October 11, 2016

Pegler’s market report – 11.10.16: The pound’s slippery slide

As published in the Brighton Argus (11.10.16) Business on page 21 under the title Pegler’s Market Report:

The pound’s slippery slide

Sterling has endured a rollercoaster week since Prime Minister Theresa May announced on Sunday during the Conservative Party conference that the formal divorce proceedings from the EU would begin by the end of next March. With fears of hard Brexit intensifying by the day, the pound hit a fresh 31-year low of $1.1841, surpassing its previous three-decade low of $1.2622.

The plunge in the pound triggered a profit warning from Sports Direct, sending shares plummeting as the sports retailer announced that it will take a £15m hit to its earnings next year due to the negative impact of a hedging strategy it had previously entered into.

Shares in Lloyds Bank also dropped after Chancellor, Philip Hammond, scrapped plans for a retail sale of the Government’s remaining stake, instead opting for a trading plan that will offload the taxpayer’s £3.6bn share gradually over the next 12 months.

US non-farm payroll data fell short of expectations, rising 156,000 last month, compared to forecasts of an increase of 175,000. Industry commentators do not think the shortfall will impact the chances of a December rate hike.

On Friday, the flash crash in the pound was the catalyst for the latest bounce in the index of the 100 biggest UK firms sending it back towards record highs. However, European bourses floundered in the red as investors turned their attention to the US jobs report.

Shares in easyJet, the low cost carrier, slumped to a three-and-a-half year low after it said it expects profit to fall by more than a quarter due to the pound’s weakness and security concerns. Negative read-across weighed on peers Ryanair and British Airways owner IAG, who shares also came under similar pressure.

On a more positive note, Croda International enjoyed a rating upgrade, sending shares higher as analysts got excited about the group’s recent investment in its US bioethanol facility that will enhance Croda’s credentials as a green chemicals provider.

Elsewhere, homeware retailer Dunelm, which has a number of Sussex stores, blamed the warmer-than-expected weather for a 3.8pc slide in its first quarter sales.

By David Pegler, Brighton Capital Management