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US data raises hopes of more Fed action
- Miners drag on FTSE 100; ENRC drops 6%
- FirstGroup slumps as Branson slams West Coast win
- Standard Chartered shares gain after US settlement
- Resolution announces overhaul, pleasing investors
- UK unemployment drops, while Bank of England releases latest meeting minutes
15.30: A wave of economic data in the US has helped turn markets around, as the outlook on the economy deteriorated and modest manufacturing figures could encourage an easing in monetary policy.
Industrial production rose to 0.6% last month, better than a forecast 0.5% for July. However the Empire State manufacturing index, which measures New York manufacturers’ outlook on the economy, dropped dramatically to -5.9, short of an expected 6.6 giving the lowest reading since last October.
Inflation, measured by the consumer price index (CPI), registered flat for July, behind a forecast 0.2%.
Rob Carnell, chief international economist at ING, commented: ‘US inflation is not a constraint on monetary policy, and so its July sub-consensus 0.0% month-on-month reading, taking the headline inflation rate down to 1.4% year-on-year, is really neither here nor there.
‘If 1.4% year-on-year marks the bottom for US headline inflation, it still leaves inflation in a helpful position for the Federal Reserve to unleash a more substantive set of policy easing measures at the September meeting.’
On Wall Street the Dow Jones Industrial Average remained flat at 13,172; the Standard & Poor's 500 index rose 0.15% to 1,406; and the Nasdaq Composite index took on 0.16% to 3,022. Most European markets are now in positive territory, while the FTSE 100 is pulling back from earlier lows, now down just 0.2% at 5848.
Miners drag on FTSE 100; ENRC drops 6%
13.30: The FTSE 100 remains lower as poor results from Kazakh miner ENRC prompt concerns about the wider industry and mining stocks hold the blue-chip index down.
The blue chip index has shed 0.42%, or 25 points, to 5,840 and the Mid-250 index is off by 0.12%, or 14 points, to 11,490.
Eurasian (ENRC.L) is down 27p, or 6.5%, to 387p as its first half profits plunged on weaker commodity prices.
The group announced it will cut investment expenditure in the coming year and is reviewing its $11.1 billion (£7.07 billion) investment pipeline. Eurasian’s pre-tax profits fell 59% to $667 million (£425 million) in the first half of the year, from $1.63 billion (£1.03 billion) in the same period of 2011.
Other mining stocks languish at the bottom of the FTSE 100 on concerns about the impact of poor global demand and weakening commodity prices on the wider industry. Rio Tinto (RIO.L) is down 139p, or 4.5%, to £30.48; Evraz (EVRE.L) has shed 10.2p, or 3.8%, to 263p; and Vedanta Resources (VED.L) is lower by 10.6p, or 3.8%, to 262.5p.
FirstGroup slumps as Branson slams West Coast win
10.40: Investors have been unnerved by FirstGroup’s (FGP.L) victory over Virgin Rail to operate the West Coast rail franchise until 2026 – especially after Richard Branson warned that past 'overbidders' had gone bust.
‘We… did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise as happened to GNER and National Express who overbid on the East Coast mainline. Sadly the Government has chosen to take that risk with First Group,’ wrote Branson today in a blog post.
‘Insanity is doing the same thing over and over again and expecting different results. When will the Department for Transport learn?’ Branson added, noting it was the fourth time that Virgin has been out-bid in a rail tender.
The Government decision to award the West Coast Main Line Franchise to FirstGroup is extremely disappointing for Virgin, and for our staff that have worked so hard to transform this railway over the last 15 years. We submitted a strong and deliverable bid based on improving customers’ experience, increased investment and sustained innovation. To have bid more would have involved dramatic cuts to customer quality and considerable fare rises which we were unwilling to entertain.
We also did not want to risk letting everybody down with almost certain bankruptcy at some time during the franchise as happened to GNER and National Express who overbid on the East Coast mainline. Sadly the Government has chosen to take that risk with First Group and we only hope they will continue to drive dramatic improvements on this line for years to come without letting everybody down.
