December 20, 2016

Pegler’s market report – 20.12.16: The Fed finally take action

by David Pegler

in Insights Press Releases

As published in the Brighton Argus (20.12.16) Business on page 21 under the title Pegler’s Market Report:

The Fed finally take action

Last Wednesday, the Federal Reserve raised US interest rates for only the second time in 10 years, to a 0.5% to 0.75% range. The Fed also signalled that 2017 could see three further hikes, a more aggressive pace of increases than previously suggested.

However, the Bank of England’s Monetary Policy Committee did not follow the Fed’s lead, keeping UK base rates unchanged at a record low of 0.25% when it met on Thursday.

Meanwhile, a CBI survey reported that manufacturing order books are at a 20-month high, while export orders have softened for a second successive month. But expectations for output price inflation have risen to their highest for five years, as the cost of imported raw materials continues to be pushed up by sterling’s depreciation.

Only recently the Office for National Statistics (ONS) announced the biggest jump in inflation for two years. Consumer prices were 1.2% higher compared to November last year, with all categories except food contributing to the pick-up.

For the most part global markets continued their upwards climb driven primarily from dollar strength due to the Fed’s decisive action, higher oil prices and generally more upbeat economic data. The Dow was in touching distance of 20,000. The leading index of UK’s largest 100 companies found the 7,000 mark once again and European markets also followed suit.

It wasn’t so upbeat at Monarch Airlines as profits came under increasing pressure after the slide in the value of sterling compounded what the airline’s chief executive called the “toughest trading environment ever faced by the industry”. The downturn dealt a heavy blow to the embattled low-cost carrier, which was forced to rely on its fifth financial bailout in four years to avert a funding crisis that threatened to ground its planes.

In an update on trading in the year to the end of October, the airline said it expected earnings before interest, tax, depreciation and amortisation of £48m, compared to £74m the year before. It blamed a ban on flights to the popular Egyptian resort town of Sharm el Sheikh and the fall in the pound since the EU referendum in June.

Investors in Monarch had some respite after the business managed to secure a £165m lifeline from owners Greybull Capital alongside a restructuring of its £2.6bn deal with Boeing for up to 45 new aircraft.

Elsewhere in the market there was plenty of bid talk – Heineken is in advanced talks to buy Punch Tavern, the British pub franchise, in the midst of a bidding war from a co-founder currently looking to secure the funding necessary for a successful bid. Sky also came under the spotlight as Fox made steps to acquire the British broadcaster for up to £11.7bn.

By David Pegler, Brighton Capital Management