Market buzz: Challenger banks rise, analysts quarrel over BoE rate hike
Updated : 15:35
1527: With the poor outturn for the UK first-quarter GDP on the back of Mark Carney’s recent comments, Oxford Economics has joined along with those saying they no longer expect the BoE to hike interest rates next week.
However, they expect the MPC to hike once in 2018, at the August meeting, as "the MPC’s default position is to gradually raise rates, and that we expect growth to rebound in Q2 as the temporary factors that weighed on Q1 unwind, the rate hike is likely to be postponed, rather than abandoned".
1520: Sainsbury's has put out a customer-friendly video with CEO Mike Coupe explaining a bit more about the proposed merger with Asda, with counterpart Roger Burnley and Walmart's Judith McKenna chipping in.
Coupe says on the video that the deal is expected to close in the second half of 2019 after the CMA's 12-18-month phase 2 review process that is "there is there to protect the interest of customers".
1420: Challenger banks are among the top risers on the FTSE 250 following a report that the UK's small and mid-sized banks are bracing themselves for a fresh wave of consolidation.
According to the Financial Times, senior executive at a number of smaller lenders and high street banks said they expected a pick-up in M&A activity following last year's takeover of Shawbrook and FirstRand's acquisition of Aldermore.
Virgin Money and OneSavings are up on the news, 5% and 2.5%, respectively.
1401: Parliament's Treasury Committee will grill TSB chief executive Paul Pester, chairman Richard Meddings and a representative from Spanish parent Sabadell on Wednesday about the huge IT foul-up at the UK bank.
Nicky Morgan MP, chair of the committee, wrote to Pester last week and published the letter today.
"The Treasury Committee is extremely concerned by the problems at TSB, and by the apparent miscommunication to customers about the extent and nature of these problems," she said, adding that evidence will be taken from TSB and Sabadell "to find out how they got into this mess, who is responsible, and how they are putting it right".
1302: Morgan Stanley expects a "dovish hike" from the Bank of England's monetary policy committee next Thursday, with a split vote and cautious forward guidance.
"Despite hawkish MPC forecasts, we then expect an uncertain Brexit endgame to pause hiking for a year," said note from economist Jacob Nell and strategist Shreya Chander.
The pair gave three reasons for expecting a hike, with the MPC very much focused on inflation that is expected to be above target through the forecast horizon, plus "clear signs" of rising homemade inflation from the tight labour market feeding through to rising pay and domestic cost pressures. Thirdly, the MPC now has a "majority of hawks", with Haldane, Vlieghe and Broadbent "likely to hike, given their views and the tight labour market" in addition to McCafferty and Saunders who have already voted for a hike.
1207: Competition concerns will be "challenging" for the overnight deal announced between Sprint and T-Mobile, with analysts at RBC Capital Markets saying the merger "represents headline positives for all wireless operators and negatives for towercos given the implications for industry structure".
The companies are targeting regulatory approval by the end of 1Q19, with both the FCC and DOJ due to approve, along with state PUCs.
"We continue to believe the likelihood of a Sprint/T-Mobile deal approval is less than 50% based on criteria that we believe the DOJ would apply around industry structure (see HHI math inside) and the resulting sector concentration," says RBC. "We believe DOJ staff feel vindicated in blocking the AT&T/T-Mobile merger several years ago and would want to maintain a four-player market to preserve competitive behavior, whereas a three-player market may be susceptible to coordinated effects."
1144: There's a firmer tone across European and US stock indices this morning, says market analyst David Morrison at GKFX, as the upswing from the end of last week continues.
To refresh us, he recalled that there was a dramatic sell-off last Tuesday into Wednesday after the yield on 10-year T-bills broke above the significant 3.0% level and topped 3.03% before pulling back on Thursday. "The rally in bond yields (meaning a sell-off in bond prices) came as investors once again fretted about the outlook for inflation, driven to a great extent by the ongoing rally in oil," Morrison says.
Looking ahead to the US opening bell, he highlights the core PCE inflation figures that are due soon, which is the Fed’s preferred inflation measure and are expected to come in significantly below the central bank’s 2% inflation target though last month showed signs of picking up again, rising to 1.6% annualised after stalling out at 1.5% for the three preceding months.
"Another increase here will only add to inflation worries, particularly as there are concerns that US economic growth (like that in the euro zone) is rolling over," he says.
After Friday's first quarter US GDP rose 2.3% year-on-year, better than expected but still below the previous quarter’s 2.9%, Morrison says the potential combination of higher inflation and lower growth – stagflation – "is generally bad news for both bonds and equities".
