- Quiet start in UK and European markets after heavy losses on Wall Street
- UK GDP growth revised to 0.2% from -0.1%
- Sterling bounces back
- Water Utility Pennon trading in line but feeling pinch on interest and energy costs
- Numis struggling with weak capital market conditions
- Funeral provider Dignity sees half year profit collapse
Steve Clayton, Fund Manager at HL Select:
“The UK and European futures markets are indicating a quiet start to trading, despite a torrid session on Wall Street last night. The broad-based S&P 500 index lost 2.1% whilst the tech-heavy NASDAQ dropped by 2.8%. Currency markets however are more settled, with sterling having recovered the ground lost after the mini-budget, to stand today at $1.112 and €1.133.
Economics – Q2 GDP revised up, 2020 was worse than first thought
The Office of National Statistics has released its revised view of recent GDP data this morning. Growth in Q2 of this year has been revised up from -0.1% to growth of 0.2%. Hardly a blistering pace, but enough to mean that the UK has not already entered recession, contrary to some forecasters’ views. The ONS have also revised their view of how the economy performed through the pandemic; 2020’s contraction is now estimated to have been much worse than previously thought, with a contraction of 11.0% compared to the previous view of a 9.3% slippage. 2021 also gets revised, with growth of 7.5% compared to the first view of 7.4%. This now leaves the overall size of the economy 0.2% below the pre-pandemic level, whilst Q2 2022 was 4.4% greater than the level in the prior year.
These numbers are basically a nip here, a tuck there. The most significant thing perhaps is that compared to where the ONS first stood, the overall scale of the economy is 0.8% below previous estimates, which suggests that the tax base will also be smaller than previously believed. That raises the stakes for Chancellor Kwarteng who may well find that the taxes available to fund the operations of Government are less than he first thought when he was planning the mini-budget.
Will this impact how traders view the pound? Markets have been coming round to the view that the unfunded tax cuts were less significant than first seen, with the pound recovering strongly in the last 48 hours. There are a lot of moving parts currently and bond yields are edging lower again this morning. Most of the movement is at the ten-year maturity, where yields are down 6bps to 4.08% at the time of writing. The 30-year maturity is also firmer, with the yield down 4bps at 3.93%.
Stock Market News – Q3 limps to a close
Before taking into account today’s moves, Q3 will have been a pretty dreadful quarter for many investors in the UK stock market. Larger companies, represented by the FTSE100 index have generated total returns of -3.0%, including dividends, whilst their mid-cap counterparts in the FTSE 250 index have fallen far behind losing around 9.3%, even after adding those dividends back. Markets peaked in mid-August, and if you measure the declines from then, the FTSE100 is down around 9.0% and the FTSE250 has lost a thumping 17%.
The losses are greater for the mid-cap index because it is more exposed to the UK economy than the multi-nationals that dominate the FTSE100.
With today being the last day in the quarter, company news is quite limited, but Pennon Group, the Water utility covering much of the South West of England has issued a trading statement. Pennon see themselves as performing pretty strongly operationally, but the rising costs of power and debt servicing mean that numbers are likely to be coming down. Power costs are roughly doubling to £106m for the full year. The group make less use of index-linked debt than most water companies, but even so, each additional 1% point of inflation is set to cost the group an extra £8m in financing costs. Pennon shares dipped almost 2% in early trading.
Elsewhere, stockbroker Numis Corporation has spelled out the impact of weak market conditions on its own business. Capital Markets revenues are down 39% on last year and whilst the group is working on a large book of announced M&A deals, Numis see full year revenues declining by a third, but if those deals progress to completion, the group should have a strong start to its advisory revenues in the new financial year about to begin. The market preferred to look at what was left in the bag for this year, rather than what might turn up in next year’s catch and pushed the shares 2.7% lower.
Dignity plc, the UK’s largest group offering funerary services reports interim results this morning. Post pandemic, death rates are down, which is good news for everyone except funerary service providers. This, coupled with a more competitive pricing strategy has led to Dignity’s earnings for the half-year collapsing by 97% to just £0.6m and the stock was down over 6% at the opening.”
