Join our community of smart investors

Market Outlook: Sterling stabilises, equities steady, Rio, Ashmore & more

European markets are becalmed at the end of a testing week
September 11, 2020

Sterling stabilised after testing new six-week lows yesterday following the testy exchanges around the internal market bill, but the pound remains highly exposed to negative news around Brexit talks. The EU Commission said the bill has damaged trust and would, if adopted, represent a serious breach of the withdrawal agreement and of international law. The British position remains resolute. The UK government legal opinion is that it remains a sovereign matter of UK domestic law. This is serious brinkmanship, and trade talks appear close to collapse. Moreover, it is opposed by the devolved regimes in Scotland and Wales - if it passes and there is no deal, the relationship between Westminster and Holyrood will be close to breaking point and it could accelerate and heighten demands for Scottish independence. 

The EU wants the offending bill pulled by the end of the month or they may launch legal action – but stopped short of saying they will walk away from the trade talks. The EU doesn’t want to be the first to walk away. Nevertheless, there has been a material escalation of no-deal risks, which was reflected in the pound’s price action yesterday. The clock is ticking and whilst we continue to stress that a deal will always look further away than it is due to the nature of the posturing and public statements, the move on the internal market bill comes somewhat out of left-field (although it was actually reported back in Feb that the govt was working on it) and it does not pertain to the talks themselves. We should also note that it is not guaranteed to pass both British chambers in its current form. Europe’s finance ministers are gathering today so expect a lot of headlines criticising the British – plus ca change. The good news is there is UK-Japan trade deal ‘in principle’ – hopefully that means cheaper wagu steak.

UK Company Announcements

Rio Tinto (RIO)

Following the destruction of an ancient Aboriginal site at the Juukan Gorge in May, the company has announced that chief executive Jean-Sébastien Jacques will depart by the end of March. The move comes amid investor backlash over Rio’s actions and response – “significant stakeholders have expressed concerns about executive accountability for the failings identified.” The head of Rio’s iron ore operations, Chris Salisbury, is stepping down immediately and Simone Niven, who is in charge of corporate relations, is also due to leave at the end of the year.

Ashmore (ASHM)

Though a slight improvement in revenues, a 10 per cent drop in operating costs and a raised final dividend put the gloss on full-year financials, a 9 per cent drop in assets under adminisrtation and broad benchmark underperformance give investors plenty to chew over. Finance director Tom Shippey told us relative asset performance has improved on one, three and five-year views since April.

Ferrexpo (FXPO)

Having already declared a 6.6¢ per share special dividend to accompany the interim payout in June, the company has announced another 6.6¢ special dividend that will be paid on 8 October to shareholders on the register on 25 September. Ferrexpo says “operations have continued to perform well and demand remains strong for the company's iron ore pellets.”

CentralNic (CNIC)

The internet domain name specialist has raised £30m through a private share placing, which will help to fund the $36m (£28m) acquisition of Codewise.

Provident Financial (PFG)

Chief executive Malcolm Le May is to take a short leave of absence to undertake a planned heart procedure later this month. Until his expected return in November, Patrick Snowball will step into the role of executive chairman.

GBPUSD dropped under 1.28 but has found some support at this level and pared back losses a touch. Read why Chris Dillow believes a weaker dollar is a boon to emerging markets. Against the euro, the pound plunged to its weakest since March, as the single currency also found bid after the European Central Bank sounded a bit more optimistic on the economy and a little less dovish than the market had thought. The ECB indicated it would not overreact to the appreciation of the euro, which was a green light for the currency to rally. ECB sources suggested they don’t think the euro is overvalued and don’t want to start a currency war – let's wait and see what happens when 1.20 gets tested again. 

Meanwhile, Britain’s economy faces even greater uncertainty from Brexit as it tries to rebuild in the wake of the pandemic. GDP rose 6.6 per cent in July, but this was short of expectations and still well below pre-pandemic levels. All areas of manufacturing, particularly distillers and car makers, saw improvements, the ONS said without a hint of irony. In July, monthly GDP was 11.7 per cent lower than the pre-pandemic levels seen in February 2020. 

The good news is that because of the way the UK measures education in GDP numbers, means things should pick up as the number of pupils returning to school rises. It also means the decline in GDP might not be so bad compared with peers as it looks. 

Among the service sector, accommodation & food services remain worst hit, but we know it got a big – albeit temporary - boost in August from the Eat Out scheme. 

European markets were flat on Friday after US markets pulled back on Thursday, declining for the fourth day in five, with the Nasdaq down another 2 per cent and the S&P 500 falling 1.75 per cent on the back of the previous session’s rally. The resumption of the downtrend came as Senate Republicans failed to pass their $500bn stimulus package, with Democrats complaining it does not go far enough. The impasse has doused hopes Congress can agree a package in the near-term and could give a tailwind to bears who have the bit between their teeth. US futures are higher. 

Concerns about the US economy remain. US jobless claims just aren’t heading in the right direction. The total number of people claiming benefits in all programs for the week ending August 22 was 29,605,064, an increase of 380,379 from the previous week. In the week to Sept 5th initial claims hit 884,000, unchanged from the previous week's revised level. The previous week's level was revised up by 3,000 from 881,000 to 884,000. US CPI numbers out later today are the main economic event to watch, but the furore over the internal market bill is not going away.

 

**For those interested in trading opportunities in individual companies, Michael Taylor's weekly columns are a must read. This week Michael writes on the rich vein of trading opportunity at platinum miner Sylvania.**

 

Neil Wilson is chief markets analyst at Markets.com