Politics will pervade through the business agenda in the coming week as the landslide Tory election win means the government is now aiming to reconvene parliament in the coming week and use its new chunky majority to begin pushing through its Brexit legislation.
Downing Street aims to hold a Queen's speech on Thursday and hold a first reading of the Brexit bill by end of next week, with the Christmas break to be followed by the final passage of the legislation in January, with a new Budget before the end of March.
Boris Johnson wants to get the bill completed in time for the ‘Brexit day’ on 31 January, with trade talks with the EU pencilled in to start in February to try and reach a deal by next December.
The schedule for the week ahead also includes a Bank of England policy meeting, results from the central bank’s stress tests of high street banks, unemployment and inflation data, ‘flash’ PMI reports, and a smattering of company updates, including from Bunzl, Sports Direct and Petrofac.
Interest in rates decision
Last month, the BoE’s monetary policy committee vote resulted in a surprise split, with external members Michael Saunders and Jonathan Haskel voting for a cut in interest rates.
The general election outcome will bring new lines of thinking in what is the last MPC meeting of the year and the penultimate gathering under governor Mark Carney, but it does not seem likely to bring any immediate change of heart.
With the base rate currently at 0.75%, where it has been since August last year, it is widely expected to remain unchanged as the decade comes to a close.
The odds strongly favour the MPC keeping rates unchanged on Thursday, but “there will be much interest in the voting margin and the tone of the minutes of the meeting”, said economist Howard Archer of the EY Item Club, wondering if any of the other seven members will vote for a cut and whether the minutes come across as more dovish.
“For now, we just about maintain the view that the BoE is most likely to keep interest rates at 0.75% through 2020,” Archer said.
“However, it is a close call and there is clearly a very real possibility that there could be a 25 basis point interest rate cut to 0.50% in 2020.”
It's worth noting, said economists at RBC Capital Markets, last month’s 7-2 split vote “revealed a degree of concern within the MPC” on the outlook for UK growth, in particular the downside risks to growth overseas.
But as the coming meeting comes just a week after a general election and is accompanied by neither a press conference nor a refreshed set of forecasts, “it is very difficult to see the MPC making any change to policy on this occasion”, RBC concluded.
Policymakers will of course have kept an eye on the latest set of labour market and inflation figures, due in the two days preceding the meeting.
Unemployment has been at long-term lows in recent years, though the rate is predicted to rise to 3.9% in October from 3.8% the month before.
Average weekly wage growth, meanwhile, is forecast to ease to 3.4% from 3.6% for both the total and ex-bonus measures.
Inflation numbers from November are due on Wednesday and not expected to move much, with the consumer price index having fallen to a three-year low of 1.5% in October, from 1.7% in September, and with analysts previously predicting that it is unlikely to rise above the Bank of England’s 2% target next year.
CPI is expected to remain at 1.5%, though some economists such as those from RBC seeing it drop to yet another three-year low of 1.4%.
If the prediction proves accurate and November brings signs of more slowdown, pressure may begin to rise on the BoE to cut interest rates.
On Friday, as politics news held the headlines, the BoE published its inflation expectations survey, showing that 39% of the public expect interest rates to rise over next 12 months, the lowest since August 2016 and down from 43% in August and 49% in May.
Before the election result was clear, only 6% expect a cut in rates over next year, down from 8% in the August survey.
Banks less stressed
Before all that, the week will start with the central bank’s annual stress test for the UK’s big lenders, which after the election result already boosted sentiment for the sector, will hope to further banish anxieties about the industry from slow economic growth.
Straight-A students Barclays, HSBC, Lloyds, RBS and Standard Chartered, as well as Santander and the Nationwide Building Society, all passed the test last year, not that it made much difference to their mostly stagnant share prices.
Big banks have struggled this year under pressure from low interest rates and stifled bond yields.
“The aim of the exercise will, therefore, be to give depositors and borrowers comfort that their bank or building society of choice is safe, ten years after the end of the financial crisis,” said Russ Mould at AJ Bell.
The test will see lenders hit with three challenges: one that will model how banks will cope with a five-year macroeconomic decline worldwide, including assumptions of UK property values plunging by over a third, unemployment rocketing to 9.2%, sterling falling against the dollar, with high inflation and interest rates hikes then kicking in.
Two more assessments follow, with a misconduct test and a financial markets test, which assumes 41% lower UK share prices, and corporate bond spreads jumping.
The big banks have been building up their capital buffers to cover riskier assets with cash and equity, and have also cut their leverage ratios to protect themselves against insolvency if the value of their assets fall.
As for shares, well, “if we remain stuck in this period of low growth, low inflation and low interest rates, with QE thrown in for good measure, the banks could struggle to provide the profits-surprise catalyst that would make investors want to revisit them”, Mould said.
Results of the stress testing, as well as the BoE's biennial systemic risk survey, will be published at 5pm on Monday.
A turn of Frasers for Sports Direct
When Sports Direct International Plc (LON:SPD) comes out with its half-year results on Monday, centre of attention will be how controversial chief executive Mike Ashley’s decision to buy troubled House of Fraser is turning out.
