Leading shares are suffering sharp falls in early trading, as another sell off in the bond market spooks investors and Greece comes closer to running out of cash despite Monday’s Eurogroup meeting amid talk of a possible referendum.
The FTSE 100 is currently 84.10 points lower at 6945.75, with the recent election rally and positive reaction to China’s latest interest rate cut seeming a long way off. The fall in bond prices - in Europe and overnight in the US - is doing some of the damage, with a number of reasons cited for the decline, including raised inflation expectations, an illiquid market and concerns the European Central Bank might end its bond buying programme early.
Michael Hewson, chief market analyst at CMC Markets UK, said:
A sell-off in US treasuries yesterday saw US stocks slip lower, as yields started to push higher again, the 10 year closing at its highest level this year.
European bond markets also started to succumb to the same selling pressure that we saw in the middle of last week, with German bunds also coming under pressure again, on receding deflation concerns.
On top of that, the fact that Greece has paid the €750m owed to the International Monetary Fund has merely drawn attention to the next set of payments, with the country’s financial situation still precarious and talk of a vote on its future in the eurozone adding to the uncertainty.
Better than expected UK industrial production figures have prompted renewed speculation of interest rate rises and sent sterling higher.
But mining group Anglo American is bucking the downward trend, adding 6.5p to 1134.5p on talk it could profitably sell its iron ore business, perhaps to the Chinese, following recent declines in the metal’s price. Investec analyst Marc Elliott said:
Even in today’s depressed environment, we argue that an exit from iron ore might still offer the best value for Anglo American shareholders. Chinese interests would be the most likely acquirer, given that the production base would be of most value to them. In our view, the division presents a risk to the group if iron ore prices slip back. Many of the problems in the iron ore portfolio can be attributed to the previous management team, and an exit would refocus the investment case for Anglo American on precious metals and diamonds.
Furthermore, we feel that the South African government might well be supportive of a deal, since it could help relations with the Chinese government and encourage further investment into the country.
An exit from iron ore could be the start of a move back to the group’s precious metal and diamond roots. The cash would be welcome in terms of reducing balance sheet stress and removing the threat to the dividend if commodity prices do not improve, and could potentially allow reinvestment into later cycle divisions such as copper. Although earnings dilutive on our current assumptions, we think it could prompt a significant re-rating.
BHP Billiton is 8p better at £15.80 as it said it would cut capital expenditure in 2016 to $9bn from $12.6bn amid falling prices.
Among the fallers easyJet is down 135p at £16.98 as the budget airline issued a cautious outlook on the third quarter, due to the costs of strike-related disruption and a fall in underlying trading, partly hurt by the timing of Easter.
But Thomas Cook has climbed after Credit Suisse moved from neutral to outperform with a target price raised from 159p to 180p. The bank said:
Seven factors support our upgrade: 1) earnings expectations have stabilised (our 2016 estimated earnings per share falls 4% on foreign exchange); 2) the UK outlook is improving (falling summer 2015 capacity; sterling strength; 4 years of rising package share of holidays yet volumes are still 16% below peak); 3) Nordic capacity risks have reduced (summer 2015 up 1.5% versus 12% in prior four years); 4) the fuel and foreign exchange cost outlook is the best for 10 years; 5) we estimate re-financing could add 8%-15% to 2017 estimated earnings per share; 6) the Fosun deal supports the product plans (more 100% controlled product) and means there is a known buyer for 5% of the shares; 7) we assume just £90m or 22% of Wave 2 profit targets land between 2015-2018 but this already helps support a 2014-2017 constant currency earnings before interest and tax growth of 14%.
