Langton Capital – 2016-02-08 – Daily Wrap: UK interest rates, bond spreads, Sterling & other:
Leisure Wrap & Other:
So the trading day is grinding to a close. We’re another day older but are we any wiser? After a day of intensive head-scratching, pen flipping and gossip, we have been considering the following. As always, contact us if you’d like further details:
UK interest rates, wider economy:
• Bank of England Governor Carney in the Bank’s latest Inflation Report almost came out & said that there would be no rate rises this year
• The Bank is looking at corporate bond spreads. That is the premium over gilts that corporations must pay on their bonds.
• This narrows when times are good. It narrows too much when times are too good (risk ceases to be properly priced in) and it widens when credit conditions are tougher.
• And it’s beginning to widen.
• This is most noticeable with high yield (more risky) bonds, which is understandable. The chart below is taken from the Bank’s Inflation Report.
• Here yield spreads have widened by almost 2% in the US and by around 1.25% in the Eurozone and the UK over the last year
• As regards AA bonds, spreads have widened but by more like 40bps.
• This is important for a number of reasons.
• Not least, it suggests bond-buyers, who tend to put their money where their mouth is, believe that credit conditions are ‘worsening’.
• In addition, it suggests that annuity rates should rise
• This will help pension deficits etc.
Currency moves have Sterling adopt mid-Atlantic position:
• The real news in the currency markets is USD weakness
• However, as Sterling is frequently seen as neither fish nor fowl, it is moving somewhere in-between the USD and the Euro
• Hence over the last few days, the Pound has strengthened against the USD but it has weakened against the Euro
• It doesn’t take a lot of analysis to work out, therefore, that the Euro has been extremely strong against the USD – this will have an inflationary impact on many commodities as these are priced in USD yet will move in line with demand from many other, non-USD currencies
Random information, hopefully not all of it useless:
• Domino’s price weak Friday on delayed consideration of Langton’s comment that its shares were looking perhaps a shade pricey
• Fuller’s & Young’s share prices reverse opening differential. Young & Co price up a shade last week whilst FSTA was down by more than 4%
• Punch and Enterprise differential, meanwhile, continues to widen.
• Former M&S boss Stuart Rose saying that we could see further consolidation on the High Street. See Nick Bubb, earlier. Morrison’s & Ocado also said to be having a spat & Next is being assailed by short-seller(s).
• Oil price kinda stable around $34. But everything’s relative. It has been $120 and $27 in the last year and a half
• China pretty much closed all week for New Year
• Tech stocks weak in US. NASDAQ at 15mth lows.
• Commodities. Gold really rather strong. Sugar now weakening. Cocoa and coffee remain weak.
• Hog prices on the up. Cranswick, a great, Hull-based company, has benefited from recent falls. Rises – though the company does have a number of herds itself and is represented throughout the supply chain – could put some pressure on margins.
We’re so 21st Century, this morning’s Tweets (diff. font size denotes importance):
1. BBPA reiterates UK beer drinkers pay twice European average in taxes + c13x more than in Germany
a. BBPA calls for further beer duty cut in Budget on 13 March. Says will help offset cost increases
2. Pret A Manger has been voted the Most Admired Brand in the UK foodservice industry for the seventh year running.
3. Mitchells & Butlers plans to convert another 10 pubs to its Sizzling Pizza & Carvery format by summer 2016, writes M&C.
4. Krispy Kreme is to push coffee sales, attempt to double revenues from coffee to 10% of total
5. Tax on sugary food & drinks may be gaining traction. Health Secretary Jeremy Hunt says it is not ‘off the table’
6. BrewDog is preparing to launch a new bar in Hong Kong, which will offer 14 different draft lines
7. A Spanish winemaker who died at age of 107 attributed his long life to drinking four bottles of wine a day. Do not try this at home…
8. STR suggests US hotel industry will soften in the future but says that doesn’t mean it will crash & burn.
9. French travel market recovering per Phocuswright. Says market totalled some €43bn in gross bookings in 2015.
10. Elegant Hotels announces agreement to buy Swiss International in Barbados, the owner of Waves Hotel and Spa for US$17.7m
11. UK hotel prices have increased dramatically due to the popularity of the Six Nations tournament, per Trivago
12. US economy adds 151k jobs in January, unemployment rate falls to 4.9%. Number sharply down on December’s 292k.