1107: We could now be at a turning point for ASOS, says Morgan Stanley, "where revenue no longer surprises and the margins come into focus and under pressure".
The investment story for ASOS has been "similar to Amazon's", MS analysts say, with a focus on growth that has served it well, with the AIM-listed company's share price responding to revenue beats without changes to PBT.
The turning point comes as revenue is now less likely to surprise on the upside, with ASOS is no longer benefiting from FX-driven price investment and effective changes such as adding free returns or benefitting from higher thresholds on US import duties.
Analysts think declining return on capital employed "is likely to weigh on the shares", with capitalised software development costs as a proportion of sales now 5%, well ahead of most global eCommerce peers, which are also growing at 20%+ but capitalizing 1-3%.
MS has a 5000p price target, which is below the near-6000p current share price.
1101: The Sainsbury and Asda deal is a direct response to Tesco's acquisition of wholesaler Booker, says market analyst Neil Wilson, who has moved to Markets.com from ETX, in case you were missing him.
Tesco's moved gave it even more buying power from suppliers, which has been an important factor in its margins of late, he notes, with the 2016 spat with Unilever "instructive".
"With Booker, Tesco managed to gain more buying power without changing its share of the grocery market - the fact the CMA was so relaxed still beggars belief, but the fact remains. Asda and Sainsbury’s combined would clearly enjoy far more clout with suppliers than they have as separate entities - more even than Tesco-Booker, a not unimportant factor," he says.
"The CMA’s relaxed attitude to the Tesco-Booker deal is also a factor. The CMA waved through the Tesco-Booker deal on the nod but the boards of Walmart and Sainsbury’s cannot expect the same laissez-faire approach for their proposed mega-merger. Booker is a wholesaler and that difference should not be ignored. Significant store divestments will be the minimum required by the regulator. But it’s hard to see how this one can work from the regulatory perspective - what's interesting is that the share price reaction of SBRY does not see to discount the risk of failure. The initial knee-jerk jump may get pared in due course once we learn more about the CMA's response."
Looking at the regulatory and competition impact Wilson is withering.
"In short, lots of good reasons to combine and save, but it’s hard to see the CMA going for this one. The CMA is fickle but this looks easy to call - major store closures would be required as a minimum and this may benefit rivals more than the two parties in the transaction. Tesco would likely be the only buyer of any significance. Morrisons meanwhile is increasingly appealing as a target for Amazon. The rest don’t seem to have the desire to acquire multiple superstore sites. Aldi and Lidl look well poised to pick up market share more and more - the merger of Asda and Sainsbury may only make this process easier."
1043: Shares in WPP are up 8% this morning as investors look pas the weak Q1 numbers at a new strategic review and reports of possible M&A.
Q1 results showed revenues down 5.1% after a 6% FX headwind from the recent recovery of the pound, with like-for like group sales flat as North American sales fell 12.3% due to a 10.6% currency drag.
The positive reaction likely derives from a combination of factors, says Mike van Dulken at Accendo Markets, including Q1 not being quite as weak as expected and not enough to jeopardise 2018 guidance, with management expecting a slightly stronger second half.
Second, WPP, where CEO and industry legend Sir Martin Sorrell left under a cloud and non-deisclosure agreements earlier this month under, has announced that its current joint chief operating officers are taking a fresh look at strategy, focusing on growth.
Van Dulken also notes the potential for disposals of this advertising behemoth, with weekend reports that private equity group CVC Capital has approached WPP about acquiring its Kantar market research division, following the collapse of merger talks with peer Neilson, which had valued the unit circa £4bn.
"This could be a first step towards simplifying the media/advertising giant in the post-Sorrell era, allowing it address underperforming businesses and focus on growth, something we will hear more on from a pending strategic review," van Dulken says.
"If such a transaction goes ahead, might it be the opening scene of the break-up that many have been calling for after the group (or rather its CEO) got too big (for his boots)? Or just careful pruning? The results aren’t much to write home about this morning, so the share price reaction implies optimism about, not just turning a new page (post-Sorrell), but opening a new chapter, reinvigorating the group under new leadership (yet to be found)."
0950: Buyout activity in the UK and Ireland has had a slow start to 2018, with 45 deals completed compared to 65 in the last three months of last year.
The past quarter has seen an upward trend of deals with an enterprise value of less than €25m, says Unquote, a provider of private equity data and intelligence.
2017 saw more buyouts in the UK and Ireland in 2017 than in any other year since the financial crisis, with 215 deals worth a total of €39.5bn, with the largest growth bracket being for deals valued between €5-25m, up 84% year-on-year.
