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No deal Brexit concerns dragging on UK stocks, and the pound

Having seen some markets in Europe post new record highs yesterday we’ve seen a little bit of a pullback this morning with financials amongst others seeing a little bit of profit taking, after three days of solid gains.

UK banks are lower in the wake of yesterday’s Bank of England stress test results , though this morning’s declines are unlikely to be predicated on these results, which all banks passed quite comfortably. Today’s sell off is more likely to be down to last night’s reports that the UK government is expected to enshrine in law the UK’s departure date from the EU, thus increasing the risks of a no deal Brexit at the end of next year. As a result both Lloyds Banking Group and Royal Bank of Scotland are amongst the biggest fallers.

UK house builders are also lower for the same reasons, having been the main beneficiaries of the last two days gains, with Barratt Developments and Berkeley Group near the bottom of the FTSE100.

In essence all of the big gainers of the past few days are giving back some of their gains as the reality check of the possibility of a no deal Brexit, while still over a year away, has tempered some of the enthusiasm from last Thursday’s election result.

In an unscheduled trading update Unilever this morning warned that it expected underlying sales growth for 2019 to come in slightly below previous expectations of its 3-5% range, sending the shares sharply lower to six month lows. The company has blamed challenging conditions in its South Asia markets, as well as West Africa. Management also said that markets in North America are improving, but this wouldn’t prevent first half growth from coming in below 3%.

Trainline PLC has been one of those rare IPO stories this year that has been a success. In its Q2 numbers the company, which joined the FTSE250 recently, raised their full year guidance saying they expected revenues to rise by 20% this year, after first half revenues came in at £129m, a rise of 29%. This improvement was largely driven by the UK consumer business; and this has continued to be the case in terms of this latest update. For the year to date revenues are up 26% to £198m, driven mainly by UK consumer business which saw revenues rise from £102m to £133m. International sales also saw good growth despite the strikes in France, rising 90%, to return £20m. The board confirmed their guidance from Q2 saying that while they expected a weaker second half revenues were still expected to improve by between 22% and 25%.

The pound has slipped back after the UK government unveiled plans to pass legislation to prevent the extension of the EU transition period beyond December 2020. This is a surprising move by the UK government given the size of the majority, which affords much more wriggle room from the UK side.

The rationale it appears would appear to be an attempt by the UK government to concentrate minds in terms of preventing procrastination when it comes to trying to come to nail down the terms of the UK/EU future relationship. It also serves to highlight how much trust has been lost in the negotiations so far, in terms of attempts behind the scenes over the past three years to undermine and delay the negotiations by those who wanted to prevent the UK leaving the EU.

On the economic front recent data has shown that the UK economy has stalled in the last three months, however wages have continued to look solid, well above 3% at 3.5%, while unemployment is showing little sign of edging up, still near 40 year lows of 3.9%. The big worry will be if unemployment starts to edge back above the 4% level as we head into 2020. This will be something that the new UK government will want to avoid having seen such a solid swing towards them in the latest election from some key traditionally working class seats.

US markets, having set more new records last night, look set to open slightly lower later today on the back of the slightly softer tone seen here in Europe, as well as last night’s announcement by Boeing after the bell, which is likely to see their shares come under pressure when they open later today.

Boeing announced last night that it intends to suspend the production of its 737 MAX fleet from January next year. It is somewhat surprising that it has taken so long for Boeing management to accept this reality. For weeks now we’ve seen Boeing pressure US regulators to issue safety certificates on a number of software patches to the MAX software. This was never likely to happen given the global scrutiny around these crashes with the FAA under pressure not to be seen to cave to intense lobbying from the US plane maker.

Over the last nine months Boeing has built over 400 of these planes which are parked in and around its various facilities. These further delays are likely to result in the company having to pay out further compensation to airlines affected by the groundings, as well as affecting the company’s supply chains which would be affected by a production suspension.

The delays also raise the prospect that the loss of confidence in the aircraft mean that the plane may well never fly again. Confidence amongst consumers in the aircraft is already shot to pieces and further delays are unlikely to swiftly assuage these fears. This would be a catastrophic outcome for a company that still has an order book of around 5,000 for these planes, and while this isn’t an outcome that investors are pricing in, the longer the delays the more likely Boeing may well have to go back to the drawing board.

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