Wall Street opens higher
US shares continue to forge ahead, with the Dow Jones Industrial Average making further strides towards the 20,000 barrier.
The Dow is currently up 61 points or 0.3% 19,944, as the post election rally continues. The S&P 500 has opened 0.22% higher and the Nasdaq Composite 0.3% better.
The moves higher came despite the increased global tensions, following the attacks in Berlin and Turkey.
Michael Hewson, chief market analyst at CMC Markets UK, said:
US markets are continuing to remain resilient despite the continued rise in yields and the US dollar, with the Dow looking to have another crack at the 20,000 level that it fell just short of last week.
As for Europe, the FTSE 100 is up 0.3%, Germany’s Dax is 0.19% higher and France’s Cac has climbed 0.4%. Hewson said:
It’s been another fairly quiet pre-Christmas trading day for European equity markets which, after yesterday’s brief pause have continued to build on the gains of the last few weeks with the Dax shrugging off the tragic events in Berlin, to put in another new high for the year.
The FTSE100 has also hit its highest level since October as both key European benchmarks reap the benefits of a weaker currency with the euro hitting its lowest levels since 2002 and the pound posting a one month low against the US dollar.
If investors are in any way fazed by the rise in geopolitical tension over the past 24 hours it’s certainly not being reflected in stock market valuations.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Over in Greece, the euro working group is set to decide whether to reinstate short-term debt relief measures abruptly suspended last week. Helena Smith reports:
In Athens officials are privately expressing optimism that lenders will take the view the government’s announcement of relief measures for the vulnerable “in no way conflicts with fiscal targets.”
Prime minister Alexis Tsipras, who caught creditors off guard when he declared a budget primary surplus would allow his leftist led coalition to grant a one-off bonus to around 1.6 million low-income pensioners, is hoping today’s teleconference will clear up “any misunderstanding.”
Greece has been on a collision course with bailout partners since the measures were unveiled. Suspension of a planned VAT rise on islands in the Aegean hit by refugee flows - a second measure - was included in a draft bill put before parliament last night.
The hope is that the euro working group will unblock the debt relief measures it froze last week so that a second review of the economy assessing the headway Greece has made in implementing reforms can be concluded when euro zone finance ministers convene again on 26 January.
Updated
The euro continues to fall against the dollar, heading closer towards parity. The decline is mainly a function of the strength of the US currency of course, as further interest rate rises from the Federal Reserve loom large. But the problems of the eurozone, including the troubled Italian banking sector, are also a factor, as is the horrific attack in Berlin.
The euro is currently down 0.5% at $1.0353, its lowest since early 2003.
Fawad Razaqzada, market analyst at Forex.com, said:
Another day, anther multi-year high for the dollar. This afternoon saw the euro/dollar drop below last week’s low to hit its lowest level since 2003. The world’s heaviest traded pair has been falling sharply in recent times as disparity between Eurozone and US monetary policies grow. Whereas the ECB has turned even more dovish by expanding its QE stimulus programme to at least December 2017, the Fed has [raised] interest rates and has talked up the possibility of three further hikes next year. This is basically the driving force behind the euro/dollar’s downward move and will probably remain so in the early parts of next year.
[The] next phase of the move could be severe in terms of magnitude. At a minimum, the euro/dollar, I think, would reach parity, possibly before the year is out. I think there is potential for it to drop even lower over time.
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Here’s our report on the CBI’s retail sales survey. Larry Elliott writes:
Retailers have been enjoying their strongest sales growth in more than a year amid signs from Britain’s leading employers’ organisation of a pre-Christmas consumer spending spree.
The latest health check of high street and online activity from the CBI found that sales so far in December beat expectations, were above average for the time of year, and led to retailers beefing up their orders to suppliers.
But the CBI’s distributive trades survey also found that retailers expect the pace of growth to slacken in early 2017 when the fall in the value of the pound pushes up inflation and reduces living standards.
The survey of 112 retailers reported 51% as saying sales were higher than a year ago while 16% said they were lower. The resulting balance of +35 points was up on the +26 points recorded in November and the highest since September 2015.
