In the absence of US markets yesterday, Asia markets had a rather quiet session. It’s not been a quiet start for European markets, which have slipped sharply on the open, as concerns about economic disruption in Europe weigh on sentiment, though the weak pound has helped underpin the FTSE 100.

It’s very much all eyes on Westminster today as MPs return from their summer break with a number of them determined to tie prime minister Boris Johnson’s hands and pass a motion that prevents the UK government from leaving the EU without a deal on 31 October. In an attempt to get out in front of this, the prime minister told MPs yesterday that he remained committed to leaving the EU on 31 October, imploring them to not undermine the UK’s negotiating position, while also implying that he would call an election if they were to do so. The implication was clear that MPs would be blamed if he was forced to go down this road, and while rebel MPs appear unbowed by this threat it is not immediately clear what they hope to achieve beyond stopping the UK leaving the EU, and getting another three-month extension. It is also worth noting that the EU may decide not to grant an extension even if the UK were to ask for one.

Pound plummets against dollar

Unsurprisingly, the pound has come under pressure once more as the prospect of an October general election comes into view, with some of the weakness also coming from the weekend headlines as to what a potential Labour administration might do to the UK economy if elected in any new poll.

When looked at through a prism of a no-deal Brexit, or a possible Corbyn-led administration, investors are being forced to take a view on what particular type of poison is going to be the least harmful. It is also a calculation that MPs will also have to take when they try and push this new EU bill through parliament over the next few days.

While the value of the pound is getting all the headlines, falling to its lowest level against the US dollar since the October 2016 flash-crash lows, below the 1.2000 level, it hasn’t been the only casualty against a US dollar that appears to sweeping all before it. The euro is also trading at its lowest level against the greenback for over two years, while the Australian dollar is also down near its lowest levels against the US dollar in the last 10 years, with the RBA painting a weak economic picture.

As for the next key support levels on sterling it really depends on who you talk to with various estimates of those October 2016 lows varying from between 1.1500 in extremis with some counterparties, and 1.1830 with others, with some counterparties not seeing any trading below 1.1950. What we do know is that the pound is looking extremely vulnerable at these levels, and if it stays at current levels against the US dollar, we’ll see the lowest weekly close since the mid-1980s.

Tesco sells mortgage book to Lloyds

Earlier this year Tesco announced its intention to offload its mortgage book as it looked to withdraw from a market that was becoming increasingly difficult to generate a profit, as falling interest rates and a slowing housing market slashed its margins. This morning Tesco confirmed that it had agreed a deal to sell the portfolio to Lloyds Banking Group for the sum of £3.8bn, even though last year the portfolio generated income of £81m and a pre-tax profit of £9m to the year ended 28 February 2019. From a commercial point of view the deal makes sense for Tesco is it looks to focus on its more core operations at a time when the UK mortgage market is only likely to become more competitive and when margins are likely to come down further. It’s also a decent fit for Lloyds, though it makes the bank even more exposed to the vagaries of the UK economy and the effect of further Brexit uncertainty on the UK housing market.

For some time now Ferguson management have come under increasing pressure from some of its shareholders to demerge its UK operations from its more profitable US operations. Trian Partners, an aggressive activist investor owned by Nelson Peltz, has been pushing this line for some time now and it appears to have had the desired effect, as Ferguson this morning announced plans to do just that, subject to shareholder approval. Management have adopted the usual line in these sorts of announcements that the split will allow each parts of the business to be able to focus on their core markets, with the UK operations reverting to the Wolseley brand. It rather makes you wonder what they’ve been doing up until now, if not trying to maximise business potential. Management have said that they are considering a range of options and will further consult shareholders in due course.

Restaurant Group reveals interim results

Over the past year we’ve seen a number of high profile restaurant failures as higher costs and falling margins have pressured the ability of businesses to attract UK consumers through their doors. Frankie and Benny’s owner Restaurant Group has been one such business, with its share price sharply down from its peaks in 2015 when it was well above 500p, a decline that accelerated in 2018 when the share price halved from 240p in May 2018 to lows of 110p in April this year. In an attempt to try and offset this decline as well as widen the business franchise, management decided to take the somewhat risky decision to pay £550m for the Wagamama restaurant chain, while the departure of CEO Andy McCue earlier this year also raised eyebrows. When the company reported its full-year numbers earlier this year, it was notable that Wagamama showed a strong performance, a hopeful portend of things to come perhaps, which helped the company see an increase in sales of 2.8% in the 10 weeks to March.

This morning’s interim results appear to reinforce that strength in the Wagamama brand, however the shares have slumped after the company announced a loss of £87.7m after taking a £115.7m impairment on its leisure business as the company wrote down the value of a number of restaurants across its portfolio, while closing 16 sites, with the Frankie and Benny’s brand seeing the biggest number of closures at 10. While the loss is disappointing, management do appear to be taking steps to cut out unprofitable areas of the business, and while that’s never particularly welcome, and costs money, it’s also necessary if the business is to move forward. In terms of current trading, like-for-like sales across the group were up 3.7%, with Wagamama doing a lot of the heavy lifting as LFL sales rose 10.6% in the first six months of the year. Management expressed optimism about the outlook saying that trading was in line with expectations, albeit with a cautious outlook about the prospects for future impairments.

US markets are also set to return from their long Labour day weekend and look set to open lower, with President Trump likely to have a few more words to say about the strength of the US dollar which has continued to grind higher, to another two-year high against a basket of currencies, as it looks to close in on the 100 level.

 

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