Weakness in the energy sector after BP reported its worst results in a decade and another big downdraft in oil prices is hurting European stock markets.
The price of oil is weaker again on Tuesday, building on the sharp $2 per barrel loss seen on Monday. The oil price is still well off the lows this year but the likely absence of any joint cut in production from Russia and OPEC anytime soon puts the price recovery on shaky ground.
A -7% decline in heavily-weighted BP shares took 10 points off the FTSE 100 after the oil giant’s earnings missed expectations.
The only positive to be taken away from BP’s results was the maintenance of the dividend. Profits before and after adjustments both significantly undershot which reduces the capacity for BP to pay future dividends. It seems likely BP will have its credit rating downgraded in the not too distant future as the company slashes capex and increases leverage to sustain the same dividend it was paying when oil prices were more than double what they are now.
Sainsbury’s shares have reacted positively to the widely expected second offer to buy Argos-owner Home Retail. The deal was initially shunned by investors as a distraction form the main task at hand of repairing Sainsbury’s core UK grocery business which is under attack from discounters Aldi and Lidl. The tide seemed to turn on the sale of Homebase to Australia’s Westfarmers, which should make integrating Home Retail with Argos alone into the Sainsbury’s group easier.
The supermarket sector is not going to be a growth industry for the big four grocers anytime soon. It makes sense for Sainsbury’s to think outside the box of a race to the bottom of asset sales and price reductions alongside Tesco, Morrisons and Asda. Amazon are gradually moving into the grocery business so Sainsbury's CEO Mike Coupe must be of the opinion that the best form of defence is offence. Offering Argos collection in store is likely to broaden the appeal of Sainsbury's core grocery business, helping in the fight for Market share against discounters Aldi and Lidl.
The major sticking point for the deal could be the price, Sainsbury's are raising their bid to a 63% premium over Home Retail’s share price before discussions of the deal were reported. The 161.3p per share offer seems reasonable if you consider Home Retail’s historically share price. In 2007 Home Retail was valued at 500p but the group’s latest profit warning justifies the current share price. The deal’s supposition that the fortunes of Argos will change substantially under Sainsbury’s is questionable.
The euro got a positive jolt after Germany reported its lowest unemployment rate since records began after reunification.
US markets look set for a lower open despite strong afterhours earnings from Google-owner Alphabet as front-running presidential candidate Donald Trump was beaten in the Iowa Republican caucuses by Texas senator Ted Cruz. Alphabet’s results are expected to catapult shares to a fresh record high and take the company above Apple as the largest by market capitalisation in the world.
USA pre-opening levels
S&P 500: 20 points lower at 1,919
Dow Jones: 173 points lower at 16,276
Nasdaq 100: 39 points lower at 4,247
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