Today's Markets: Euro near parity, ECB fiddles as currency burns

The latest from world markets and companies news

July 12, 2022

Euro slides to near 20 year low against greenback
Markets respond negatively
Russian miner Petropavlovsk nears end game

The euro neared parity with the dollar for the first time since 2002. It’s been on the slide for months but the euro took a fresh low as fears mount Russia could cut off gas supplies to Europe this winter. French Economy and Finance Minister Bruno Le Maire warned over the weekend that there is a strong chance Moscow pulls the plug. This is further stoking recession fears in the bloc and the currency just cannot catch a bid. At this level there is a lot of interest so expect a robust defence before it eventually goes and then it gets messy. At some point the bears are just going to drive this right through the parity level and be done with it. When does the ECB act – fragmentation risks or not, the ECB is fiddling while the currency burns, causing worse inflation and more misery for the population. Time for an emergency inter-meeting hike to show they are serious – the market just doesn’t believe in the ECB any more. Inflation above 8 per cent and interest rates remain negative… it’s madness. ZEW economic survey due up shortly…

There is not much relief for peers – sterling dipped to a new two-year low against the dollar, with GBPUSD below 1.1850. USDJPY rose clear of 137.750, a new 24-year low for the yen. At least the pound made a two-month high against the euro. The dollar continues to act as a haven, whilst the better-than-expected payrolls report on Friday lifted sentiment – the US economy is nowhere near where the UK or Eurozone are. The US also has a serious central bank, one that is far more credible than the disastrous ECB or BoE. Dollar index north of 108 this morning, new 20-year high.

The pressure on the euro and sterling reflects grave concern about the economic outlook. With inflation soaring and no plan to get it under control, the currencies are sitting ducks. UK retail sales fell at the fastest pace since the worst of the pandemic, all due to inflation. It’s this weird stagflation environment – you have a job but are generally just anxious and looking at rising costs with concern.

European stock markets fell on Tuesday with just about every sector in the red – only utilities and telecoms managing to stay green. US stocks broke their 5-day win streak, the S&P 500 down over 1 per cent and the Nasdaq sliding by more than 2 per cent. After a decent ramp in the last week, we’re just starting to get the kind of earnings jitters we can expect. I’d anticipate the outlook will not be good. Overnight Asian stocks fell to a 2-year low. Oil also fell amid the risk-off tone – energy crisis in Europe, fresh covid outbreaks in China and central banks tightening all combining to sour investor mood. Treasury yields are lower, with the benchmark 10yr note under 2.94 per cent having traded above 3 per cent yesterday, recession fears driving inflation expectations lower. Push-pull of inflation vs recession continues to move markets... my bet is that inflation proves stickier than markets think.

Companies

Petropavlovsk shares suspended

After one near death experience after taking on too much debt in 2014/2015 and three board coups in recent years, Petropavlovsk (POG) was coming into 2022 as an unlikely survivor, worth over £1bn. But Russia’s invasion of Ukraine put paid to all that. The gold miner has called in administrators after deciding there was no chance it would be able to find $200mn (£169mn) to pay back Gazprombank, which demanded full repayment of a loan in April. Its shares were suspended on Tuesday morning.

Sanctions have limited Petropavlovsk’s ability to move cash around and sell gold, while the writing was on the wall earlier this month when auditor MHA MacIntyre Hudson resigned after less than a year in the job.

Remaining shareholders - who held on as the company’s market capitalisation fell to under £50mn - are unlikely to get anything given the level of debt.

In a statement Petropavlovsk said it was still in talks to sell off its operating subsidiaries, which hold its mines. There is one offer and another interested party, the company said.

“There can be no certainty that either will result in a sale and it is highly unlikely that there will be any return to shareholders given the level of the group's indebtedness,” Petropavlovsk said. AH

Serica and Kistos in North Sea showdown

Two North Sea oil and gas companies are trading takeover offers. Kistos (KIST), a new company only listed last year, said on Tuesday it had offered the Serica Energy (SQZ) board 246p a share in cash and 0.2932 new Kistos shares, a premium of 25 per cent on Monday’s closing price, 305p. Serica’s offer for Kistos - made on 1 July - was a combined cash and share deal worth 483p a share, a 4 per cent premium on the previous trading price.

