Mixed day for European markets but FTSE hits 11 month closing high
The ARM deal may have boosted the UK markets, but elsewhere the mood was fairly uninspired. French and German markets dipped slightly while Italy edged higher and Wall Street struggled to gain ground. The final scores showed:
- The FTSE 100 finished 26.18 points or 0.39% higher at 6695.42, but that was more than accounted for by the gain in ARM (26.5 points). It still represents the highest close since August last year
- Germany’s Dax dipped 0.04% to 10,063.13
- France’s Cac closed 0.34% lower at 4357.74
- Italy’s FTSE MIB added 0.08% to 16,762.73
- Spain’s Ibex ended down 0.08% at 8524.4
- In Greece, the Athens market slipped 0.38% to 555.26
On Wall Street the Dow Jones Industrial Average is currently up 4.79 points or 0.03%.
Meanwhile after the hawkish comments from MPC member Martin Weale, the pound has added 0.49% to $1.3255.
On that note, it’s time to close for the evening. Thanks for your comments, and we’ll be back tomorrow.
Updated
It has ended up being a fairly uninspiring day on the markets, with only the £24bn deal to buy UK chip designer ARM giving a boost to leading shares. Tony Cross, market analyst at Trustnet Direct said:
There’s really only one story driving the rally in London today, and that’s the bid for ARM Holdings that’s been received from Japan’s SoftBank. Shares in the microchip company are up around 40% and if it hadn’t been for this news, the day’s performance would have been a whole lot more pedestrian.
Hawkish comments from BoE policymaker Martin Weale have also done little to buoy sentiment for UK stocks today, although the confidence this kind of message imparts has at least managed to cheer the housebuilders. At the other end of the board, TUI is markedly lower off the back of the weekend’s events in Turkey amidst fears of holidaymakers changing plans for the summer, whilst BHP Billiton is also struggling with word that a subsidiary has seen its debt rating downgraded to junk weighing here.
Oil prices are now down around 2% as new data showed a hike in US crude supplies.
Market data firm Genscape reported a stock build of 26,460 barrels last week at the Cushing, Oklahoma delivery hub, following a surge in US supplies of gasoline and distillate last week.
Brent crude is currently down $1.03 a barrel at $46.58 while West Texas Intermediate, the US benchmark, is down 2.1% at $44.98 a barrel.
Wall Street has edged ahead in early trading, continuing to head towards record highs but only gradually.
A drop in the oil price has taken the shine off some reasonable company results, with Bank of America beating expectations with its second quarter figures. The Dow Jones Industrial Average is currently up 0.12% at 18538, compared to its lifetime high of 18557.
The proposed takeover of ARM by Japan’s Softbank is an illustration of the consequences of volatility in the global currency markets, says John Haynes, head of research at Investec Wealth & Investment:
The announcement of an agreed bid for ARM Holdings by Softbank of Japan is the clearest illustration possible of the consequences of the current global currency volatility. Assuming the bid price, Softbank is paying over 25% less in yen terms compared to over a year ago to acquire this crown jewel of UK, and indeed global, intellectual property. The devaluation of sterling will continue to provide interesting investment opportunities for overseas investors to buy UK assets, including central London property, at a discount.
The repercussions of the Brexit decision have yet to be felt. Over the next six to nine months we will see not only the direct effect on growth in the UK and Europe of this blow to business confidence, but also the impact it has on the political landscape. We should take some reassurance from recent market action as it was a high profile challenge to the resilience of the European financial system. The measures central banks have put in place to address outside “shocks” passed an important test, which is an endorsement of the progress made since the Eurozone crisis. Furthermore, as last week’s non-European data indicated, the world economic picture still has many bright spots. The US remains highly resilient whilst the picture in emerging markets is improving. If the last two weeks has taught us anything, it is that Britain is not as important to the world as the world is to Britain, hence the importance of retaining a global perspective when making investment decisions.
