FTSE lower as pound spikes on u-turns, Persimmon margin grind, Babcock Brexit hit. - Forex News by FX Leaders
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FTSE lower as pound spikes on u-turns, Persimmon margin grind, Babcock Brexit hit.

Posted Tuesday, February 26, 2019 by
Neil Wilson • 3 min read

The FTSE 100 opened markedly lower, slipping 1% to around 7112 as the pound rallies on hopes of a Brexit deal. Dollar earners are the FTSE big guns and they are taking a hit. You have to wonder what the FTSE will hit if the pound ramps to around $1.40 on a positive Brexit deal – are investors prepared for this?

Sterling has rallied on movements in the political space that have encouraged the bulls. First, Labour is now backing a second referendum – one u-turn. If anything, though, this just hints at the party worrying about an exodus to The Independent Group. Secondly, and more importantly, there appears to be building pressure on the prime minister to take no deal off the table – another u-turn. If no deal is abandoned, it would likely entail a delay to Brexit, and whilst assuaging concerns about crashing out without a deal in place, it would not remove all the uncertainty. A key cabinet meeting today will reveal all – we hope.

GBPUSD has broken clear to a four-week high above 1.3150, looking to breach the Jan 31st high at 1.3160 before a move to 1.32. If that goes then last September’s highs at 1.33 would come into view. All this is dependent on the Brexit news flow however – but momentum is currently back with the pound. Outside the political sphere, risk events today centre on the testimony of Jay Powell.

Yesterday saw the main US indices fail their first attempt at breaching key resistance on the upside. The S&P 500 clawed its way up but closed well off the session highs. Look for the Oct-Nov twin peaks topping out at 2817. As detailed yesterday evening, we need a close above that to suggest a push back to all-time high territory is on. That is also sitting pretty much bang on the 78% retracement of the rout late last year from the all-time highs to the Christmas lows. On the Dow we are looking for a break north of the Nov high at 26277. I think we might expect a big tussle around these levels as bulls and bears fight for supremacy.

Equities

It’s been a touch week for Persimmon what with all the talk of it losing Help to Buy status, but nevertheless the company delivered a very robust set of full-year numbers, with profits topping £1bn for the first time.

Group and pre-tax profits were 13% higher than last year, with total group revenue for the year +4% to £3.74bn (2017: £3.60bn).

New housing operating margin rose to 30.8% from 28.2% last year, with a second half new housing operating margin of 31.8%. This is good work, but Persimmon may be taking this emphasis on profitability too far.

Margins of course are the real bone of contention – or at least how Persimmon is perceived to be squeezing every last drop of paint, every last nail and fixing from its work to deliver a trebling in the profit per home since 2012.

The outlook is pretty solid and shares have rallied 2% after falling heavily yesterday. As yet investors are still worried about the government’s intervention on Help to Buy. Interesting to note yesterday’s read across on house builder shares on the Persimmon report given the government is not looking at any of the others.

Babcock shares dipped 4% on the open after it said it will take a £10m one-off tax charge due to Brexit, although the outlook for the year ahead remains unchanged. It will also take a £30m charge relating to pension liability adjustments.

Underlying margins are however set to be ahead of last year, meaning management expects to deliver underlying earnings in line with current market expectations and slightly higher than last year. Underlying revenues are seen coming in at £5.2bn, a little lower than last year due largely to weaker activity in the rail business and power outages in South Africa affecting its operations in the country.

It’s been a tough period for Babcock but whilst there is still something of a Boatman overhang – still struggling from the Oct report warning about burying bad news, poor MoD relations etc – there is a sense that it’s beginning to shrug it off. MoD relations – worries about its ability to complete £200m HMS Vanguard overhaul for example, may not be at their best, but it doesn’t look like the doom and gloom portrayed by Boatman, whilst it can also point to a number of new contract wins. I’d stick to the view that the share price has been undervalued by the market as it’s been tarred by the outsourcer brush and longer-term fears about exposure to UK defence contracts. But this is no ordinary outsourcer – defence contracts are not open to all comers.”

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About the author

Neil Wilson // Chief Market Analyst at MARKETS.COM
His analysis regularly features on CNBC, Reuters, BBC, Bloomberg, Forbes and he is a regular contributor on TV and radio on financial markets. FX Street & Investing.com contributor, columnist for Investors Chronicle.
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