As Greece edged closer to default after weekend talks with its creditors collapsed almost as soon as they began, leading shares hit a new three month low.
The FTSE 100 fell 74 points or 1.1% to 6710.52 - its lowest level since 10 March - as investors fretted that both sides were becoming more intransigent in their positions, even as time for Greece to reach a deal comes closer to running out. London fared slightly better than some of its European peers, with German and French markets both down around 1.6%. In Greece, the Athens market dropped 4.68%, ahead of what is seen as a key Eurogroup meeting on Thursday. On Wall Street, the Dow Jones Industrial Average was down around 100 points or 0.6% by the time London closed.
David Madden, market analyst at IG, said:
The London market has lost a lot of ground today, but it is doing better than its continental counterparts. The eurozone equity markets are feeling the most pain over the Greek situation, and without an agreement a bounce back is not likely. The five-year debt saga for Greece has left traders feeling that something drastic needs to happen, and a default seems as if it is just around the corner. Athens needs to shape up or ship out, and every day that goes by with no resolution makes a default all the more possible. Traders are fixated on Greece at the moment and that won’t change until a deal has been reached, and even then traders will be mentally preparing themselves for the next round of Greek negations as the indebted country has several more sizeable payments to make over the summer.
Among the few risers in London, Randgold Resources added 19p to £46.26, with traders suggesting it was benefiting from the prospect of gold being a haven among the market storms.
Tesco edged up 0.3p to 214p as snack maker Orion Corporation said it was considering a bid for the UK supermarket’s South Korean business Homeplus, which is valued at around $6bn.
But easyJet fell 36p to £15.50 after RBC downgraded from outperform to underperform and cut its target price from £20 to £15.
Housebuilders were under pressure, with Taylor Wimpey down 5.4p to 183.4p and Barratt Developments losing 15p to 596p.
Standard Chartered dropped 26p to £10.38 after Jefferies cut its price target from 722p to 656p with an underperform rating, with the bank’s new chief executive expected to cut its dividend.
ITV lost 2.6p to 267.1p despite Liberum saying that a possible privatisation of Channel 4, as suggested at the weekend, could benefit the broadcaster:
[In an] interview with Channel 4 chief executive David Abraham in the Sunday Telegraph [it is clear that] C4 thinks its privatisation is very much on the agenda (with a possible sale price of up to £1bn) as the government looks to dispose of assets. If C4 is privatised, then introducing retransmission fees for the main commercial channels (including Channel 4) would see a maximisation of value...which would also benefit ITV - a double-digit increase on our 2017 forecasts and we are around 20% ahead of consensus.
Royal Mail edged down 2p to 505p, even though analysts at Berenberg said last week’s share sale by the UK government - and the expected disposal of a third tranche in 90 days - could be a boost for the business.
British American Tobacco, down 6p at 3411.5p, failed to benefit as Berenberg issued a buy note and raised its target price from £38.50 to £40, in the wake of associate Reynolds American’s purchase of Lorillard:
On our estimates, this suggests around 5% upside to BAT from current Bloomberg 2016 consensus of 226p, with Reynolds’ contribution as an associate at constant exchange rates rising from £449m in 2014 to over £810m in 2016 on our estimates. The deal raises Reynolds’ contribution from around 11% in 2014 on a reported basis to around 19% in 2016, using current Reynolds consensus forecasts. We expect consensus figures to adjust in the next few weeks. We also think Altria’s investor day (23 June) will reinforce positive sentiment around the US tobacco market.
We also expect that in the second half, BAT will buy out the minority investors in its Brazilian subsidiary, Souza Cruz. This deal will be about 0.5-1% earnings per share accretive in the 12 months after closing, depending on Souza’s results and the Brazilian real. The timing of this deal closing is uncertain, but it is likely to benefit 2016, in our view.
Among the mid-caps Dairy Crest dipped 4.5p to 525p after Friday’s news after the market closed that the Competition and Markets Authority had referred the sale of the company’s dairy operations to Muller UK, an investigation which will take a minimum of 24 weeks. Shore Capital analysts Clive Black and Darren Shirley said:
Not surprisingly, to our minds, the Competition & Markets Authority (CMA) has decided to take the proposed acquisition of Dairy Crest Dairies by Muller-Wiseman to a phase II review. However, when trying to make sense of the process we believe that CMA has bottled it, so unnecessarily prolonging a process that is, by common thinking, necessary for the challenge and over-supplied British liquid milk industry to progress; a view implied in the CMA’s own narrative to our minds.
... the CMA is potentially in a pickle here because if this merger does not go through then there will be further economic consequences because the viability of liquid production is under serious threat. The discounting of a highly expensive product to produce, care for and move is a frustration for everyone involved in milk production. Rationalisation and concentration needs to take place because the retail trade is picking off the processor leading to depleted margins. Such margins are a chronic issue with respect to future investment and innovation in the trade. The farming lobby will justifiably go nuts with the CMA if common sense does not prevail. That though, when it comes to common sense, there is now encyclopaedic evidence that the CMA lives on another planet.
Shore Capital believes that this apparently finely tuned decision creates a path for Muller-Wiseman to explore reasonable remedies with the CMA albeit we struggle to see why change is necessary in the first place, particularly if big supermarkets are behind the decision. In due course though, admittedly at inordinate cost, we believe that there are greater chances than not that approval can come through. Accordingly, whilst we sense that the management and shareholders of both parties and their suppliers will be frustrated, we reiterate our buy stance on Dairy Crest Group shares, noting that a cash generative group with a strong portfolio of proprietary brands remains for investors to harvest.
