Flattish start to equity trading in Europe this morning after a mixed bag in Asia and not a huge amount happening though the US is back for a half-day after the Thanksgiving holiday. The FTSE 100 continues to hover just shy of 7,500 with tepid gains this morning, whilst the DAX added a small amount, but overall trade looks flat with the major indices flipping either side of the flatline in the first hour of trade. US futures look a bit firmer. German Q3 GDP was a bit better than expected, though Q4 still showing contraction. Consumer sentiment in the Eurozone’s largest economy barely improved. China’s covid situation doesn’t improve, but this is well priced by now.
Into next week we see lots of big data releases that will guide expectations for the Fed in December and what it does next. Many think it’s ready to pull the brake, with a 50bps hike. Jobs and inflation data next week will be the steer for the market though it already anticipates the Fed slowing down the breakneck pace of tightening…but as we keep saying it’s about the destination as well as the journey that matters. Obviously, Black Friday…keep eyes on retail trends going into Christmas etc, etc. The softer dollar continues to offer support to risk…everyone eyeing the equity market run-up into the year-end. One thing on the dollar is that if the Fed does slow this might provide cover for other CBs to slow, not least as dollar strength has been important factor in importing inflation.
Ofgem brings in capital rules for energy retailers
The run of energy retailers going bust last year as power prices surged showed the startup challenger companies were not set up with any real thought toward tougher conditions. This saw established operators like Centrica (CNA) taking on customers they did not want in very high numbers.
Additionally, the Bulb takeover by the government will likely cost the taxpayer billions of pounds. Regulator Ofgem was quick to say change was coming to the sector at the time, and it has now laid out new rules for retailers and generators. Included is a minimum capital requirement, so there is cash on hand if prices spike, while there will be more limits on how customer credit balances are used. The rules are not yet confirmed, with a consultation period to follow. Final rules are expected in spring next year.
Ofgem boss Jonathan Brearley suggested much was still up for discussion: “While Ofgem want well capitalised businesses that can weather price fluctuations, we also don’t want to block the market for new suppliers or force suppliers to sit on lots of capital they could be investing in innovative ideas”. AH
SSE sells transmission stake
The ever-present Ontario Teachers’ Pension Plan Board will pay £1.5bn for a 25 per cent stake in SSE’s (SSE) transmission business. The sale has been on the cards for a year, and SSE finance director Gregor Alexander said “bringing in minority partners will balance capital allocation and support further growth”, particularly for the utility’s net zero spending.
‘Teachers’, as it is known, holds stakes in significant infrastructure all over the world – as well as dicier bets like failed crypto exchange FTX – and will have proportional board representation on the transmission division’s board once the deal completes. AH
LSL shares drop after it posts downturn in estate agency revenue
Shares in property services company LSL (LSL) dropped 12 per cent this morning after it posted a 6 per cent drop in revenue from the estate agency arm of its business and warned of a “challenging” market ahead. In a trading update for the 10 months to 30 October, LSL pinned its lagging performance on “sharply increasing interest rates” putting off buyers.
However, the company recorded a slight uptick in overall revenue – from £275mn to £276mn – thanks to an increase in sales from its financial services and surveying activities. ML
Pressure still on the dollar: sterling pushed up to a fresh three-month high at 1.2150 amid thinnish trade, before paring gains back below $1.21 this morning. The move higher ran out of steam short of the 200-day line and we might expect the next drive higher to take this level around 1.2180. The yen meanwhile has come back a bit after USDJPY tested 138.0 yesterday. The euro continues to trade above $1.04, above the 200-day line, which offers support now – need to see weekly close above for confirmation.
And just when you thought inflation may have peaked… it pulls you back in. The ONS is out with a chunky revision to its PPI inflation reading for October – headline output producer prices rose 17.2 per cent from the initial estimate of 14.8 per cent due to an error. The peak in July was revised up to 19.7 per cent. The annual input PPI was also revised up to 19.5 per cent from 19.2 per cent previously. All of which leaves the Bank of England’s relative dovishness all the more puzzling…the problem is the housing market that it daren’t crash.
Which leads neatly to Berenberg reiterating its bearish view on UK housebuilders… says it does not expect the sector-wide trough in earnings to occur until 2024. “Indeed, we do not yet believe that company valuations are attractive enough for us to turn more positive on the sector and we maintain just two Buy ratings, primarily for stock-specific reasons,” the broker says. Those buy ratings are on Berkeley Group (PT 4,500p) and on MJ Gleeson (PT cut to 470p). The rest of the sector is slapped with a hold rating. Berenberg notes affordability deteriorating materially in the housing market, models 5v decline in prices, 10 per cent drop in volumes… sell side is too optimistic on the shape and timing of recovery. “With volume, price and margin weakness spread over the next two years, we do not expect earnings to trough until 2024,” they add.
Oil is catching some bid with Iraq and Saudi Arabia promising additional measures if necessary to sooth the oil market. This kind of plays into the idea that with prices down still, the OPEC meeting next week is more likely to look at cuts and not increasing production. Reports earlier this week suggesting the cartel could raise production by 500k bpd were quickly dismissed by members, and seem far-fetched right now. Prices would need to recover a lot more. Indeed, with crude prices falling, the reverse – more cuts – could be on the table. Either way it will be a live meeting.
Neil Wilson is the Chief Market Analyst at Finalto
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