10 September 2015
Week in Brief: BUSINESS AND THE CITY
WORLD ECONOMY: The slowdown in the Chinese economy is affecting share prices across the world. A survey of China’s manufacturing sector reported a 6 year low. The downturn has affected oil prices with Brent crude now trading at below US$50 a barrel.
In the UK, manufacturing output fell in the month of August, casting doubt over the prospect of a rise in interest rates. The latest figures show a decline in manufacturing production, orders and a revision of the prospects for growth.
The Euro has fallen in value against the pound which has affected the volume of exports from the UK to Europe, especially exports of food and drink.
The German manufacturing sector was affected in July by a lack of demand from Asia, although the domestic demand for engineering products rose.
The US economy is recovering as revealed by the latest employment figures. Production is growing and does not seem to have been hit yet by the world economic slowdown.
In Europe, Mario Draghi, President of the ECB, has indicated that he will resume quantitative easing to mitigate the effects of the global economic gloom. The result of the announcement was that the FTSE Eurofirst share index rose, government bond prices rose and the Euro fell on foreign exchange markets.
NUCLEAR POWER STATION: The French power giant EDF has confirmed that the nuclear power station which it is proposing to construct at Hinkley Point in Somerset will be further delayed and, if it goes ahead, will not start to generate electricity in 2023 as predicted last year. The project, which involves a 35 year arrangement under which the UK government guarantees revenues, was cleared by the European Commission in October 2014 after an enquiry into whether this constituted illegal state aid, a decision which is being challenged by Austria in the European Court of Justice. The project was originally expected to produce electricity in 2017.
BANK MERGERS: A bank based in Spain, Sabadell, is drawing up plans to make a bid for Clydesdale and Williams & Glyn. The Co-op Bank may also be in their sights. Sabadell took over TSB earlier this year.
LEHMAN DISTRIBUTION: The collapse of Lehman Bros led to the separate European branch of the bank being placed into administration. All the creditors have been paid in full, but there is a dispute over the sum of £7 billion which is available to pay interest to creditors. The High Court in London will decide how the funds should be distributed.
PENSIONERS BOND: The National Savings & Investments bonds designed for pensioners have attracted £5.4 billion. There are concerns that the funds invested in the bonds are being withdrawn from the private sector.
LIVING WAGE: The costs attaching to the increase of minimum wages announced in the Budget are beginning to emerge with the recruitment group Manpower warning that employees are cutting back on hiring. Since the increase (to £7.20 from April) will only affect workers over twenty-five years old, it may result in a move to younger employees. Self-employed workers will be unaffected. According to Manpower’s research, the employment market is less optimistic than at any time in the last three years.
Whitbread, the brewing and catering group which owns Premier Inn, Costa Coffee and the Beefeater restaurant chain, has indicated that the higher salary costs will mean price increases, although it hopes to reduce the impact through increased productivity. Other labour-intensive industries such as care homes will also be severely impacted and leading operators Four Seasons Care, BUPA, HC – One, Care UK and Barchester believe that the change will cost the industry £1 billion by 2020, when the living wage will hit £9 pounds per hour.
MINER CUTS BACK: Mining and commodities group Glencore is to reduce its copper production by 25% by suspending operations in Zambia and the Congo for eighteen months. The move is part of a package designed to reposition the group following the decline in copper, coal and oil prices. The restructuring, which will involve the sale of assets and a $2.5 billion the issue of new shares of which $550 million will be subscribed by executives, is intended to reduce group debt from its current level of $30 billion to nearer to $20 billion. There will be no dividends to shareholders until further notice.
In August the group announced a first half loss of $676 million. Glencore say that the proposed restructuring will not affect their core operations. The restructuring should enable the group to withstand further adverse moves in commodity prices.
TESCO: Cleaning up the balance sheet was also the name of the game round at Tesco which has sold HomePlus, its south Korean business, to a consortium which was led by local buyout specialists, MBK Partners and which also included the Canadian Pension Plan Investment Board, the Public Sector Pension Investment Board and, from Singapore, Temasak Holdings (Private) Ltd. The price was £4.2 billion and the net proceeds of £3.35 billion should help Tesco to strengthen its balance sheet. Its total debt stood at £21.7 billion at 28 February 2015.
Tesco, which has been suffering as a result of competition from Aldi and Lidl in the UK, posted a statutory pre-tax loss of £6,376 million for 2014/15. It remains to be seen whether there will be further disposals of overseas assets.
WILLIAMS RACES AHEAD: Better results on the track – third place in last year’s constructors’ championship – and good results in its engineering division, which sells Formula One derived technology and expertise, have seen Williams strengthen financially. Losses for the six months to 30 June, before interest and tax, were down to £1.4 million, a huge improvement on the £19.6 million for the same period last year. With more sponsorship money coming in as a result of track success, the improvement is revenue-driven and will underpin the stability of the business.
KEY MARKET INDICES: (comments refer to change on week)
Interest rates:
UK£ Base rate: 0.5% (unchanged); 3 month 0.58% (steady);
Europe€ 1 month -0.05% (rising); 3 month -0.6% (steady) ;
US$ 1 month -0.105%’ (falling) 3 month -0.03 (falling);
Currency Exchanges:
£/Euro: 1.38 (rising).
£/$: 1.54 (steady)
Euro/$: 1.12(falling).
Gold, oz: $1121 (falling)
Oil, Brent Crude barrel: $48.60 (falling)
Wheat, tonne: £108.90 (falling)
London Stock Exchange: FTSE 100: 6158.19. FTSE 350: 3396.33.
Briefly: After catastrophic falls in preceding weeks, the market seems to be putting the drop in Chinese output into perspective. A small recovery of the week reflects a slight coming of nerves.
