10 March 2016

Week In Brief: BUSINESS AND THE CITY

EMPLOYMENT PROSPECTS:   The USA economy continues to outperform projections, at least so far as employment is concerned.   In January the number of people in employment rose 172,000, above projections, and in February’s beat the forecasts again with 242,000 new jobs.   A lot of this is in the education, health, and retail sectors, and in lower paid jobs.  This suggests that dollar interest rates may soon start to rise to prevent inflation starting to cut back in.

BANKING STARS:   After several near starts, Metro Bank finally got its LSE initial flotation away, raising £400m of new money for 25% of the business.   Metro is a new bank, rolling out a programme of customer friendly branches mainly in London, but also in some major South Eastern centres – it aims to have 110 branches by 2020.   It has £5.1bn of deposits and £3.5bn of loans on the books – most loans being to higher waged professionals and to SME’s.   The founder of the bank is the American billionaire banker Vernon Hill, rolling out a model he successfully introduced in the USA; he owns about 7% of Metro Bank’s shares.   The new money was raised by an offering to a range of mostly institutional shareholders – many existing shareholders prepared to put more capital in, but a third came from new shareholders prepared to join them; the new shares will begin trading on Thursday this week.   The only bad news is that the bank is yet to make a profit – losses last year were £49m – but Hill says that that is because the bank wants to grow to an optimum size as quickly as it can.

TAKEAWAY SHARES:   Mr Hill is hanging onto his shares, but round at Just Eat, the sector leading food delivery service whose slightly disappointing results we featured last week, the directors seem less keen to keep their money in the business.   Both the chief executive, David Buttress, and finance director, Mike Wroe, were big sellers of shares after the publication of the results.  Mr Buttress sold 3.2m shares, almost all his shareholding, leaving him with less than 1% of the company, and Mr Wroe now has even less than that.  Both do have potential further share ownership through their membership of the executive investment incentive plan, so other shareholders will be hoping that they are incentivised enough to get the company buzzing again.

OIL SHOCK:  Again… Upwards this time; the price touched US$40 a barrel and is hovering around that level – but some industry experts say that they expect the price to go on up for a while yet.  (Yes, probably the same experts who expected that the price would go down to US$20 a barrel six weeks ago.)  Ostensibly the position has not changed much – world storage facilities are full, the northern hemisphere winter has been mild and is almost over, and big industrial users continue to be gloomy about growth – especially China.  And the big shale and sea rig oil producers have been introducing tight cost controls so that their breakeven price has come down as much as US$20 a barrel – though average breakeven is still around US$50.  So what is going on?  The main driver of the upward bounce is that four big producers – Saudi Arabia, Russia, Qatar, and Venezuela have agreed a production freeze, and it is rumoured that the next OPEC meeting later this month will try to extend that across OPEC.   The market is wondering nervously whether this agreement might hold, and also unravelling some complex bear market positions to take profits.  More cynical observers are not so sure that the direction is up – both Russia and Saudi are at full production already, so a production freeze won’t make much difference there, and Venezuela is so broke that the temptation to pump out anything they can is likely to be irresistible.

ELECTRIC SHOCK:  Even if oil is having somewhat of a bounce back, falling energy prices around the world, especially for carbon based fuels, has thrown the sustainable energy market into disarray.  The premium for going green is getting ever higher, and in the stressed economies of Western Europe it is one more load on consumers.  The general evidence seems to be that households will bear that burden to make the world cleaner and greener; at least that is what consumers tell pollsters.  But where green issues buy less good feelings is in industry; the steel industry in the UK has shown the problems of trying to operate in a high cost sustainable energy market whilst your rivals are still burning fossil fuels at a third of the cost.  This is an increasing problem for large scale energy users across the West (less so in the USA which has very large supplies of carbon fuel sources and goes on using them).

One solution in the UK was thought to be to build a new generation of nuclear power stations, with Hinkley Point in Somerset to be first, to be built by EDF Energy, the French power company, to be completed in about two years time.  You may have noticed though that no work has yet started and the start-up date is 2025.  Even that now looks in doubt; the finance director of EDF, Thomas Piquemal, resigned this week, saying that the financial incentives to build the new station were not great enough.  This caused astonishment in the industry.  EDF are being offered twice the current tariff, UK government guaranteed and index linked, for 35 years to build and operate the plant.  Now there is serious lobbying against building the thing at all, analysts pointing out that Britain could build conventional new stations to produce the same output at less than a third of the price of Hinkley Point.  That might well appeal to the man at 11 Downing Street, trying to balance his forthcoming budget.

GOLD FINGER:  Whilst most attention in recent weeks has been on the performance of sterling and the oil price, gold, that last refuge of the nervous investor, has been slowly creeping up in price.  Not so slowly in fact; since last December the price is up 20% – which meets the definition of a bull market.  The price reached US$1,279 per ounce last Friday, though it has fallen back a little since.  Since the extraordinary convolutions of the precious metal markets of the early 1980’s – the Hunt brothers’ attempts to corner the silver market also drove gold up to record levels, but it then collapsed in line with silver – gold has been a relatively steady performer.  It has become increasingly used in industry for high tech connectors and other specialist purposes, which together with its traditional role in jewellery has given it a steady underpinning.  Mining sources continue to provide a steady supply, and modern methods of recovery mean that recycling is much more efficient, so price has tended to relate more to use than restricted supply or speculative demand.  But with negative interest rates and political instability in some parts of the world where portability of wealth can be a useful factor, interest in gold has started to pick up from speculators, both from the Middle and Far East, but also from Europe.  And that is now been reflected in the price – market observers expect it to go further yet, pointing out that since highs of $1,700 and a top of $1,800, gold fell back to trade in a band around $1,000 for several years, so a breakout upwards would make entire sense.

KEY MARKET INDICES:  (as at 8th March 2016; comments refer to changes on the week; $ is US$)

Interest Rates:

UK£ Base rate: 0.5%, unchanged: 3 month 0.67% (rising); 5 year 0.87% (rising).

Euro€: 1 mth -0.22% (falling); 3 mth -0.16% (falling); 5 year -0.16% (falling)

US$: 1 mth 0.73% (rising); 3 mth 0.73% (steady); 5 year 1.27% (rising)

Currency Exchanges:

£/Euro: 1.29, £ rising

£/$: 1.42, £ rising

Euro/$: 1.10, € steady

Gold, oz: $1,264 rising

Aluminium, tonne: $1,598, slight rise

Copper, tonne: $4,999, rising

Oil, Brent Crude barrel: $39.85, rising strongly

Wheat, tonne: £104, steady

London Stock Exchange: FTSE 100: 6,182 (rising). FTSE Allshare: 3,395 (rising)

Briefly: Commodity prices continue to edge upwards, with this week’s clear winner being oil – see above. Sterling continues to recover slowly from Boris’s Brexit shock and is improving a little against Euro and the US$. But sterling interest rates are now on the up again – which may be US$ influence rather than Euro shocks.

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