The CMA said ‘pre-notification’ discussions with the companies "to ensure they are supplying the information it will require before a formal investigation can begin" can last for a number of weeks.
Once the CMA’s formal investigation begins, the initial Phase 1 review would be expected to run for up to 40 working days, with the merger assessed for the potential to reduce comp0950etition and choice for shoppers, but due to the size of the deal it is likely to be referred for an in-depth, Phase 2 investigation lasting up to 24 weeks – unless the merging parties offered immediate proposals to address any competition concerns identified.
0916: Analysts at JP Morgan Cazenove looked at the antitrust implications for Asda and Sainsbury, each account for circa 16% of the market, alongside the 28% of Tesco, implying the two major grocers would eventually account for circa 60% of the market before CMA intervention.
"The CMA defines the market more broadly since the landscape has changed so dramatically in the last few years with the expansion within convenience, online and Amazon, the discounters, the Tesco-Booker merger etc. Hence, the deal has decent chances of being considered, in our opinion," the analysts said in a note on Sunday that's making its way around the City today.
"The process should be long (>1 year) as the amount of market participants, remedies etc. that might involve should be vast. There should be some space to be shut and stores to be disposed of, by both companies, we believe, albeit we would note in this context that the overlap between Asda (skewed to the North) and Sainsbury (to the South East) is much less than typically perceived by the market.
Cazenove wonders if this is Walmart's first move for an exit later, with the core focus being its US business and the competition with Amazon, growth in China, and key markets around the globe. Amid press reports of its interest in selling Brazil and in buying a stake in Flipkart and interest in Humana. "We believe an Asda exit could allow management to continue to prioritize its strategic efforts. Perhaps the deal with Sainsbury is a first step."
0857: Morrisons would be the most likely buyer of Asda or Sainsbury's stores if a merger is approved by the CMA and there are “remedy stores” to be sold, says HSBC, ruling Tesco, Co-op, Waitrose out and saying Aldi and Lidl would only be interested in a few.
The proposed merger "makes sense economically", the bank's analysts are saying, regarding food retail as "a quasi-natural monopoly where scale counts, but it brings risks".
HSBC says the CMA will consider whether the merger is "against the consumer interest", with local competition and market structure likely to be key issues. A full investigation would last a year, with the outcome "uncertain".
Neverthelss, Sainsbury's was upgraded to 'hold' with a target price of 270p upped from 210p "as shares likely to track sideways while market digests implications".
0844: Monday's London open market report shows the FTSE 100 on the front foot as the week begins, underpinned by the Sainsburys agreement with Walmart's over a merger with Asda.
At the blue chip index was up 0.2% to 7,513.27, while the pound was down 0.2% versus the dollar at 1.3758 and 0.1% lower against the euro at 1.1352.
0822: After confirmation of its agreed merger with Asda, Sainsbury's shares are up 17% to 314.9p.
The deal, says industry analyst Natalie Berg of NBK Retail, will undoubtedly generate cost synergies, but "doesn’t materially address the structural changes in the market".
She says the deal is about two things – scale and survival as industry margins have dropped from 5% to around 2-3% as a result of higher costs and increased competition from the discounters.
"Over the past five years, Aldi & Lidl’s combined market share has grown by 80% while online sales of non-food products have doubled. The only retailers that can sustainably compete on price with the discounters are other discounters. The discounters’ operating model is vastly different to the large supermarkets, given their focus on smaller outlets, a no-frills store environment and a limited, predominantly own-label assortment."
"Sainsburys and Asda went into this deal with the understanding that a significant number of stores disposals will be required in order to gain the green light from the CMA. In that sense, the deal is an opportunity to gain scale in face of rising costs and increased competition while simultaneously offloading some unwanted sheds. A decade ago, at the height of the space race, the supermarkets would have been more reluctant to let sites go. In a sense, this deal is an admission of today’s oversupply of retail space."
0803: Looking at the Sainsbury's-Asda merger, market analyst Japser Lawler at London Capital Group notes that short-sellers have been targeting retailers heavily over the past two years, meaning news of potential tie up between Sainsbury is likely to see many traders caught on the wrong side of the bet in early trade.
"The timing of this deal is key. It comes potentially as a response to the Tesco and Bookers merger, which passed through the competitions agency without remedies and at a time when pressure from Amazon has stepped up following their purchase of high end supermarket Whole Foods. Given the more challenging outlook for the sector in the face of recent Tesco/Booker and Amazon/Whole Foods tie up, Sainsbury and Asda were in danger of losing significant market share."