- Rolls-Royce touches 16-year low after unveiling £2bn fundraise
- Markets rise on hopes US will agree stimulus package
- Manufacturing sector chalks up fourth straight month of growth
- Bank of England chief economist Andy Haldane warns against excessive pessimism
- Ambrose Evans-Pritchard: China: green saviour or climate villain?
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Manufacturers are leading the UK’s post-Covid bounce after a fourth successive month of growth in September, writes our economics editor Russell Lynch.
The latest snapshot of activity from the Chartered Institute of Purchasing and Supply – where a score over 50 signals growth, registered 54.1 last month – albeit a slight slowdown on August’s pace.
CIPS director Duncan Brock said manufacturers “made solid progress towards recovery” but also warned that firms had cut jobs for the eighth month in a row.
UK manufacturing recovery continues in September
The UK’s manufacturing recovery extended to its fourth straight month, according to the closely watched PMI survey. It recorded 54.1 in September, above the 50 level needed for growth.
Rolls shares sink further
Rolls-Royce shares continue to trough, down about 10pc after its fundraising announcement.
DCC is down more than 6pc.
Bottling company Coca-Cola HBC was the biggest riser on the FTSE 100, up more than 3pc, after a note from Goldman Sachs upgrading it to a buy.
Telegraph columnist Russ Mould of AJ Bell says “investors were hungry for a broad mixture of stocks on the UK market on Thursday”. On Rolls he adds:
The equity component of the new fundraise equates to a theoretical ex-rights price of 54.6p. It was only two years ago that Rolls-Royce was trading above £10, illustrating a massive fall from grace.Investors taking part in the share and bond issue need to have considerable faith in the aviation industry getting back on its feet.
Handing over money now to back Rolls-Royce would also require considerable patience as this is unlikely to be a rapid recovery story.
There are two factors to consider – the first is how long it will take for demand to return for plane travel. Airlines need to see sales improve to restrengthen their balance sheets. And that leads to the second factor – in general they can’t think about ordering new planes, and therefore engines, until they are in a much stronger position financially.
Eurozone manufacturing growth ‘strongest for over two years’
The final PMI reading for manufacturing across the eurozone is out. The number was 53.7, unchanged from its initial estimate. Remember, anything over 50 in this survey means growth.
Output and new orders were both up sharply, supported by resurgence in export trade, according to IHS Markit. The German manufacturing powerhouse was the biggest driver, it adds.
Chris Williamson, Chief Business Economist at IHS Markit said:
The eurozone’s manufacturing recovery gained further momentum in September, rounding off the largest quarterly rise in production since the opening months of 2018. Order book growth and exports also accelerated, indicating a welcome strengthening of demand. Job losses consequently eased as firms grew more upbeat about prospects for the year ahead, with optimism returning to the highs seen before the trade war escalation in early 2018.
The recovery would have been far more modest without Germany, however, where output has surged especially sharply to account for around half of the region’s overall expansion in September. Germany’s performance contrasted markedly with modest production growth in Spain, slowdowns in Italy and Austria, plus a particularly worrying return to contraction in Ireland. Excluding Germany, output growth would have weakened to the lowest since June.
Italy’s manufacturing activity rises
Stand by for a flurry of economic reports on manufacturing across the eurozone. The closely watched PMI survey for Italy improved to a 27-month high, according to IHS Markit. It registered 53.2 in September, up from 53.1 the month before. Anything above 50 indicates growth.
Lewis Cooper, economist at IHS Markit, said: “September PMI data signalled an ongoing recovery in the Italian manufacturing sector, with the headline figure the highest for 27 months and indicative of a moderate improvement in overall conditions.
“Improved client demand, both domestically and abroad, provided a further boost to the sector, leading to sustained and solid growth of both output and total new orders.”
H&M shutting stores
Fashion giant H&M has said it plans to shut 250 of its stores globally next year after the pandemic moved more shoppers online.
However, the Swedish company said it has seen sales continue to recover in September, although sales remained 5pc lower than the same month last year.
It came as the retailer reported that its pre-tax profits fell to 2.37 billion Swedish krona (£210m) for the nine months to August 31, topping analyst expectations.
US stimulus hopes drive markets higher
Could US politicians be about to agree a new stimulus package? Positive noises overnight have certainly given markets a lift.
The FTSE 100 is up around 0.64pc now at 5,902.54, having cooled a little since the open.
In the eurozone, Frankfurt’s DAX 30 index added 0.3pc and the Paris CAC 40 jumped 1.2pc.
“Hopes that a US fiscal stimulus package could be just around the corner, in addition to upbeat US data, is driving demand for riskier assets as trading kicks off in Europe,” says City Index analyst Fiona Cincottam, via AFP.
“US Treasury Secretary Steve Mnuchin said that (stimulus plan) talks are progressing very well,” she noted.
House Speaker Nancy Pelosi and Mnuchin have held a series of talks this week aimed at breaking the impasse and both have said they were “hopeful”.
Reports out of Washington say the two sides were looking at an “escalator” compromise in which the new stimulus starts at $1.5 trillion – around what Republicans are open to – and rises closer to the Democrats’ $2.2 trillion plan if the pandemic persists.
