• 17th February 2017

    Economics

    Week in Perspective - 17 February 2017

    Market Roundup

    Shares started the week strongly, with the FTSE 100 index up 0.3% on Monday to its highest level for a month, and the FTSE 250 at a record high.

    The large-cap mining sector hit its highest in two years, with Rio Tinto up 3% and Glencore up 2.6%.

    Primark-owner AB Foods gained 1.6% on positive broker comment.

    Meanwhile, US indices reached new highs on hopes about Donald Trump’s promised tax reforms.

    Tuesday saw Rolls-Royce off 4% after reporting heavy losses, while Centrica was down 1% on pressure to cut energy bills.

    But Tui rose nearly 6% after the travel company said its first-quarter loss narrowed and it expected underlying earnings to grow 10% for the full year.

    The FTSE 100 gained 0.5% on Wednesday, helped by financial stocks on growing speculation of a US rate rise next month.

    Equipment hire business Ashtead climbed to a record high on US tax reform hopes. But Tui dropped back 7.2% after Tuesday’s rise.

    Blue chips including AstraZeneca, BP and Royal Dutch Shell went ex-dividend, feeding a 0.3% drop in the FTSE 100 on Thursday.

    Coca Cola HBC led the gainers, up 4.9% to a record high on better-than-expected results. Meanwhile mid-cap Cobham slumped 15% on a fifth profit warning.

    The FTSE 100 was down in early trading on Friday ahead of retail sales figures..

    Company Focus: Rolls-Royce

    Rolls-Royce reported its biggest ever loss on Tuesday, citing the pound’s fall and the cost of settling corruption charges.

    The jet engine maker reported a pre-tax loss of £4.6bn for 2016, including a £4.4bn derivatives’ write-down following the fall in the value of sterling, and a £671m settlement for historic bribery and corruption claims.

    Stripping out these one-offs, underlying profit slumped 49% to £831m, from £1.4bn the previous year.

    Warren East, chief executive since 2015, said: “While we have made good progress in our cost-cutting and efficiency programmes, more needs to be done to ensure we drive sustainable margin improvements within the business.”

    The group expects revenue this year to be only “marginally higher” than in 2016. Difficulties in its marine business are expected to continue due to weak oil and gas markets.

    The final dividend was held at 7.1p per share..

    Economic Roundup

    The European Commission (EC) upgraded its forecast for UK growth in 2017 to 1.5%, from 1% previously. Forecasts for the eurozone area were also revised up to 1.6% for 2017 and 1.8% for 2018.

    Consumer inflation in the UK rose at its highest level since 2014 in January, according to Office for National Statistics. The CPI index rose 1.8% in the year to January, from 1.6% in December.

    Meanwhile, producer price inflation was up a hefty 20% as the weak pound pushed up the cost of imported materials.

    The ONS said that CPI inflation is likely to rise above the Bank of England's 2% target in coming months. The Bank’s own forecasts show it expects inflation to hit 2.7% this year, before falling back to 2.6% in 2018.

    On Tuesday Janet Yellen, chair of the US Federal Reserve, prompted a rally in financial stocks as she hinted that a rate rise could come as soon as March due to improving US economic data.

    Waiting too long before raising rates could be “unwise” and force the Fed to raise rates more rapidly later on, she said.

    Yellen’s comments came ahead of data showing that US inflation had hit 2.5%, its highest in five years.

    UK wage growth slowed to 2.6% in the three months to December, despite unemployment remaining at a low and amid continuing jobs growth.

    The headline unemployment rate held steady at 4.8% and employment was up 37,000 to a new high of 31.84m, or 74.6% of people of working age.

    The ONS said the jobs market "appears to be edging towards full capacity", with the employment rate for women reaching 70% for the first time.

    Rising food and fuel prices led to a sharp fall in retail sales in January, indicating that higher prices are starting to bite.

    Seasonally adjusted volumes, excluding fuel, were 0.2% lower in January than in December, the ONS reported.

    This was significantly weaker than analysts had predicted, and followed a drop in sales in December.

    “In the three months to January 2017, retail sales saw the first signs of a fall in the underlying trend since December 2013,” said Kate Davies, ONS senior statistician.

