Global Markets Overview: UK
Updated: Sep 11, 2020
From 27 July to 10 August 2020
The FTSE 100 started with a steady uptrend last week as many companies released second quarter results. The UK Services Purchasing Managers’ Index (PMI), released last Wednesday, came in at 56.5 which is the fastest rate of growth seen in the last five years, up from 47.1 in June (anything above 50 is growth). Behind these recent optimistic results is the daunting prospect of a possible second wave of Covid-19, as parts of North-West England were put under further restrictions. On the back of recent fears, the price of gold increased above $2,000 per ounce for the first time last Tuesday, as traders look for a haven or at least a way to hedge their investments.
Although UK companies have started restoring dividend payments with more than £1bn dividend payments in recent weeks (as well as £4.5bn of maintained dividend payments), the UK is still in the early stages of economic recovery with growth coming from an exceptionally low base. Businesses are still extremely vulnerable to any lockdown change, highlighted recently by travel companies as quarantine restrictions were re-imposed on some international arrivals, most notably from Spain.
Consumer borrowing is rising again as households’ net borrowing rose by £1.8bn in June — the first increase since March — almost entirely from a return of activity in the housing market. Approvals of mortgages were over four times higher in June — at 40,000 — than May lows of 9,300. The housing market was boosted further in early July, as Chancellor Rishi Sunak raised the stamp duty threshold from £125,000 to £500,000 until next March (in England and Northern Ireland), helping house prices make a surprising rebound in July: increasing 1.7% compared to the previous month. The Government started its ‘Eat Out to Help Out’ scheme last week, giving consumers a 50% discount (up to £10) at participating restaurants on Mondays, Tuesdays and Wednesdays during August in the hope of rejuvenating the hospitality sector. Online retailers could face a new sales tax in the future while high streets continue to struggle in the wake of the pandemic, as the Treasury announced a review into business rates. The review, started by Chancellor of the Exchequer Rishi Sunak, will not be finished until next Spring, but the current thinking is that a 2% levy may be imposed (in addition to VAT) on online goods purchases.
Online retailers have thrived throughout lockdown whilst high street footfall continues to struggle, so it is no surprise that the Government is attempting to prop up the high street. However, a flat 2% levy on online sales will not address the imbalance between large and small online retailers, especially as many high street shops have an online sales presence and some large online retailers (e.g. Amazon and eBay) often act as an intermediary between consumers and smaller online sellers. The Government is presumably more focused on the revenues from this levy, expecting to raise £2bn a year, instead of the impact on retailers.
Despite a recent rise in the oil price with Brent Crude rising above $46 per barrel, the UK oil and gas sector sees little gain as investors react to dismal second quarter results. Oil major BP cut its dividend for the first time in a decade following a record Q2 underlying loss of $6.7bn (compared to $2.8bn profit in Q2 2019), although its share price saw gains as the loss was not as bad as analysts’ forecasts. BP also announced its long run plan to transition from being a traditional oil company to an integrated energy company hoping to reach net zero emissions by 2050. FTSE 100 rival Royal Dutch Shell managed to avoid a Q2 loss using its trading division to secure cheap oil to store and sell at a higher price. Back in April, like BP, it also cut dividend payments. Royal Dutch Shell has commitments to reduce the Net Carbon Footprint of its energy by around 65% by 2050.
The magnitude of BP’s announced transition away from oil and gas is quite a statement and it certainly helped their share price over the course of the release of Q2 results. CEO Bernard Looney is new to the job (appointed in February) and may be looking to make his mark on the company so as not to be cast in the shadow of his predecessors.
By James Parteka - Analyst at the York IFS Global Market Telegraph
This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 4.1 in early August 2020.
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