‘Least worst option’ for Rolls
Rolls-Royce shares are down about 2pc in morning trade, having initially fallen more. It’s still hovering at around a 16-year low.
Rolls going cap in head to shareholders for £2bn is the “least worst option to help it deal with the crushing impact the pandemic has inflicted on its core business”, says Susannah Streeter of Hargreaves Lansdown. She adds:
The aircraft [engine] manufacturer is in a bleak position given the collapse in international air travel. There is little end in sight for the falling demand for new planes and it’s already shed assets and announced mass job losses.
It had considered getting a cash injection from sovereign wealth funds in Singapore and Kuwait, but withdrew from those talks. It will instead raise another £1 billion through the corporate bond market…
This should all give Rolls Royce a lot more room for manoeuvre to help it navigate the Covid crisis.
This morning’s updates
What’s happening on the London market this morning?
- Halfords said it expects to surpass profit targets after strong summer sales momentum driven by demand for cycling and staycations continued into September. It now expects to post pre-tax profits above £55m for the first half of the year.
- FTSE 100 medical device manufacturer Smith & Nephew says underlying revenue for its third quarter fell 4pc, an improvement on the 29pc slump it recorded in the second.
- Southend Airport owner Stobart Group is “managing” its costs. It warned its airline, Stobart Air, is “operating below the scenarios” set out at the time of its £100m capital raise in June “due to the continued quarantine arrangements in Ireland, with limited flights operating”.
- Pre-tax profits fell 15pc at litigation funder Burford Capital in the first half of its year.
FTSE opens higher
The FTSE was up nearly 1pc in early trade, hitting 5,924.06. The FTSE 250 was 0.54pc higher at 17,408.52
Tokyo stock exchange loses a day’s trading
Here’s a bit more on that remarkable story in Tokyo, where the stock exchange lost a day’s trading because of a software glitch.
The shutdown frustrated investors looking to buy back shares after the first US presidential debate, and could tarnish the exchange’s credibility just as new Prime Minister Yoshihide Suga makes digitalisation a top priority and Tokyo looks to replace Hong Kong as Asia’s financial hub, Reuters notes.
The exchange blamed the outage on a hardware problem at its “Arrowhead” trading system, but added that it found no evidence of unauthorised access. It was the worst glitch since the exchange switched to all-electronic trading in 1999, it said.
Rolls-Royce to raise £2bn from shareholders
Rolls has unveiled details of its widely expected fundraising this morning.
It will raise £2bn in a rights issue and a further £3bn in loans as it looks to recapitalise its balance sheet in the face of the Covid downturn.
Rolls, which makes jet engines, said that the 10-for-three rights issue was fully underwritten by its banks.
Under the terms of a rights issue, shareholders have to buy newly issued shares or have their stake in the company diluted. The new shares will be priced at 32p and must be approved by investors at a meeting later this month.
FTSE to edge up
Good morning. The FTSE is tipped to edge higher after Asian markets climbed overnight – apart from in Tokyo, where a glitch wiped out an entire day’s trading on the stock market. Rolls-Royce is to tap investors for £2bn and seek more loans to shore up its finances.
5 things to start your day
1) Ignore ‘Chicken Licken’ pessimists, says BoE chief economist: Andy Haldane spoke as official figures revealed households saved record amounts in lockdown, giving them spending power for the recovery.
2) Firms wait for payouts as insurers appeal to Supreme Court: Insurers and the City regulator failed to reach an agreement to avoid appealing the High Court’s landmark judgment.
3) Government cracks down on “rabbit hutch homes”: Homes built using Permitted Development Rights must meet minimum size requirements even if they don’t need planning permission.
4) Sleepless nights at family coach firm: Coach companies call for government help as passenger numbers dwindle, despite schools reopening, as holiday-makers stay home.
5) GardaWorld turns hostile in £3bn battle to secure G4S: A transatlantic war of words broke out with the British company saying Gardaworld’s approach “significantly undervalues” its shares.
What happened overnight
Asian markets got the new trading quarter off to a stuttering start on Thursday with Tokyo hit by a computer glitch and several others closed for holidays, though there were healthy gains elsewhere in the region on hopes for a fresh US stimulus package.
Buying and selling on Tokyo’s stock exchanges was halted at around 8:35 am (2335 GMT) owing to “glitches linked to the delivery of market information”, operator Japan Exchange Group said in a statement.
The precise nature of the glitch, the worst in 13 years, was not explained further, but it meant the country’s top indexes – the Nikkei 225 and the Topix – were unable to open at the start of the trading day. Trade was halted for the entire day.
The issue was also affecting trade on several other exchanges, including in Nagoya and Sapporo, though the Osaka exchange was functioning normally though.
There was also no trade in Hong Kong, Shanghai, Seoul and Taipei owing to public holidays.
Australia’s S&P/ASX 200 gained 1.6pc by midday to 5,909.40 and Singapore rallied more than one percent while there were also gains in Jakarta and Wellington as investors picked up the baton from US traders.
Coming up today
Results: ( Interims) Burford Capital
Economics: Manufacturing PMI final reading (UK, Japan, Germany, France, Italy, Spain, eurozone, US), jobless claims (US)