We won the franchise in 1997 with an agenda to change radically the way people viewed and used the train. At the time the track was run-down, staff demoralised, the service riddled with delays and reliant on heavy subsidies. We set hugely challenging targets to dramatically speed up journey times with modern tilting trains, increase the frequency of the service, improve the on-board experience; as well as double passenger numbers and return the line to profit.
We were told it was "Mission Impossible" and our plans were laughed at by critics. However 15 years later, despite continued problems with the track, we have achieved our targets. Passenger numbers have more than doubled to over 30 million, the fastest growth in the UK and world leading. We have the highest customer satisfaction of any long distance franchise operator and dominate the air/rail market between London and Manchester. It has been a remarkable achievement by an outstanding team who have successfully delivered on our promises.
I am immensely proud of our staff for turning the West Coast line from a heavily loss-making operation into one that will return the taxpayer billions in the years to come. Last year we paid a net premium of £160 million to the taxpayer and have created a franchise worth more than £6 billion which is hugely valuable to the country.
These achievements have counted for little – as this is the fourth time that we have been out-bid in a rail tender. On the past three occasions, the winning operator has come nowhere close to delivering their promised plans and revenue, and has let the public and country down dramatically. In the case of the East Coast Main line, both winners – GNER and National Express - over promised in order to win the franchise and spectacularly ran into financial difficulties in trying to deliver their plans. The East Coast is still in Government ownership and its service is outdated and underinvested, costing passengers and the country dearly as a result.
Insanity is doing the same thing over and over again and expecting different results. When will the Department for Transport learn?
Interestingly before Virgin took over the West Coast there were more passengers using the East Coast than the West Coast. Now there are 12 million fewer.
Under our stewardship, the West Coast Mainline has been transformed from a public liability into a valuable asset for the UK, worth many billions of pounds. The service is a British success story and one to put up against rail companies around the world. It is a great shame that such a strong track record has been discounted in the evaluation process for one of the UK’s most important infrastructure assets. The country's passengers, taxpayers and the West Coast employees deserve better.
Based on the current flawed system, it is extremely unlikely that we would bid again for a franchise. The process is too costly and uncertain, with our latest bid costing £14 million. We have made realistic offers for the East Coast twice before which were rejected by the Department for Transport for completely unrealistic ones and therefore will have to think hard before embarking on another bid.
Our amazing staff have been the driving force behind the West Coast Main Line’s transformation and I am sure that for the last months of the contract they will all continue to run the high quality service that has helped win us many awards and attract millions more customers to rail.
Richard Branson, Founder of Virgin Group
First Group’s shares had risen recently in anticipation that the company would win the bidding process for the London to Scotland route, but are today down 7% to 240p. The company highlighted the route’s annual revenues of around £900million, while promising more seats, improved services and stations, and cheaper fares. It will pay the government £5.5 billion over 13 years, less than some news reports had speculated.
Union leaders and transport experts said the big question was whether FirstGroup could deliver on its promises, while financial analysts were cautious. Joe Spooner of Jefferies said: ‘It is the assumptions underlying the bid model that should be the focus for investors, and an assessment taken as to whether those are deliverable.’
‘From here, we'd expect the shares to start settling back as the market assesses this bid, which at first reaction may not be priced for the higher levels of risk accepted.’
Shore Capital is reviewing its forecasts, while retaining a ‘hold’ recommendation on the shares. Analyst Karl Burns said First Group’s revenue growth assumptions ‘look aggressive’.
‘Despite today’s franchise win, we believe the group’s balance sheet retains too much leverage… whilst recovery, at this stage is uncertain,’ he added.
Bank of England unanimous in holding QE and rates unchanged
09.45: The Bank of England’s policy-setting committee voted unanimously against extending the £375 billion quantitative easing programme at its meeting earlier this month, according to minutes published today.
Despite the worsening economy – the Bank of England itself has just downgraded its forecasts – little support had been expected for an immediate expansion of the economic stimulus programme as the £50 billion extra of asset purchases announced in July will take until November to complete.
The Bank also wants to monitor the Funding for Lending scheme that it has just launched. ‘Over the coming months, the Committee could take stock of the impact of the FLS and the implications this had for other potential policy options. For some members the decision was nevertheless more finely balanced, since a good case could be made at this meeting for more asset purchases,’ the minutes say.