Our view prior to Brexit was that the world would “muddle through” and risk takers would be rewarded for their steely nerve. Our view now is the same, but there is less margin for error and a higher level of background political risk.
Wells Fargo buys City office block development for £300m
In another sign that Britain remains open for business, US bank Wells Fargo is to buy an 11-storey office block development in the heart of the City in one of the largest real estate deals since the Brexit vote.
It has bought the development - 33 Central at 33 King William Street - from property company HB Reavis. The deal will allow the US bank to consolidate its 850 London-based staff in a single location when construction is completed in the third quarter of 2017.
Terms of the deal were not revealed but a source told Reuters it was likely to be worth around £300m.
Updated
Lunchtime summary
A quick recap.
Martin Weale argued that Britain may not need immediate reassurance from the BoE, and argued that central bankers shouldn’t act as nursemaids to the markets’ every whim.
Weale also predicted that the Brexit vote will make the country poorer, as firms slash spending and hiring.
The warning came after a flurry of data showing that the Brexit vote has hurt the economy.
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The EY Item Club predicted a recession next year.
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Deloitte reported that business confidence has suffered its worst knock in at least a decade.
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RightMove warned that asking price for home sales have dipped in the last month.
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Societe Generale predicted that house prices in some London areas could halve!
Elsewhere...
Downing Street says the deal is in the national interest, while SoftBank’s CEO Masayoshi Son claims to have wowed Theresa May and Philip Hammond with his pledges to invest in the company and hire more staff.
Cambridge’s MP, though, is worried...
Turkey’s stock market has now slumped by over 5%, following last week’s coup attempt.
The Turkish lira has recovered some of Friday night’s heavy losses, as the Erdogan government asserts control.
Fawad Razaqzada, market analyst at Forex.com, predicts more lira losses:
Over time, interest rates will need to be reduced significantly in order to stimulate demand in the economy. But at the same time, this will reduce the appeal of the lira as a higher yielding currency for foreign investors. So whichever way you look at it, the outlook for the Lira looks dire unfortunately.
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Unsurprisingly, the Adam Smith Institute thinks overseas firms shouldn’t be blocked from buying UK ones.
Their head of research, Ben Southwood, says it would be a blunder to consider blocking deals such as the SoftBank/ARM takeover.
Here’s his argument:
“Vetting all foreign bids for British firms represents yet another step on the risky road to ‘Italyification’ of the UK economy, where inefficient national champions are propped up and those putting money into our growth are scrutinised based on their national origin.
“The fact you can later sell your business to a wider pool of investors—and attract capital from everywhere in the world—is a major driver behind British investment. It is also the foundation of Britain’s world-beating finance industry, which provides an outsized portion of UK output, and UK tax revenues.
“British economic success has been based on openness to trade and investment for hundreds of years. Theresa May must not put an end to that.”
Is he right? Well, ARM is hardly a failing company in need of some foreign expertise. It’s already hugely successful, providing key chips for the iPhone (for example). SoftBank are paying 43% over last week’s share price precisely because ARM is such a good company.
Also, SoftBank’s insistence that really wants ARM’s technology, and will help the company grow, should allay fears in Westminster.
The Labour MP for Cambridge doesn’t share the Conservative government’s enthusiasm for the £24bn takeover of ARM – Britain’s preeminent tech company.
Daniel Zeichner is concerned about ARM’s long-term future under Japanese conglomerate SoftBank, and isn’t totally convinced by its pledge to double the UK workforce.
He told ITV News that:
“Well of course the promises are great, but how are those promises going to be guaranteed? Do we know what will happen in 6 months or a year? Do we know much about SoftBank? And they seem to be making some pretty big deals across the world.
This is a Cambridge success story upon which the future of the United Kingdom is probably depends because this is what we’re good at.”
Cambridge MP cautious over ARM Holdings takeover https://t.co/D1FVsRRhPb
— ITV News Anglia (@itvanglia) July 18, 2016
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Holiday firm TUI is the worst-performing stock on the FSTE 100 so far today, shedding over 2%.
