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Last Week in the City: Three FTSE profit warnings

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (23 to 27 September 2019).

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (23 to 27 September 2019).
Garry white employee

by
Garry White

in Features

27.09.2019

Three UK blue chips – Imperial Brands, International Consolidated Airlines Group and Pearson – issued profit warnings this week. Europe saw its largest IPO this year after German software group TeamViewer listed in Frankfurt. Its shares fell on the first day of dealings. Analysts also met in Saudi Arabian desert to question executives as they prepare the pre-IPO documentation for Aramco’s listing.

The FTSE 100 rose 1.2% over the week by mid-session on Friday and the FTSE 250 fell 1.3%.

The Charles Stanley Investment Strategy Committee met to review markets and the economic outlook. Here are its conclusions.

Brexit

The way forward with Brexit remains unclear, with fraught scenes in parliament this week after it sat again after Boris Johnson’s advice to the Queen to prorogue parliament was ruled illegal by the Supreme Court.

There appears to be growing pessimism on the continent over whether a new withdrawal deal can be agreed. The EU's chief negotiator, Michel Barnier, said the UK's proposed alternative to the Irish backstop was unworkable. Downing Street said “progress has been made” but there were still “significant obstacles” to reaching a deal.

Garry White looks at what an election will mean for markets here.

Trade war

The Office of the US Trade Representative announced that it is granting tariff exemptions to more than 400 items imported from China. The move may indicate that the trade war was inflicting increasing harm on American industries and consumers – and that the White House is trying to mitigate that damage and lower tensions as negotiators from the two countries try to work out a deal.

The US trade deficit narrowed slightly in July, but the gap with China, a focus of the Trump administration’s “America First” agenda, surged to a six-month high.

Economics

Michael Saunders, a member of the Bank of England's Monetary Policy Committee, said it could cut the UK's interest rate even if the government secures a deal in time for Brexit on 31 October. In a speech to local businesses in Barnsley, Mr Saunders said: "If the UK avoids a no-deal Brexit, monetary policy also could go either way and I think it is quite plausible that the next move in Bank Rate would be down rather than up.” The comments hit the pound.

The European economy is getting closer to a stall, as both manufacturing and services data prompted concern. European manufacturing data was particularly weak, highlighting the difficulties currently faced by the Eurozone. German private sector activity shrank for the first time in 6-1/2 years in September as a manufacturing recession worsened and growth in the service sector lost momentum. The purchasing managers’ index for German manufacturing fell to 41.4 in September, from 43.5 the previous month, slumping to its lowest level since mid-2009. French private sector activity grew less than expected.

Germany still has a lot of adjusting to do as we move towards green vehicles. This will continue to impose a cost on its economy. John Redwood takes a look here.

China’s industrial profits fell 2% year-on-year in August, official data showed. The figures compared with a 2.6% rise in July. The contraction indicated Chinese industrial companies are under strain as domestic demand remains weak and the US-China trade war drags on.

Geopolitics

Forty-five years after Watergate and 20 years after Bill Clinton's impeachment failed, the prospect of another president thrown from office reared its head this week. Donald Trump is accused of abuse of power by leveraging hundreds of millions of dollars in taxpayer military aid to pressure Ukraine to try an uncover dirt on Democratic rival Joe Biden and his son, Hunter, in a telephone call. The White House is also accused of trying to cover it up. “The President of the United States has betrayed his oath of office, betrayed his oath to defend our national security, and betrayed his oath to defend our constitution," House Intelligence Chairman Adam Schiff said.

Adel al-Jubeir, Saudi Arabia's minister of state for foreign affairs, said all options, including a military response, were open after attacks on two of its oil facilities, which it has blamed on Iran. While Saudi Arabia wanted to avoid war and escalation, Iran would be held accountable for the drone and missile strikes, Mr al-Jaber said.

Iranian foreign minister Javad Zarif rejected talks with the US after President Donald Trump imposed fresh sanctions on Iran’s central bank. Mr Zarif said in New York over the weekend that Trump had “closed the door” to talks with Tehran after adding its central bank to the “Specially Designated Global Terrorist” list.

Profits warnings

It appeared things had improved at publishing group Pearson, but a profit warning on Thursday sent its shares down significantly. The education publishing brand said “weaker than expected” sales in its US higher education courseware division mean adjusted operating profit will hit £590m, far from the £640m it had hoped to hit.

British Airways owner IAG warned that its profits will be lower than expected this year, partly due to the impact of strikes by its pilots. Management said the two-day strike earlier this month in a dispute over pay and conditions cost it at least €137m. Overall, IAG expects its operating profit for this year to be €215m lower than previous guidance.