    Samuel Tombs of Pantheon Macroeconomics said: “The failure of retail sales in January to rise at all after December’s 2.1% month-to-month drop demonstrates that consumers’ spending has shifted down several gears in response to slowing employment growth and rising inflation.”.

     

    Company announcements that caught our attention this week

    Date Company Comment
    16/02/2017 Drax Power generator Drax reported a 54% drop in underlying earnings on Thursday, blaming lower power prices and the removal of renewable energy subsidies. The group’s full-year dividend, based on a 50% payout ratio, was also halved to 2.5p. The board promised to review its dividend policy in the first half of this year. More positively, net debt was significantly lower than expected. Drax, which is converting its Yorkshire power station from coal to biomass, plans to refinance its existing debt and re-leverage in 2017. Last year was an important one for Drax, culminating in the acquisition of Opus Energy in December. The Opus Energy acquisition and the decision to construct four gas turbines indicated a slight tilt in strategy away from dependence on wholesale electricity prices.
         
    16/02/2017 Nestle Nestle, the world’s biggest food and drinks producer, unveiled disappointing full-year results this week. Net profit for 2016 fell to 8.5bn Swiss francs, down from SFr9.1bn a year earlier. Organic sales growth slowed to 3.2% from 4.2% in 2015. New chief executive Mark Schneider, who officially took the helm in January, said: “Our 2016 organic growth was at the high end of the industry but at the lower end of our expectations.” The group, which makes KitKat, Nescafe and Carnation condensed milk, is aiming for sales growth of 2% to 4% this year. Flat margins are expected. The dividend is increased to SFr2.3, up from SFr2.25 last year.

       

    Key company diary dates

    Tue 21 Feb
    BHP Billiton Half-year results
    Tue 21 Feb
    HSBC Full-year results
    Wed 22 Feb
    Lloyds Banking Group Full-year results
    Thu 23 Feb British American Tobacco Full-year results
    Fri 24 Feb  William Hill Full-year results

    Economic highlights over the next week

    Mon 20 Feb CBI industrial trends survey The Confederation of British Industry's monthly industrial orders balance improved to +5 in January, its highest reading since February 2015. A level above zero suggests manufacturers expect order volumes to increase.
         
    Wed 22 Feb
    GDP 2016

    The preliminary estimate of economic growth in the fourth quarter of 2016 showed the UK economy expanded by 2.2% year-on-year. Wednesday sees the ONS’ second estimate of end-of-2016 growth.

         
    Wed 22 Feb Germany lfo index How is business sentiment in the eurozone? In January, the closely followed Ifo Business Climate index for Germany fell from a three-year high as managers became less optimistic about their six-month business outlook.

    Index movements*

    Index Value % change
    FTSE 100 7,277.92
    0.67
    FTSE 250 18,705.72 0.42
    AIM 906.66
    0.81
    Dow Jones 20,619.77
    2.22
    S&P 500 2,347.22 1.71
    Hang Seng 24,107.70 2.48
    Nikkei 225 19,347.53
    2.33

    Currency movements*

    Currency Pair Value % change
    £:$ 1.25 -0.18
    £:€ 1.17 -0.24
    £:¥ 141.64 0.10

    Best & worst performing sectors (rel. to FTSE 350)*

    Sector % change
    Basic Resources 4.4
    Banks 1.7
    Healthcare 1.0
    Technology -1.7
    Oil & Gas -1.9
    Personal & Household Goods -2.0

    Best & worst performing stocks*

    Company % change
    Rio Tinto 7.8
    Anglo American 5.7
    BHP Billiton 5.7
    TUI -3.8
    Reckitt Benckiser -4.7
    Convatec Group -4.7

     

    * Weekly movements up until close of business Thursday.

    Important Notes:

    Main source of information: Company Report and Accounts, Bloomberg

    The value of investments can fall and you may get back less than you invested. No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy. If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset. The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

    Brewin Dolphin Ltd, a member of the London Stock Exchange, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Smithfield Street London EC1A 9BD. Registered in England and Wales no 215876.

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