Traders are calculating that the turmoil in Turkey is going to deter holidaymakers from jetting to its resorts; although recent terrorist attacks had already had an impact.
Tony Cross of Trustnet Direct explains:
TUI is also struggling with that news from Turkey likely to further disrupt travel to the country this summer, although there has been a shift in bookings by holidaymakers for some months now to resorts in the Western Mediterranean.
The shock Brexit vote has taken the world’s attention off other issues, such as the ongoing economic crisis in Greece.
But the eurozone’s most troubled member hasn’t gone away. And European Comissioner Pierre Moscovici has popped to Athens today, for high-level talks about its current bailout programme.
He’s met with prime minister Alexis Tsipras, and discussed the labour reforms and spending cuts that Greece needs to enforce, to get its next tranche of bailout funds (worth around €2.8bn).
Over in Downing Street, Theresa May’s spokeswoman has told lobby reporters that SoftBank’s takeover of ARM is in the national interest (that’s via Reuters)
SoftBank CEO: UK government approve of ARM takeover
SoftBank’s CEO, Masayoshi Son, has denied that the Brexit vote prompted him to launch today’s massive £24bn takeover of UK chipmaker ARM.
Speaking to reporters in London, Son says the EU referendum did not affect his decision. He says SoftBank is determined to have a big role in the development of the Internet of Things -- the next major area of technology.
The FT’s Arash Massoudi is tweeting the key points:
MasaSon takes the stage at SoftBank presser. Just back from meeting UK Chancellor Hammond. pic.twitter.com/3GyO7YILFe
— Arash Massoudi (@ArashMassoudi) July 18, 2016
"One of the biggest paradigm shifts is coming." First wave was internet to PC. Then mobile. Next wave is internet in everything, Son says
— Arash Massoudi (@ArashMassoudi) July 18, 2016
Why is SoftBank doing deal? "Next big paradigm shift is coming in IoT...it will be a big opportunity for all of mankind and products used"
— Arash Massoudi (@ArashMassoudi) July 18, 2016
Son also declared that Britain’s new political masters are impressed by the deal - and his pledge to double ARM’s UK workforce.
Son: I presented assurances abt HQ, jobs, investment. "The PM and Chancellor said Wow. That's good!"
— Arash Massoudi (@ArashMassoudi) July 18, 2016
SocGen: Top London house prices could halve due to Brexit
Readers with expensive houses in the heart of London should take a deep breath, and stay sitting down.
French bank Societe Generale has predicted that house prices in the capital could plunge by over 30%, due to the vote to leave the European Union.
That’s based on the idea that highly paid City workers will be forced out of London, if Britain loses access to the single market.
That would end the ‘passporting’ which lets banks in the UK sell services across the EU, and mean banks have to shift overseas.
SocGen analyst Marc Mozzi explains the gloomy prognosis:
“While in recent stress tests, the major U.K. banks were assessed with declines of around 30 percent in commercial real estate prices, we fear that London residential could experience an even more severe downturn.
“Brexit will damage the U.K. economy, and some companies will almost certainly have to relocate parts of their business to retain access to the EU single market.”
Whoa. SocGen: house prices in London's most expensive areas could halve in the wake of Brexit pic.twitter.com/YHHjvAgaTZ
— Ed Conway (@EdConwaySky) July 18, 2016
Weale speech: What the experts say
Jeremy Cook, chief economist at World First, reckons Martin Weale may decline to support an interest rate cut in August:
*WEALE: BOE SHOULD WAIT FOR FIRMER EVIDENCE BEFORE POLICY CHANGE - rate cut abstention in August?
— World First (@World_First) July 18, 2016
Sky’s Ed Conway isn’t too surprised; Weale is one of the more hawkish MPC members.