Shares in Imperial Brands dived after the tobacco giant warned that the crackdown on flavoured e-cigarettes in the US would hit its sales. The company has invested heavily in vaping products, which many believe are safer than tobacco. But it warned that demand in the US had fallen sharply since Donald Trump vowed to ban flavoured varieties this month.

M&C Saatchi’s share price crashed again, taking the drop to 55% in six weeks. The advertising agency group admitted that an investigation into accounting woes won’t finish until November and cut its annual profit forecast. Auditor PwC highlighted a series of accounting problems or misstatements, including "overstated accrued income" of £2.6m.

IPOs

It appears the world’s biggest-ever IPO may actually happen. Investment banks’ research teams started meeting executive from Saudi Aramco in the desert city of Dhahran for two days of briefings ahead of its IPO. They will then have barely three weeks to prepare their pre-IPO reports, according to an internal schedule seen by Bloomberg. That compares to six to eight weeks they’re normally given for some of the biggest global listings.

WeWork's Adam Neumann agreed to step down as chief executive of the office rental group, saying it's in the "best interests" of the company. He will remain with the company as non-executive chairman. Scrutiny of his leadership had "become a significant distraction," it said. This followed speculation that SoftBank, the biggest investor in WeWork, which recently postponed its IPO, was exploring ways to replace Mr Neumann following a pushback from prospective investors over widening losses and Mr Neumann’s unusually firm grip on the company. The company also announced it was selling the group’s $60m private jet, bought by the company and used by Mr Neuman and his family. S&P also lowered its issuer credit rating on WeWork to 'B-' from 'B’ and revising its outlook negative from stable. SoftBank was hoping the IPO would bolster its profits as it seeks to woo investors for its $108bn second Vision Fund, so it represented a major setback for the Japanese group, which is a substantial investor in WeWork and Uber.

Endeavor Group Holdings, the owner of talent agency WME-IMG and mixed martial arts league UFC, cancelled plans for its highly anticipated IPO the day before the stock was expected to begin trading on Wall Street. Management cited hazardous “market conditions.”

Europe has another listed technology company. Shares in German software company TeamViewer drifted lower following its stock market debut in Frankfurt on Wednesday, after the remote connectivity specialist completed Europe’s biggest IPO of 2019.

Shares of Swedish private equity group EQT surged around 20% above the offer price in its debut on the Nasdaq Stockholm Index.

Exercise bike and treadmill company Peloton priced its IPO at $29 a share, the high end of the expected range of $26 to $29. However, its shares slumped 11% following its debut on Thursday.

Palantir Technologies is targeting a valuation of at least $26bn in a private fundraising round, the first for the Peter Thiele-backed data analytics start-up in four years, reports suggested. Palantir is regarded as a major tech union that could IPO in the coming years. To discover more click here.

Technology

Shares in US memory-chip maker Micron Technology fell after it reported another large earnings decline and predicted a disappointing holiday season. The company has struggled to bounce back from plunging demand for its memory products over the past year, after rising prices led many customers to build up supply of memory chips.

Swedish telecom equipment manufacturer Ericsson has set aside $1bn to cover the cost of an investigation by the US government into its compliance with the US Foreign Corrupt Practices Act (FCPA). The group is accused of breaches of the company’s Code of Business Ethics and the FCPA in six countries: China, Djibouti, Indonesia, Kuwait, Saudi Arabia and Vietnam.

Netflix has now erased all the gains in its valuation this year, as investors grow concerned about rising competition. Apple and The Walt Disney Company are expected to usher in a "whole new world" for streaming services in November. Amazon.com is also building up its offer, signing up Phoebe Waller-Bridge, the writer of Fleabag and Killing Eve, this week to make content following her win at the Emmys.

Devin Wenig, eBay's chief executive, is stepping down amid the company’s ongoing operating review and pressure to keep up with rival Amazon.  Scott Schenkel, the company's chief financial officer, has been appointed as interim CEO.

Uber’s application to renew its private hire operating licence in London was rebuffed again by regulators. Transport for London instead gave the ride-hailing company a two-month extension to its licence, which was due to expire on Wednesday night.

Energy

Oil saw its biggest weekly loss since July on indications Saudi Arabia was restoring lost crude production quicker-than-expected after attacks on its key energy infrastructure. Brent crude futures fell 2.8% over the week to trade at about $62.50 a barrel by mid-session on Friday.

