Leading shares have fallen back at the start of the trading week with the usual worries to blame: the outlook for the UK after Brexit, uncertainties around the US election and the prospect of the Federal Reserve raising interest rates before the end of the year.
With signs of tensions in the UK cabinet over Brexit discussions, the FTSE 100 has fallen back below 7000 and is currently 46.27 points lower at 6967.28, not helped for once by further weakness in the pound. Rebecca O’Keeffe, head of investment at stockbroker Interactive Investor, said:
After the positive move in European equities on Friday, markets are giving back some of those gains today, as attention turns to Janet Yellen, Mark Carney and the bond market. Both Yellen and Carney have been attempting to manage bond yields higher from their record lows of the summer. Talk of allowing the economy to run hot by “temporarily running a high pressure economy” and being willing to “tolerate a bit of an overshoot in inflation” from Yellen and Carney respectively are having the desired effect in the short term as bond yields rise. However, the key questions are whether this strategy will herald the start of a prolonged bond market sell-off and if so, what effect this might have on other asset classes.
Alongside the bond market, the other key theme dominating investor sentiment is US earnings, with a plethora of results due this week from companies including Bank of America, Goldman Sachs and Intel. With US markets close to record highs, the potential for surprises on the downside remains, even though expectations are low.
Ahead of the US financial sector figures, banks are putting in a mixed performance, with Standard Chartered up 15p at 667.1p, Lloyds Banking Group 0.22p better at 52.65 but Royal Bank of Scotland slipping 2p to 170.8p.
Education specialist Pearson is leading the market ower, down 74.5p at 758p after a disappointing update.
Among the mid-caps Drax has jumped 8p to 319.3p after a positive note from Credit Suisse, which put an outperform rating and 425p price target (up from 415p) on the power company. The bank’s analysts said:
GB power has been volatile and is pricing in scarcity across the coming five months. Drax is the clearest beneficiary and we raise our 2016 and 2017 EBITDA estimates around 10% and around 13% respectively for increased near-term power prices and the value of gas hedges.
Credit Suisse said an EU decision on whether to approve the UK’s plans for state aid to help convert some of its plant to biomass could be imminent and would be crucial to the business:
EC state aid approval on the contracts for difference is key (worth around 111p a share). It has been 286 days since the EC opened their investigation, and the two precedents were EDF’s Hinkley Point and RWE’s Lynemouth; approved after 294 and 285 days respectively. We expect a new dividend policy and investor day to follow any EC state aid approval.
Elsewhere Ladbrokes has dipped 2.4p to 136.7p after agreeing to sell 359 shops as part of its merger with Gala Coral at a lower than expected £55.5m. In a buy note Stifel said:
The price achieved is lower than expected, but this transaction should enable the merger to occur before the end of October.
But Davy analysts were less positive:
The end is in sight! It is almost 15 months since Ladbrokes and Gala Coral announced the intention to merge, and the final major obstacle to that deal being completed has now been overcome with the announcement of the sale of 359 shops to BetFred and Stan James. The sale of these units was required by the UK’s Competition and Markets Authority (CMA).
As such, Ladbrokes and Coral were effectively forced sellers of these units which immediately put them on the back foot when it came to negotiating a price. A shortage of viable bidders was also a factor given that the CMA insisted that the buyers have demonstrable experience in running such shops.
That said, it would be wrong to entirely blame the 3.3 times EBITDA multiple on the factors above. The valuation undoubtedly also includes a discount for regulatory uncertainty ahead of the pending review of gaming machines in the UK.
We continue to believe that the combined entity will be stronger than its individual parts and therefore are supportive of this merger. However, the mood music in relation to UK machines remains ominous. Better to wait and buy when there is regulatory certainty, in our view.