Note the MPC minutes said “most” MPC members thought policy should be loosened in Aug. Not all. So Weale’s relative hawkishness not a shock
— Ed Conway (@EdConwaySky) July 18, 2016
Buzzfeed’s Simon Neville flags up that the rapid appointment of Theresa May as prime minister may calm the situation:
Martin Weale says: "If I did want to read the tea leaves, investors are expecting the economy to be a bit weaker than beforehand"
— Simon Neville (@SimonNeville) July 18, 2016
Weale suggesting the alarm immediately after the referendum result could have been allayed now the political vacuum has been removed
— Simon Neville (@SimonNeville) July 18, 2016
Weale: Our incomes will be lower because of Brexit
Martin Weale has also warned that the Brexit vote will make the UK population poorer.
The Bank of England rate-setter tells his audience in London that:
My own view is that, despite any savings resulting from a lower contribution to the EU budget, the nation’s income, and thus people’s incomes, are likely to be reduced as a result of the choice made on 23rd June.
Weale is concerned that Britain may not retain full access to the single market, which has delivered useful economies of scale.
A failure to retain them would amount to a worsening of Britain’s supply conditions reducing both productivity and household incomes. International competition may also have had the effect of stimulating productivity improvements in domestic firms.
He also warns that everyone could suffer, if London’s financial sector takes a hit (perhaps because banks are forced to move operations into the EU):
Should life become harder for the financial sector then....that may fall disproportionately on London and the South-East.
But, if taxable capacity declines disproportionately as a result, the effects of this on people’s incomes will be spread across the country more evenly than the effects on output.
He also produces these two charts, showing how UK business confidence has declined in the last few weeks.
BoE policymaker says interest rates may not be cut next month
Bank of England policymaker Martin Weale has just fired a warning shot at the City, saying interest rates might not be cut in August.
Speaking in London, Weale revealed that he is not convinced - yet anyway - that rates need to be slashed from 0.5% to fresh record lows to calm Brexit fears.
Weale (who has previously voted to raise interest rates), says: the Bank shouldn’t be worried about disappointing the markets.
The Old Lady of Threadneedle Street is not a nurse to markets.
People who trade in markets know that the Monetary Policy Committee sets policy month by month in the way that its members think appropriate. It does sometimes, as we did in our July meeting, give an indication of where policy may go in the future. But that is no more than the best judgement at the time and not in any sense a commitment; the public understand that.
Weale also argues that the Bank doesn’t need to act early to reassure households and businesses.
In contrast to the experience of 2008, I do not have any sense that either consumers or businesses are panic-struck and, as I observed, there have been no material signs of financial panic.
Martin Weale giving his final major speech as an MPC member. Doesn’t sound like he’ll be voting for a cut next month pic.twitter.com/TamfZKPKD6
— Ed Conway (@EdConwaySky) July 18, 2016
Last week, the Bank of England surprised many economists by voting to leave interest rates on hold. The minutes of the meeting showed that many members of its monetary policy committee expect to agree on a new stimulus package in August.
However, that might not necessarily include a rate cut. The MPC could vote to boost quantitative easing (buying bonds from banks with newly created money), or launch new measures to encourage banks to lend to businesses and consumers.
#Weale (largely hawkish) indicates not sure will vote for #BOE #interest #rate cut at his final #MPC meeting in Aug https://t.co/R85upKydVX
— Howard Archer (@HowardArcherUK) July 18, 2016
Brexit vote will drive UK into recession – EY Item Club
The UK will fall into a “short, shallow recession” around the turn of the year as Brexit hits house prices, jobs and spending, according to forecasters at the EY Item Club.
In another dose of gloom, they have slashed their 2017 growth estimate to 0.4% from 2.6%, and warned that Britain’s economy will suffer permanent harm from the decision to leave the EU.
The group says:
“There are likely to be severe confidence effects on spending, only partially cushioned by a fall in the pound.
“We would expect a permanent reduction in the level of U.K. output and productivity.”
Britain’s new digital minister is also backing the ARM takeover, underlying that SoftBank are not going to be blocked by Westminster.