UK rates as likely to rise as fall - BoE's McCafferty
As if to confirm the CBI’s comments about rising prices, the Bank of England’s Ian McCafferty has pointed to the prospect of higher inflation, and reiterated the bank’s stance that interest rates were as likely to rise as to fall.
In a speech at the Dorset Chamber of Commerce, he said that higher inflation, weaker growth and the fallout from the Brexit vote complicated the outlook for the UK economy:
This confluence of trends - rising inflation, initial demand resilience but a slowdown in growth in prospect and a likely hit to supply over the longer term - provides a challenging background for policy setting...
On the basis of our current understanding of the economy, the balance of risks around the outlook was two-sided, such that from the current level, any further changes in our policy stance in the near future were as likely to be upward as downward...
The uncertainties about the future path of the economy following the referendum are such that we will be following the emerging data even more closely than normal. Quite where policy will go next will depend crucially on how the different cogs and wheels in the economy behave over the coming year or two.
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Consumers may be splashing out because they anticipate prices are heading higher, says economist Howard Archer at IHS Markit:
Retailers will certainly be hoping that consumers’ willingness to spend holds up over the final part of the vital Christmas shopping period and into the New Year. The CBI survey indicates that retailers are more cautious about sales prospects in January although they still see them at a relatively decent level....
For now, consumers are still benefiting from decent fundamentals, notably relatively decent purchasing power and high employment...
The major problem facing the economy - and retailers in particular - is that it looks inevitable that the fundamentals for consumers will weaken markedly over the coming months with purchasing power being increasingly squeezed and the labour market likely weakening...
In the near-term, there is the possibility that some consumers will bring forward purchases of big-ticket items in the belief that their prices are likely to rise appreciably over the coming months.
Expectations of rising prices may make consumers particularly keen to take advantage of genuine bargains in the clearance sales in late-December and January.
Next year looks more challenging for retailers, ING economist James Knightley agrees:
Households are clearly willing to spend, but the headwinds for next year are strong.
The UK’s Confederation of British Industry has reported that retailers have had a really strong Christmas trading period so far. A net 35% of retailers saw higher volumes of sales than 12 months ago, up from 26% in November and well ahead of the 20% consensus. This is the strongest reading since September last year and suggests that consumer spending will again make a big contribution to 4Q GDP growth. It also again highlights the resilience of the UK economy despite the Brexit uncertainty.
However, 2017 is already shaping up to be more challenging. Consumer confidence has weakened significantly in the past couple of months, which may be partly due to growing fears over what Brexit might mean for households, but also an anticipation of sharply higher prices. Inflation expectations have jumped in response to warnings from industry groups and individual companies that the pound’s collapse means higher costs that will likely be passed onto consumers. This is going to squeeze household spending power and may be partly responsible for the recent run of strong spending – people bringing forward purchases to avoid higher prices.
The CBI survey actually takes in the last week of November and the first two weeks of this month, so it includes Black Friday as well as the pre-Christmas shopping spree.
The CBI calculates its balance figure by taking away the percentage of retailers who saw falling sales from those who reported a rise.
So 51% said sales volumes were up, whilst 16% said they were down, giving a balance of +35%.
But despite the boom in the numbers, the CBI said it expected sales to slow in 2017 as the weaker pound pushed up prices and squeezed disposable income.
It said the growth was broad based, with strong performances from clothing and grocers. Internet sales - of course - continued to move higher, at their best pace since November 2014. CBI economist Ben Jones said:
It’s encouraging to see retailers reporting another month of healthy sales growth leading up to the festive season, which rounds off a fairly solid quarter.
While we still expect to see decent growth in the near term, the pressures on retail activity are likely to increase during 2017, as the impact of sterling’s depreciation feeds through.
With higher inflation beginning to weigh on households’ purchasing power, consumption patterns are likely to shift, creating winners and losers across the retail landscape.
Stronger than expected UK retail sales
So far in December retail sales have come in stronger than expected, according to the CBI.
Its retail sales index showed a balance of +35%, up from +26% in November and better than the expected +20%. This is the highest level since September 2015.
The index of retailers’ orders with suppliers was up 12% in December compared to a rise of 6% in November, the best level for more than a year.
Updated
A quick update on the markets.
Despite the horrific events in Berlin and Turkey, leading shares are attempting to move higher.
