A recovery in oil prices, which boosted index heavyweights BP (BP.) and Royal Dutch Shell (RDSB), and continuing Brexit-related weakness in sterling lifted the FTSE 100 34 points higher by the close to 7,038.95.
On Monday (3 December), Tuesday (4 December) and Wednesday (5 December) next week purchasing managers’ index data covering the manufacturing, construction and services industry in the UK are released. These come ahead of a looming vote on Prime Minister Theresa May’s Brexit deal which is expected to face defeat when it is voted on by MPs on 11 December. Next Thursday (6 December) oil producers cartel OPEC is set to meet in Vienna (see Economic update). Friday (7 December) sees the release of US non-farm payrolls data. The earliest release, based on hard data, to provide an insight into the health of the world’s largest economy.
Investors in the high-street banks breathed a sigh of relief this week after the Bank of England’s stress test (29 November) showed that they are more resilient to a deep global recession than they were during the financial crisis. Shares in Royal Bank of Scotland (RBS), which is still 62%-owned by the Government, enjoyed the biggest bounce as investors reacted to the news, followed by Lloyds (LLOY) and Barclays (BARC).
According to the stress-test results, the UK banking system could weather ‘deep simultaneous recessions in the UK and global economies that are more severe than the global financial crisis… combined with large falls in asset prices and a separate stress of misconduct costs’. Despite potential losses of £140 billion due to write-downs on loans and assets under the most extreme scenario, the banks’ overall core equity tier 1 (CET1) ratio, a measure of the ability of a bank’s balance sheet to weather financial shocks, would still be twice the level before the financial crisis and above the new, higher ‘hurdle rates’. The ultimate upshot is that even in a worst-case scenario none of the banks would need to raise more capital to continue lending and there is no need to change their current dividend pay-out plans.
Producers’ cartel OPEC is widely expected to take some action to curb output at its meeting next Thursday (6 December). In the current climate this is likely to do little more than stabilise oil prices. If OPEC fails to act, then another big fall cannot be ruled out. US included more waivers in its sanctions on major oil producer Iran than expected. This meant Iranian production and exports remained robust at a time when Saudi Arabia had been ramping up its own output to compensate for an anticipated shortfall.
Investors looking for exposure to the health care sector could consider Source US Health Care (XLVP) which provides exposure to a basket of US health care stocks for an ongoing charge of 0.14%.
4 December – Investors will be expecting plumbing products specialist Ferguson’s (FERG) first quarter update to reflect its exposure to a relatively buoyant US economy. The US accounts for around 80% of its sales and 90% of its operating profit. As well as selling plumbing fittings, Ferguson provides water-related products to utility companies and their contractors through its Waterworks unit.
6 December – British fashion label Ted Baker (TED) will be aiming to bounce back from a disappointing set of first half results, linked to weather and a hit associated with its concessions in troubled department store House of Fraser, when it updates on trading. Online sales, which have been growing rapidly, may be a rare bright spot.
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