The FTSE 250 retailer’s never-ending acquisition spree culminated in last year’s £90mln deal for the department store, which Ashley promised to transform into the “Harrods of the high street”.
Doubts were raised when Sports Direct published its delayed full-year results earlier this year, with underlying earnings (EBITDA) down 6% to £288mln, which it blamed on taking on the “under invested and poorly managed” department stores, with Ashley even calling HoF’s problems “terminal”.
HoF is likely to remain “a drag on earnings”, say RBC analysts as department stores as a group face “continued structural pressures”, but that its long-term horizons are expanded.
Other retailers bought in the last 18 months by Ashley include Evans Cycles, Sofa.com and Game Digital, having also attempted takeovers of department store Debenhams, and Findel, the online retail and education group.
Nevertheless, in December, Sports Direct proposed to change its name to Frasers Group, in an effort to elevate the £1.8bn retail group beyond the sportswear for which it is known, after which shares have maxed out with year-highs.
David Daly, Sports Direct’s new chairman, said that it “demonstrates the transformation of the company over recent years into the holder of a diversified portfolio of sports, fitness, fashion and lifestyle fascias”.
If shareholders approve the name change when they vote on Monday, the chain of shops will not be renamed, the group will be known as Frasers, which may hope to distract investors from the many scandals Sports Direct has faced recently over its working conditions, as well as the boss being accused of “bullying” behaviour.
Bunzled up for Christmas
Results this year have been consistent with weaker economic conditions, with underlying revenue dipping 1% in the third quarter as per management expectations.
In October’s update, the FTSE 100-listed firm said there will not be any changes to the full-year projections, so investors will hope that stays put.
Sales have been growing through acquisitions and there are “a number of ongoing discussions”, with £100mln invested so far this year.
“It is not impossible that management will spring a little Christmas purchase on investors next week,” analysts at Hargreaves Lansdown said in a note.
Hunting warned in October that its full-year profits would be pushed to the lower end of market expectations because of a continuing decline in US onshore drilling.
Third-quarter underlying profits (EBITDA) had dipped below the US$35mln and US$42.4mln it had pulled in the first and second quarters respectively.
Sales were squeezed in the last three months by a slowdown in drilling across North America, the FTSE 250 energy services provider said, anticipating that US drilling will keep going downhill, affecting results for the second half of the year.
Volatile oil prices in the past few months have led to lower investment and budgets being exhausted in exploration and production companies, it added.
As a result of weakness in US onshore, UBS said its forecast for Titan, Hunting, largest division by revenues down 11% compared to the first half and EBITDA down 25%.
“In the trading update we will be looking out for any further colour here as well as any commentary on 2020 outlook”
Meanwhile, although still subject of an ongoing SFO bribery investigation, rival Petrofac put out some positive news, including the sale of the remaining 51% stake in its Mexican oil & gas assets to free up capital and make the group more firmly focused on its core engineering business.
Some of the proceeds were used on an ‘entry-level’ position in the US onshore market, with the acquisition of W&W Energy Services.
"The hope is that the deal will give the group exposure to growing activity in the Permian basin in the Southern US – one of the world’s largest oil & gas producing regions," said William Ryder at Hargreaves Lansdown.
“Far more important in the near term though is the group’s ability to win new business, and it’s the size of the order book that we’ll be paying particular attention to next week.
"Petrofac revealed that it had been awarded $120m of contracts in November – in both the North Sea and Malaysia – but, given the $2bn of contracts awarded in the first half, it’s really just a drop in the ocean.”
IntegraFin to keep profits up
Among the slim corporate pickings this week, IntegraFin Holdings PLC (LON:IHP) finals on Wednesday may not be bearing huge news as the FTSE 250-listed company released some revealing figures in a quarterly update in October.
The firm, which runs investment platform Transact, ended its financial year with funds under direction totalling £37.8bn, up 14% on this time in 2018 and ahead 4% quarter-on-quarter.
Net flows were down 9% to £891mln, with inflows shrinking 3% to £1.5bn and £584mln in funds flowing out, while positive market movements contributed to the uptick in funds under direction, generating £532mln, two-thirds as much as this time last year.
According to house broker Peel Hunt, full-year profits are set to grow 10%, thanks to “solid” net inflows and operational leverage from the technology platform.
“We remain of the view that IntegraFin is well positioned,” analysts said in a note.
“The platform continues to take market share, the overall market continues to grow, revenue margin pressure is less significant than a few years ago, and the consistent investment in technology is yielding benefits.”
Significant announcements expected for week ending December 20:
Monday December 16:
AGMs: Arc Minerals Limited (LON:ARCM)
Economic data: UK flash manufacturing PMI, UK flash services PMI
Tuesday December 17:
Economic data: UK unemployment
Wednesday December 18:
Finals: IntegraFin Holdings PLC (LON:IHP)
Economic data: UK inflation
Thursday December 19:
AGMs: Haydale Graphene Industries PLC (LON:HAYD), SkinBioTherapeutics PLC (LON:SBTX)
Economic announcements: Bank of England policy decision, UK retail sales, US jobless claims
Friday December 20:
AGMs: European Metals Holdings Limited (LON:EMH)
Economic data: UK consumer confidence, US personal incomes, US personal spending, US consumer sentiment