The FTSE 100 is up 0.03%, while Germany’s Dax is up 0.05% and France’s Cac has climbed 0.3%. Mike van Dulken, head of research at Accendo Markets, said:
Equity indices are trading flat on another sombre post-terror attack day with markets shrugging off renewed geopolitical risk and Travel stocks not suffering their usual knee-jerk weakness. The FTSE100 is treading water with Lloyds (MBNA purchase offers chance for growth) and big Pharma offsetting losses for HSBC, Oil majors and Tobacco despite the weak pound.
Major bourses remain close to highs, but may struggle to improve without a Monte dei Paschi recap/rescue in the bag. The FTSE 100 is sideways 6995-7020, waiting to pop one way or the other. The DAX 30 is holding its December uptrend above 14000, still trying to engineer a breakout to fresh 13-month highs. Dow Jones Futures are knocking at 19920 resistance trying to challenge 19965 all-time highs.
The Lloyds/MDNA deal owes something to the regulators, says Laith Khalaf, senior analyst at Hargreaves Lansdown:
Lloyds is backing itself despite the uncertain economic outlook, and this deal will mean the bank has now cornered a quarter of the UK credit card market.
This does mean a special dividend for 2016 has become less likely, but at the same time the additional earnings from the credit card book bolster the dividend-paying prospects of the bank in years to come.
The acquisition will allow Lloyds to boost its net interest margin, which is pretty valuable against a backdrop of such low interest rates.
The deal owes some thanks to the FCA deadline on PPI claims, which has given some measure of certainty to the level of compensation MBNA will have to pay out, providing both parties with a more solid platform for negotiation.
News from Greece of a delay in appointing a new chief executive for the country’s biggest bank. Greece’s Kathimerini reports:
The process for the appointment of a new chief executive officer will resume in 2017, Piraeus Bank’s governing board decided on Monday.
Earlier, the majority of the board had voted down the lone candidacy of Christos Papadopoulos due to reservations expressed by the European Central Bank’s Single Supervisory Mechanism (SSM).
Sources say that the appointment was postponed after consultation with the SSM, as it appears that once again the insistence of the Hellenic Financial Stability Fund (HFSF) that a CEO must be appointed did not convince the bank’s board. The HFSF is the biggest stakeholder in Piraeus Bank. It holds 26 percent of its shares.
The mandate of the board expires next summer and, according to sources, that will set the time frame for the completion of administrative changes in the lender.
Piraeus CEO appointment put off for 2017 https://t.co/Ay7olyC6vv pic.twitter.com/Np9kACs8BS
— Kathimerini English (@ekathimerini) December 20, 2016
again.. and then the government expects #Greece to have growth when it can't even appoint a CEO to its biggest bank https://t.co/NSTT311iDp
— Michael (@mnicoletos) December 20, 2016
Back with the Lloyds deal to buy MBNA, and Neil Wilson, senior market analyst at ETX Capital, has a couple of concerns:
Lloyds says this deal will boost revenues by £650m a year and improve net interest margin about 10 basis points a year. The bank predicts earnings per share to rise by somewhere between 3% and 5% once the deal has been completed.
But we have to be sceptical about a couple of elements. First, this big purchase could take a long time to pay off and by eating up so much cash we have to question whether Lloyds can increase dividends as much as hoped.
The deal eats up 80 basis points of capital, which is about half of the bank’s annual net capital generation.
The question we have to ask is whether this is good value for money at a time of great uncertainty in the market – defaults could rise if we start to get higher unemployment. Brexit makes the economic outlook very uncertain and Lloyds has just upped its exposure to UK consumer debt at potentially the worst moment.
The run up to the last financial crisis was marked by hubristic mergers and acquisitions. Too big to fail rules make it impossible for big banks to join up these days but Lloyds has found a way to expand nonetheless.
Recent figures from Lloyds weren’t fabulous. Underlying profits fell 3 per cent to £1.9bn, while profits before tax were down 15 per cent at £811m as the bank had to set aside another £1bn for PPI claims.
