returns. Last month, president Xi indicated that he was prepared to accept lower rates of economic growth in order to defuse financial risks.

Oil prices have come off their recent highs after the International Energy Agency downgraded their demand outlook for 2018, ahead of the OPEC meeting next week. Metal prices also softened on the back of weaker sentiment on Chinese demand.

Stock focus

EasyJet was up over 7% this morning after its full-year profit before tax came in at the upper end of the company’s guidance. The airline also commented that current trading is benefiting from the struggles of rivals such as Monarch. Revenue rose 8% but currency headwinds contributed to a 17% fall in pre-tax profit. 

Compass Group, the world’s largest catering firm, reported a 5.6% rise in full-year profit this morning owing to steady growth in America, its biggest market. Organic revenue in the US rose 7%, while its European business grew 8%.

Johnson Matthey’s pre-tax profit for the first half of its fiscal 2018 has decreased by 2.5% following a number of impairment and restructuring charges. Despite reiterating its full-year guidance, the company’s shares are nearly 2% lower this morning. 

British Gas will end standard variable tariffs as part of a set of measures being introduced to drive down energy bills. Regulators have accused big energy companies of using these tariffs to overcharge longstanding customers and recently the government proposed a cap on such arrangements to fix the “broken energy market”. Around 4.5m British Gas customers are potentially affected. 

Uber has agreed to buy 24,000 hybrid cars from Volvo between 2019 and 2021, with the intention of converting the fleet into driverless on-demand vehicles. The ambitious deal is thought to be worth around $1.4bn. 

Alibaba, China’s giant e-commerce company, is taking a $2.9bn stake in the country’s top ‘hypermarket’ chain, Sun Art Retail Group. The move is not Alibaba’s first venture into physical stores and bares resemblance to Amazon’s purchase of Whole Foods earlier this year. 

William Hill claims to be on track to meet expectations in 2017, with strong growth in the US helping revenue. CEO Philip Bowcock said the performance was especially pleasing given “absence of a major football tournament”. The bookmaker came under pressure last week, however, to reveal the financial impact of a looming crackdown on betting machines.

Rolls Royce has put L’Orange, the German components business that it owns, up for sale as part of plans to simplify the structure of the company. It is estimated L’Orange could be sold for as much as £300m. 

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