ExxonMobil agreed a $4.5bn deal to sell the bulk of its Norwegian assets to Vår Energi, as the American energy major retreats from the North Sea to place greater focus on US shale fields.

French oil major Total will now boost its dividend by between 5% and 6% annually in the coming years, up from a previous plan for 3% growth.

The Iranians have struck an oil-supply deal with China. Garry White argues that this won’t please Washington’s hawks one bit here.

Financials

Executives from the biggest US financial institutions, including JPMorgan Chase and Goldman Sachs met with top regulators in Beijing. This was taken as a sign that the trade war with the US has not stopped China’s opening of its $43 trillion financial system. Among those attending meetings at the Ritz-Carlton hotel were Yi Gang, governor of the People’s Bank of China and senior officials from the China Securities Regulatory Commission.

Prudential released its prospectus regarding the demerger of Prudential and M&G. The demerger will take place on 21 October. The UK business will change its name to M&G and will continue to operate with two customer-facing brands – Prudential and M&G Investments, with shareholders entitled to one M&G share for each Prudential share held. In a company update, at group level, it stated it is experiencing an industry-wide slowdown in its new business growth in Hong Kong, however, outside of the territory, year-to-date sales have been broad based and continue to grow at a double-digit rate.

Veteran fixed bond specialist Mohamed el-Erian will join Barclays’ board as non-executive director. He will join the board in early 2020, following the appointment of former UBS Asset Management head of investments and current Soros Fund Management chief investment officer Dawn Fitzpatrick.

Supermarkets

Tesco has confirmed it is axing the first Jack’s store a year after unveiling the new discount chain to rival Aldi and Lidl. The store, located in Rawtenstall, Lancashire, was opened earlier this year. It will be replaced with a 40,000 sq ft Tesco store instead, in response to demand from customers.

Other retail

Britain’s high streets, shopping centres and retail parks have been left with the highest number of empty outlets in five years. Almost 12% of shopping locations were empty in the first half of 2019, up 0.6% compared to the same period last year, according to research from Local Data Company’s review of 3,000 retail centres.

A deal with Love Island winner Amber Gill helped drive annual sales at online fashion firm Boohoo above £1bn for the first time. The online fashion group has now overtaken rival Asos as the largest fashion retailer listed on Aim.

Furniture chain DFS reported a rise in full-year sales but issued a cautious outlook due to slowing consumer spending amid uncertainty about Brexit.

Marks & Spencer’s chief financial officer, Humphrey Singer, is stepping down after little more than a year, weeks after it was announced the company would drop out of the FTSE 100 for the first time.

Rachel Osborne is stepping down as chief financial officer of Debenhams after joining the department store chain last September. She is leaving to join Ted Baker as its finance boss.

Mike Ashley’s Sports Direct is mulling an offer to take full control of Goals Soccer Centres, which operates several five-a-side football sites throughout the UK. The company is the largest shareholder in Goals, at 19%, but its shares remain suspended from Aim after its chief executive and finance director were accused of fraud. It is believed Sports Direct has offered just £4m for the company. 

Consumer

Whitbread has bought three independent hotels in Germany for an undisclosed sum, as the company expands in Europe as part of its focus on the hotel business following the sale of its Costa Coffee chain to Coca-Cola.

McDonald’s is to trial a plant-based burger from Beyond Meat. The group will sell the “PLT”, or the plant, lettuce and tomato burger, for 12 weeks in 28 restaurants in south-western Ontario, Canada. The small-market test is rolling out about six months after rival Burger King, owned by Yum Brands, began testing the plant-based Impossible Foods burger.

Travel & transport

It was the end of the journey for Thomas Cook, as the company was forced into liquidation after it failed to secure rescue funding. The Civil Aviation Authority said the cancellations left about 150,000 British customers abroad and in need of repatriation. Shares in rival Tui jumped, as did shares in Ryanair and easyJet, which compete on some routes with Thomas Cook’s airline. Tui issued a statement indicating that its business was “resilient”.

Boeing needs to pay more attention to how pilots react to emergencies in its safety assessment of the 737 Max plane, according to the US National Transportation Safety Board (NTSB). The 737 Max has been grounded since March following two fatal crashes. The NTSB the crews in the fatal crashes "did not react in the ways Boeing and the FAA assumed they would".

Autos

Europe's car making industry has warned of “catastrophic consequences” should Britain crash out of the European Union without a deal to protect trade. “A 'no-deal' Brexit would have an immediate and devastating impact on the industry, undermining competitiveness and causing irreversible and severe damage," Mike Hawes, chief executive of the UK Society of Motor Manufacturers and Traders, said in a statement.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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