You may well be fed up of the “festive spirit” already but don’t let that stop you taking our Christmas quiz. No prizes but just the chance to show how much attention you’ve been paying over the past year:
Paysafe, the digital payment specialist which saw its shares slump earlier this month after a negative report from a short seller, is continuing its recovery.
The company, which dismissed the claims by Spotlight Research as either old or inaccurate, has jumped nearly 6% to 361p after it announced a buyback of up to £100m.
Its shares closed down nearly 18% on the day of the report, but are now not far off a complete recovery.
Here’s our full story on the Lloyds/MBNA deal:
The German and French markets have now edged into positive territory. Connor Campbell, financial analyst at Spreadex, said:
The European markets got off to another slow start this Tuesday, investors struggling to find a reason to send the region’s indices any higher.
The FTSE once again lingered around the 7000 mark, lacking any real impetus to push towards its all-time peak from earlier in the year. The pound, meanwhile, has continued to fall against the dollar; it now sits under $1.24, its worst price in around the month. Against the euro sterling has fared a bit better, remaining just above the €1.19 mark...
The fact that [European markets] posted any growth this morning is somewhat remarkable given the events in Germany and Turkey on Monday – it is perhaps a sign of how depressingly routine such tragedies have become that the market no longer has the same kind of reaction to them.
European markets open lower
It was to be expected perhaps, after the events in Berlin and Turkey, but stock markets are struggling for direction at the start of trading as investors remain cautious.
The FTSE 100 is down 0.04% while Germany’s Dax has dipped 0.04% and France’s Cac is 0.03% lower. But the Spanish and Italian markets have managed to both edge higher.
Lloyds Banking Group meanwhile is up 0.5% after its £1.9bn deal to purchase MBNA.
Speaking of deals, the controversy over the maker of the new five pound note using animal fat in the production process has not put off a Canadian company from buying the business. Reuters reports:
Canadian label and packaging maker CCL Industries Inc said it would buy Innovia Group, whose unit is the supplier of Bank of England’s new plastic five pound note that has fallen foul with vegetarians, for about C$1.13 billion ($842 million).
U.K.-based Innovia Group is a maker of specialty bi-axially oriented polypropylene films used for labels, packaging and security applications...
CCL is buying Innovia debt free and net of cash from a consortium of U.K.-based private equity investors managed by The Smithfield Group LLP.
The Bank of England said last month that [Innovia was] working toward removing the use of animal fat in the production of its new plastic five pound note after objection raised by thousands of vegetarians.
Back with the Lloyds deal to buy MBNA, and Shore Capital reckons the move could rule out any special dividend to shareholders. Analyst Gary Greenwood said:
Although there is no change to guidance for a progressive ordinary dividend payment, this may colour management’s thinking towards special dividend payments for the current financial year as management may wish to retail additional capital. Current guidance is for the group to generate capital before dividends equivalent of around 160 basis points of risk weighted assets in the current financial year. This is equivalent to around 5p per share and compares to our current full year dividend forecast of 4p, which includes a 2.55p ordinary payment and 1.45p special. It is likely that the anticipated special dividend may therefore be missed or reduced in order to finance the deal, albeit we would expect further surplus capital to be generated in subsequent years.
Overall, the anticipated financial performance and shareholder value creation that is expected to be generated by this transaction is impressive, in our view, and suggests a better use of capital than simply returning it to shareholders. That said, Lloyds will be broadly doubling up its exposure to credit cards at a particularly benign point in the bad debt cycle and ahead of a potential slow-down in the UK economy once the terms of the UK’s exit from the EU are reached. While there is some latitude in the financial metrics to absorb potentially higher impairments, the risk cannot be ignored. In addition, we see limited scope for organic growth given the high post transaction market share and attention such growth may attract from the competition authorities.
Here’s more on the Bank of Japan’s more positive view of the country’s economy. Reuters reports:
The Bank of Japan kept monetary policy steady and took a more upbeat view of the economy on Tuesday, reinforcing market expectations that its future policy direction could be an increase - not a cut - in interest rates.
Reflecting a pick-up in emerging Asian demand and factory output, the central bank upgraded its language to signal its confidence that the economy is headed for a steady recovery.
“Japan’s economy continues to recover moderately as a trend,” the BOJ said in a statement announcing the policy decision. It also offered a brighter view on exports and output, saying they were picking up.