The proposed investment of £24bn in ARM by SoftBank highlights Britain's capability to grow & build world-beating Tech companies
— Matt Hancock (@MattHancockMP) July 18, 2016
“Investment” is a funny way of describing a takeover bid -- surely Hancock knows that the money goes to ARM’s shareholders?
The government’s eagerness to support the deal is also ironic, as prime minister Theresa May has pledged to protect UK firms in ‘strategic’ industries from foreign takeovers.
July 11: Theresa May says govt will block takeovers of key UK firms
— Jonathan Eley (@JonathanEley) July 18, 2016
July 18: Govt welcomes takeover of Arm, UK's most important tech company
Proof that a week really is a long time in politics...
Brexit fears have now hit Britain’s housing market, according to the latest data from Rightmove.
UK property asking prices have dropped 0.9% over the last month, suggesting that the EU referendum is hitting demand for property. Some sellers may also be trying to get a deal before Britain’s economy has deteriorated.
Jeremy Duncombe, director of the Legal & General Mortgage Club, reckons its not a reason to panic:
“Given the uncertainty that has followed the UK’s decision to leave the EU, it’s not surprising that house prices have decreased month-on-month for the first time in a while.
We need however to look at the annual trend and not a month in isolation. House prices are still rising faster much than inflation over a 12 month period, and a slowing of this growth is not necessarily a bad thing.
Turkish stock market slides after coup failure
Turkey’s stock market has slumped by 3% in early trading, failing to match the gains in other markets.
Traders at the Istanbul Stock Exchange are understandably nervous following last weekend’s failed coup, which is likely to deter businesses from investing in Turkey and holidaymakers from visiting the country.
There’s huge trading in the Turkish lira too. It tumbled on Friday night as military officers tried to overthrow president Erdoğan, falling from 2.88 lira to the $1 to 3.04.
The lira has now bounced back a bit, as Turkey’s government rounds up thousands of suspected coup plotters.
Turkish lira claws back half of losses from coup attempt https://t.co/lZ74MBcavi pic.twitter.com/Knxungxgrq
— fastFT (@fastFT) July 18, 2016
Trading volume in Turkish lira "double normal"
— (((Burnett Tabrum))) (@BTabrum) July 18, 2016
Wolfango Piccoli of Teneo Intelligence fears Turkey faces further instability:
This highlights that Erdogan is eager to exploit the event to expand his power and continue the witch-hunt, further worsening the state of Turkey’s crumbling democracy.
Moreover, there is a growing risk of a snap election, as the AKP might seize the opportunity to enlarge its parliamentary majority with the aim of introducing an executive presidency via a constitutional revision. With two opposition parties (the MHP and the HDP) undergoing significant internal turmoil, an early election could deliver the necessary numbers for Erdogan’s dream to be fulfilled.
On the external front, the already strained relationship with the US could worsen as a result of Ankara’s increased determination to request the extradition of Fethullah Gulen, who has been quickly accused by the Turkish government of being behind the failed putsch.
ARM’s soaring share price has helped to drive the FTSE 100 towards the 11-month intraday high hit last week.
The Footsie is up 45 points in early trading to 6715, while the smaller FTSE 250 has gained 1%.
Other European stock markets are also up in early trading, as traders remain sanguine despite Brexit concerns and the instability in Turkey.
Overnight, a top City fund manager warned that Brexit will be “horrible” for the UK economy.
Richard Buxton, the chief executive and head of UK equities at Old Mutual Global Investors (OMGI), says the referendum vote is “stupendously final.”
“I don’t always agree with Martin Wolf [the Financial Times columnist], but when he wrote the day after that this is probably the single worst event in British postwar history, yeah, I don’t disagree
Buxton also laid into the Leave campaign for failing to have a strategy for actually leaving the EU:
“You can criticise the Brexit team for a) an utterly mendacious campaign and b) not expecting that they would really win, so never having a plan. I mean the whole thing is literally unbelievable. It is extraordinary how we have ended up where we are.”
