Pound slumps further as AAA doubts mount

The British pound slumped again on Monday, dropping against both the dollar and euro, as investors continued to fret over the weak economy and fate of the UK’s AAA rating.

Sterling has been declining all month, down 0.4% against the dollar this morning to $1.5742 and 0.3% lower against the euro to €1.1698. Friday’s report of a 0.3% decline in economic growth in the fourth quarter of 2012 has kept investors – and chancellor George Osborne – on edge that a cut to the UK’s AAA rating could come soon.

‘Everything, all the data, is coming in bad, there is pressure on the deficit target, and a looming threat that we are going to see a credit downgrade in the next few months,’ commented William Poole of FC Exchange.

This morning, it was data from Hometrack, which showed that the UK housing market stagnated in January.

‘Last week there was a lot of pricing in for low growth, now everyone is talking about a credit downgrade,’ Poole added.

Ole Hansen of Saxo Bank added that hedge funds were buying the euro, at the expense of currencies including the pound.

Pause in the rally

European equity markets, meanwhile, were flat after data showing Chinese industrial profits rose for a fourth month. The FTSE held steady at 6,284, taking a pause from a January rally in which it has risen by 6% amid the improving global economic outlook.

Investors are looking ahead to some major company earnings releases this week, both in Europe and the US, as well as key economic data from the US, where the Fed will be this week holding its policy-setting meeting.  

Premier slump

Shares in Premier Foods (PFD.L), owner of brands including Hovis, Oxo and Mr Kipling, slumped by 9% to 109p after announcing that chief executive Michael Clarke had quit after just 18 months.

The company said Clarke had ‘delivered the initial turnaround of the company and set a course for future sustainable profitable growth’.

The company’s casual tone was not matched by the City though. ‘That he is going just as the business needs to press on in a new chapter more dependent upon organic growth and trading than structural commercial engineering may be a concern,’ noted a surprised Clive Black of Shore Capital.

Black and colleague Darren Shirley added however that they expected strategic ‘continuity’ from new chief Gavin Darby, formerly of Vodafone and Coca Cola, who will start next Monday.

Home Retail and Capita suffer downgrades

Capita (CPI.L) was the biggest faller on the FTSE 100, dropping by 2.4% to 775p after Canaccord Genuity cut its rating on the shares from hold to sell. The analysts warned ‘Capita’s best days for growth are behind it’ partly because the coalition government’s procurement plans would limit the outsourcing company’s medium-term growth.

Argos and Homebase owner Home Retail (HOME.L) was also among the losers, down nearly 5% to 127p after Morgan Stanley cut the shares to ‘equalweight’ from ‘overweight’. The bank also downgraded Debenhams’ target price from 115p to 110p, knocking the department store chain’s shares, down 3.4% to 101p.

Borders soars after Darwin update

Shares in AIM-listed Borders & Southern (BSTH.L) soared, up 15% to 27p, after the popular Falklands oil and gas explorer upped its expectations for its Darwin gas discovery.

Initial studies had suggested that 130 to 250 million barrels of liquid could be recovered, with a mid case of 190 million barrels, but the company today said subsequent studies had shown the mid case could be as high as 210 million barrels.

Brendan Long, an analyst at Merchant Securities, reiterated his ‘buy’ recommendation for Borders & Southern, while placing his target price under review, as the developments ‘confirm our expectation that the Darwin discovery will be a commercial development.’

‘Today’s announcement, whilst clearly positive, illustrates the significant work required both financial and operationally to develop Darwin as a standalone discovery,’ commented Sam Wahab of Seymour Pierce, adding, ‘we continue to be buyers with a 56p/share price target.’

Mitie caution

Outsourcing company Mitie (MTO.L) was the top riser on the FTSE 250, up 2.1% to 287p after reporting that profits would likely meet expectations. Analysts at Peel Hunt described the update as in-line and positive overall, but they kept their ‘sell’ recommendation on the shares. ‘We remain cautious, given the risk to forecasts… potential deterioration in cash conversion… and questions over the highly priced Enara acquisition,’ said analyst Christopher Bamberry.

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