Kistos rejected the Serica offer as too low.

The combined company would have production of around 40,000 barrels of oil equivalent per day (boepd), and would likely move to the main market, Kistos said. Serica is the senior partner going by market capitalisation, at over £900mn. Kistos is worth around £400mn.

The showdown became public after Kistos published the offer for Serica on Tuesday morning. It also detailed the previous discussions between the companies, in which it said Serica had “accepted Kistos' view regarding the strategic merit of a combination”. This is clear given its own offer.

Serica said it was “considering its position”, although rejected the same terms on 1 June. AH

Balfour Beatty to gain from sale of Indiana campus

Contractor Balfour Beatty (BBY) is selling its majority stake in Aspire, an on-campus student housing project at Purdue University in Indiana for $150mn (£122mn).

The company is selling its 67 per cent stake to the Purdue Research Foundation, which is buying the entire development. Balfour Beatty expects to make a profit of $47.2mn (£38.4mn) from the sale, which is expected to complete next month. MF

Anglo Pacific Group confirms coal-free future with acquisition

It’s the best of both worlds for royalty company Anglo Pacific Group (APF), which buys the rights to a proportion of revenue or production at mines. Its key earner right now is an Australian coal mine, which because of extremely high prices is contributing to a major increase in earnings this year. But the Kestrel mine will eventually move on from the area in which Anglo Pacific owns a stake, and so it needs a replacement.

To this end, the company has just signed a $185mn (£156mn) deal to take on royalties at two mines not yet in production. They are the West Musgrave and Santo Domingo operations, copper and nickel in Australia and copper in Chile, respectively. The seller is South32 (S32), which is taking $48mn in cash and the rest in shares, so will become the biggest shareholder with a 17 per cent stake. AH

Momentum grows at Hostelworld

Hostelworld (HSW) said in a trading update to 30 June that its recovery against pre-pandemic trading is progressing across market segments, as the online travel agent enters the crucial summer period.

Net bookings in June were at 80 per cent of 2019 levels, with “higher average booking values” driving net revenue to 4 per cent ahead of pre-pandemic numbers. Demand for European locations is “strong”, while long haul bookings hit 75 per cent against 2019 with robust demand for trips from the US and Canada into Europe.

Panmure Gordon analysts said that “strong pent-up demand” was helping Hostelworld take more market share. CA

Sales still strong at Wincanton

Revenue at Wincanton (WIN) rose by 11 per cent in the first quarter of this year - but an online shopping slowdown could hamper future growth.

The logistics company said group revenue was up by 11 per cent year-on-year, or 9 per cent excluding acquisitions. Public and industrial revenues grew 11 per cent - bolstered by new contracts with HMRC - while general merchandise increased sales by 13 per cent.

Wincanton’s ‘eFulfilment’ arm is still the strongest customer segment, with 17 per cent revenue growth. However, the lion’s share of growth was driven by Cygnia, an e-commerce specialist purchased last year for £24mn. In contrast, organic growth dwindled at 1 per cent, with management citing a slowdown in online fulfilment. JS

Marley deal boosts Marshalls’ sales

Paving specialist Marshalls (MSLH) said it expects a 17 per cent increase in first-half revenue to £348mn on the back of its recent acquisition of roof tile maker Marley. On a like-for-like basis, growth was 7 per cent, which it said was in line with its forecast of group revenue growth (excluding acquisitions) of 7.8 per cent for the year.

Marshalls’ shares have dropped in value by 36 per cent this year, with investors expecting pressures on disposable household income to weaken demand for home improvement products. They now trade at around 13x forecast earnings, below their five-year average of 22x, according to FactSet. Broker Shore Capital argued the likely slowdown in the home improvement market is “bound to impact domestic revenues” as the year progresses. MF

Neil Wilson is the Chief Market Analyst at markets.com