Shares in chipmaker ARM Holdings have surged by 45% at the start of trading, as the City reacts to SoftBank’s takeover offer.
They’re changing hands for £17.32 each, slightly over the Softbank offer of £17.
That suggests investors expect the deal to go through, and there may be some speculation of a rival offer (even though Softbank are paying a 43% premium).
Updated
UK government back ARM takeover
Britain’s new finance minister has decided that the takeover of ARM Holdings by SoftBank is a jolly good thing.
Philip Hammond argues that the deal shows that the Brexit vote hasn’t hurt Britain’s place in the world, saying:
“Britain has lost none of its allure to international investors. Britain is open for business - and open to foreign investment.”
He’s tweeting the same message:
Decision by SoftBank to invest in @ARMHoldings shows UK has lost none of its allure to global investors - Britain is open for business
— Philip Hammond (@PHammondMP) July 18, 2016
This would be largest ever Asian investment into the UK & would double size of ARM's UK workforce.Big vote of confidence in British business
— Philip Hammond (@PHammondMP) July 18, 2016
The deal is also a reminder that the slump in the pound makes UK assets more affordable to overseas investors.
The yen has surged by almost a third against the pound over the last year, including a 12% spike since the referendum.
Softbank's purchase of Arm largely facilitated by FX shifts, with GBPJPY falling around 30% over the past 12 months
— Joshua Mahony (@JMahony_IG) July 18, 2016
However... ARM’s share price has also been boosted by the weak pound (as it earns most of its revenues in foreign currencies).
Updated
Brexit vote drives business pessimism to record high
British firms are slashing their spending plans in the face of uncertainty following last month’s EU referendum vote.
In a worrying signal, anxiety among UK bosses has hit a five year high, according to accountancy firm Deloitte.
Its survey found that 82% of chief financial officers from FTSE 350 and large private companies are planning to cut capital spending in the next year.
That’s the biggest amount since the survey began a decade ago, up from 34 percent in the first quarter.
And 83% are planning to rein in their hiring plans, in a blow to workers seeking new jobs.
How Brexit works: 82% of top UK firms shelve spending plans after EU vote - Deloitte https://t.co/XS5mFj3Gh3
— Tim Weber (@tim_weber) July 18, 2016
Alarmingly, businesses are more pessimistic than after the financial crisis in 2008.
Ian Stewart, Deloitte’s chief economist, sums up the situation:
“Perceptions of uncertainty have soared to levels last associated with the euro crisis five years ago.
“The spike in uncertainty has had a toxic effect on business sentiment, with optimism dropping to the lowest level since our survey started in 2007 -- lower, even, than in the wake of the failure of Lehman in late 2008.”
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The Agenda: Brexit, ARM and Turkey
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
There are three things on the agenda in the City today. Firstly, the Brexit vote, as companies continue to chew through the implications of last month’s EU referendum.
Second, investors are watching the situation in Turkey closely after last weekend’s failed coup attempt.
President Erdoğan remains in power, and is now pledging to purge the Turkish state of dissidents. But the sight of tanks on the streets may shake confidence in the country, which is already facing high inflation and a troubled tourism industry.
Analysts at RBC Capital Markets explain:
Following a turbulent weekend, markets are actually quite calm. The weekend’s main highlight was the failed attempt to overthrow the Turkish government in a military coup d’etat and the subsequent mass detentions of military and judiciary personal.
And thirdly, we have some early morning takeover action. ARM Holdings, Britain’s biggest technology company, is being taken over by Japan’s SoftBank in a £24bn deal.
Encouragingly, SoftBank are promising to at least double the number of UK employees at ARM, in what looks a massive bet on the Internet of Things [the idea that every object will be linked to the web]
Watch shares of @ARMHoldings at open...#Softbank offers £24b = 45% premium to current £16.7b market cap pic.twitter.com/PpolzamMYt
— Caroline Hyde (@CarolineHydeTV) July 18, 2016
We’ll be tracking all the main developments through the day.
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