But the central bank warned that the impact of US monetary policy on global markets was among risks to the outlook, suggesting that the Federal Reserve’s interest rate hike cycle could disrupt emerging market capital flows.
As widely expected, the BOJ kept unchanged its pledge to guide short-term rates at minus 0.1 percent and the 10-year government bond yield around zero percent.
Underscoring its optimism on the outlook, the central bank even revised up its view on private consumption - considered a soft spot for the Japanese economy, the world’s third largest.
But BOJ Governor Haruhiko Kuroda said it was premature to consider raising the central bank’s yield targets with inflation still distant from its 2 percent target.
“It’s absolutely not the case that Japanese government bond yields are allowed to rise in tandem with overseas long-term interest rates, or that (any such rise in Japanese yields) would prompt us to raise our yield targets,” Kuroda told a news conference.
Kuroda also said he saw no problem with the yen’s recent declines against the dollar, saying such falls would help push up inflation by boosting import prices and in so doing raise inflation expectations, a crucial element in the BOJ’s plan to beat economic stagnation.
“Current exchange-rate moves can be described more as dollar strengthening rather than yen weakening,” Kuroda said.
“It’s possible the divergence in monetary policy directions could affect currency moves. But for now, I don’t see current yen falls as excessive or posing any problem.”
Kathleen Brooks, research director at City Index Direct, said:
The market reaction to this move has generally been a stronger USD/JPY. Although the BOJ economic outlook is more upbeat, it isn’t enough to compete with the Fed and its rate-hiking cycle for 2017, which will continue to give the US dollar the yield advantage. Japanese stocks like it though, and the Nikkei is up 0.5% already, as a weaker currency, a brighter economic outlook and a low interest rate environment boost the Japanese corporate outlook.
Agenda: Markets expected to open lower as Lloyds unveils deal
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
On a quiet trading week in the run-up to Christmas, Lloyds Banking Group has just provided a bit of merger excitement.
It is paying £1.9bn for MBNA, the UK credit card business, from Bank of America. MBNA has assets of around £7bn, and Lloyds said the deal would increase its annual revenues by £650m. Cost cutting is on the cards - Lloyds said It expected savings of £100m within two years.
MBNA still faces claims for misselling personal protection insurance (PPI) but Lloyds says the liability is capped at £240m.
Lloyds was reportedly the favourite to buy MBNA, having seen off rival bidder Cerberus, the US private equity group.
Elsewhere, the Bank of Japan has kept interest rates on hold and upgraded its economic outlook. Michael Hewson, chief market analyst at CMC Markets, said:
This shouldn’t have been a surprise to most people given recent yen weakness which has come as a welcome relief to Japanese policymakers, after several failed attempts this year to weaken the yen. Even so the yen still remains above the levels it was when the Bank of Japan first pushed rates into negative territory in January, and reinforcing the reality that the only way the yen is likely to weaken further is as a result of future US policy moves.
Those US moves are likely to involve further interest rate rises, perhaps in short order given the bullish tone on jobs of Federal Reserve chair Janet Yellen in a speech to students in Baltimore on Monday.
On the agenda today we get the latest CBI retail sales figures. They supposedly cover December but come ahead of the last minute Christmas trading rush.
We already have stronger than expected German producer price figures, up 0.3% month on month in November, compared to expectations of a 0.1% rise. But they were lower than the 0.7% figure in October.
We will also be following developments in Greece, after Moody’s warned about the consequences of European lenders delaying debt relief. Our full story is here:
And Italy’s troubled Monte dei Paschi continues to try and attract investors to its €5bn fundraising. Meanwhile the Italian government is looking at a £20bn rescue package for all its struggling banks.
European stock markets are expected to open slightly lower, with investors likely to unnerved by the events in Berlin where 12 people have been killed after a truck ploughed into a Christmas market, as well as the shooting of Russia’s ambassador in Turkey. The opening calls are:
Our European opening calls:$FTSE 7011 -0.08%
— IGSquawk (@IGSquawk) December 20, 2016
$DAX 11414 -0.11%
$CAC 4822 -0.01%$IBEX 9320 -0.17%$MIB 18889 -0.42%
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