Global Markets Overview: UK
By James Parteka, Analyst at the York IFS Global Market Telegraph
From 22 September to 6 October 2020
The FTSE 100 gained 1.5% last Monday, driven by investors buying shares in sectors beaten down by Covid-19, before levelling off around the 5,900 mark for most of last week. Despite new coronavirus milestones for new recorded cases in the UK with hospital admissions and deaths both rising, the UK manufacturing Purchasing Managers’ Index (PMI) remained high in September at 54.1. Any value above 50 indicates growth, however September’s value was lower than the 2 year high of 54.1 recorded in August[i]. Andy Haldane, Chief Economist of the Bank of England said last Wednesday that ‘contagious pessimism’ was undermining the UK’s economic recovery following a 19.8% contraction in UK GDP for the second quarter compared to the previous 3 months. This beat the Central Bank’s estimated 20.4% contraction, however the recent resurgence of Covid-19 along with the introduction of the Government’s new Job Support Scheme will likely stall recovery below the estimated 7.5%[ii]. The European Commission announced it would take legal action against the UK on Thursday over plans to violate last year’s Brexit withdrawal agreement. The UK and EU are due to move into a hunkered down and intensified format of talks this week, called the ‘submarine phase’ by EU chief negotiator Michel Barnier[iii].
Brussels will attempt to sue the UK over Prime Minister Boris Johnson breaching the ‘good faith’ of last year’s agreement. Although the UK Internal Market Bill is not yet law, Brussels moved to sue after the UK ignored the end of September deadline issued to remove offending articles in the bill[iv]. Although the prospect of reaching a deal seems less and less likely as the end of October deadline approaches, both sides are continuing talks with the UK’s chief Brexit negotiator David Frost recently conceding defeat on securing zero-tariff access to the EU market for the UK car industry[v].
UK consumer spending remains high although recent indicators show the summer surge in spending was tailing off before the Government tightened national restrictions. Consumer spending was up just under 5% in late September year on year, however this is smaller than the 10% increases seen in August. Retail footfall has also begun to fall in recent weeks, especially in pubs and restaurants following an end to the ‘Eat Out to Help Out’ scheme implemented by Chancellor Rishi Sunak[vi]. Bakery chain Greggs said roughly half its staff would need to accept reduced hours or face job cuts from depressed trade resulting from Covid-19. Greggs CEO Roger Whiteside stated last Tuesday around 50% of food retailers’ stores had an excess of contracted hours than the company is expected to need once the furlough scheme has ended. Greggs has already closed 49 stores this year and its share price dropped by 7% by midday last Tuesday following the news[vii]. Ocado briefly became the most valuable food retailer on the UK stock market last week hitting a market capitalisation of £21.7bn overtaking Tesco’s value of £21.1bn. Share price drops last Wednesday for both companies with Ocado’s share price dropping 5%, pushed their market value back below Tesco’s[viii].
This recent event highlights the sign of a changing grocery market, especially as grocery shopping has become far more popular throughout the coronavirus pandemic. Tesco remains the largest supermarket in the UK by a long way dwarfing its closest competitors (Sainsbury and Asda) with Tesco’s dividend payments alone being close to all the operating cash flow generated by Ocado in the past decade[ix]. However, with Tesco’s share price being almost the same as 2014, Ocado’s continuous growth will likely put it above Tesco, and possibly many large supermarkets combined in the near future.
UK car output fell 44% in August compared to the same month last year as both domestic demand and demand for exports dropped. The chief executive for the Society of Motor Manufacturers and Traders (SMMT), Mike Hawes, said the drop comes as companies braced for a second wave of Covid-19 further pushing away the prospect of a return to normal for the UK car industry. The SMMT calculated that at least 13,500 jobs have been cut across the UK car sector this year, with one sixth of jobs in the industry at risk in the future[x].
The UK car industry was put further at-risk last week after David Frost conceded the EU would not grant preferential trade terms to the UK car industry. Hoping to gain a more flexible vehicle ‘rules of origin’ arrangement (under EU trade rules a vehicle must be 55% locally made to qualify for zero tariff access to the bloc), Mr Frost was not able to secure a cumulation agreement from the European Commission allowing car part imports from certain countries like Japan to be classed as ‘local’. This could have huge negative implications for the future of the UK car industry as 4 out of 5 cars produced in the UK are exported, with the majority going to Europe[xi].
This article was first published in University of York Investment and Finance Society's Global Market Telegraph (GMT) Edition 9.1 in early October 2020.
Reference list: [i]https://www.markiteconomics.com/Public/Home/PressRelease/e94ff418de5e4729b78e106c42810a3a [ii]https://www.ft.com/content/fed4fe06-8c6a-4272-b0b3-a0759805eb64 [iii]https://www.ft.com/content/af697135-1148-4f2e-b306-72080d937217 [iv]https://www.ft.com/content/8389cc9c-3ced-47f1-a85e-710ad20468a [v]https://www.ft.com/content/4fa4732b-877b-4994-bfc4-c8ae1cd80a78 [vi]https://www.ft.com/content/de0a92c5-2924-4fdb-82be-1f660315e7e6 [vii]https://www.ft.com/content/b328b5e5-9a38-42f0-a008-58d69b1bb687 [viii]https://www.ft.com/content/127ef784-ed72-4854-b776-9053d663563b [ix]https://www.ft.com/content/127ef784-ed72-4854-b776-9053d663563b [x]https://www.ft.com/content/96b50d78-b652-43fb-ba2d-d316f2065e06 [xi]https://www.ft.com/content/4fa4732b-877b-4994-bfc4-c8ae1cd80a78
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