The nine man monetary policy committee (MPC) also voted unanimously against any change to the base interest rate, which remains at the record low of 0.5%.
The release of the minutes coincides with figures showing that the UK unemployment rate has fallen, to 8% for the period from April to June, while the employment rate has risen to 71%, up 0.4 on the quarter.
There were 2.56 million unemployed people, down 46,000 on the quarter. Figures on the UK labour market have repeatedly beaten expectations, baffling economists who say they should be worse, considering the state of the economy.
Resolution announces overhaul
09.04: Shares in Resolution (RSL.L) have shot up to the top of the FTSE 100 this morning after the UK life-insurance consolidator announced a re-organisation that, as one analyst described it, means it will behave like a 'normal' UK life insurance company.
The company will no longer seek acquisitions, it said as it announced a more than halving of its pre-tax operating profit to £137 million this morning, while it has scrapped plans for stock market flotations of separate businesses including Friends Life.
The company has also adopted ‘a more conventional, simplified governance structure’, with chief executive John Tiner to step down and a board shake-up under which:
- Mike Biggs will remain as chairman
- Sir Malcolm Williamson will become the deputy chairman
- Founder Clive Cowdery (pictured above) will join the Board
- Andy Briggs will become CEO and Tim Tookey will become CFO
Resolution also raised its interim dividend by 5% to 7.05 pence per share.
Andy Broadfield at Barclays Capital said: ‘It has, in effect, decided to behave like a 'normal' UK Life company. This now changes the way that investors will view the company, with much greater focus turned to its operational performance, not simply in terms of back book management, but also on issues like its brand, distribution, product design etc.’
‘We think this is the first step on a long journey to recreate the investment case for this stock’.
Matthew Preston at Berenberg commented: ‘The stock is now a very different proposition from the one investors signed up to at inception. It is now arguably a fairly ordinary UK life business, with significant work to do if it is to become a peer-leading one’Shares in Resolution – which have been hard-hit this year – rose by 6.3% to 233p
Standard Chartered gets off lightly
08.26: Standard Chartered is not totally in the clear yet, though the fine from the US regulator (see post below) was a very good result for shareholders, analysts seem to broadly agree this morning.
Gary Greenwood of Shore Capital described it as an ‘excellent result’ for Standard Chartered, ‘in terms of the size of the settlement… the fact that the banking license has been retained… and the speed with which the issue has been resolved’.
He added: ‘The only question we have is whether the group will now need to reach similar settlements with the four other regulators that we understand have been investigating the matter and how much this might cost?’
Michael Symonds of Daiwa Capital Markets described the fine as ‘easily manageable’.
Referring to the other US agencies that are still investigating Standard Chartered, Symonds said ‘we think a more orderly joint settlement with the remaining agencies – including further large penalty of course – is the most likely outcome here.’
Ian Gordon of Investec said the risks of further regulatory costs ‘appear sufficiently contained’.
According to Reuters, Nomura this morning raised Standard Chartered’s price target to 1600p from 1500p (with a ‘buy’ rating), while Bank of America Merrill Lynch raised the shares to a ‘buy’ rating.
The shares still have a long way to go to reach the levels they were trading at before the news originally broke on 7th August.
Standard Chartered shares gain after US settlement
08.07: Standard Chartered (STAN.L) shares jumped higher this morning after the bank agreed to pay $340 million to the New York regulator over allegations that it has broken US sanctions against Iran.
A hearing scheduled for today that investors in Standard Chartered were dreading – where the bank could have lost its US banking licence – has been adjourned, the New York regulator said in a statement.
Under the settlement, alongside the fine Standard Chartered also must install staff in its New York branch to oversee the bank’s efforts to prevent money laundering.
Standard Chartered, which has mounted a robust defence of its activities since the accusations were made, put out a brief statement, adding that a formal agreement containing the detailed terms of the settlement is expected to be concluded shortly.
Shares are up 4.5% at 1432p, while the wider FTSE 100 has started down 0.4% at 5841.
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