Lloyds Bank pays £1.9bn for MBNA, while UK retail sales climb - as it happened

Nick Fletcher

from on 2016-12-20 14:42 (#25XP5)

2.42pm GMT

US shares continue to forge ahead, with the Dow Jones Industrial Average making further strides towards the 20,000 barrier.

The Dow is currently up 61 points or 0.3% 19,944, as the post election rally continues. The S&P 500 has opened 0.22% higher and the Nasdaq Composite 0.3% better.

US markets are continuing to remain resilient despite the continued rise in yields and the US dollar, with the Dow looking to have another crack at the 20,000 level that it fell just short of last week.

It's been another fairly quiet pre-Christmas trading day for European equity markets which, after yesterday's brief pause have continued to build on the gains of the last few weeks with the Dax shrugging off the tragic events in Berlin, to put in another new high for the year.

The FTSE100 has also hit its highest level since October as both key European benchmarks reap the benefits of a weaker currency with the euro hitting its lowest levels since 2002 and the pound posting a one month low against the US dollar.

1.45pm GMT

Over in Greece, the euro working group is set to decide whether to reinstate short-term debt relief measures abruptly suspended last week. Helena Smith reports:

In Athens officials are privately expressing optimism that lenders will take the view the government's announcement of relief measures for the vulnerable "in no way conflicts with fiscal targets."

Prime minister Alexis Tsipras, who caught creditors off guard when he declared a budget primary surplus would allow his leftist led coalition to grant a one-off bonus to around 1.6 million low-income pensioners, is hoping today's teleconference will clear up "any misunderstanding."

Greece has been on a collision course with bailout partners since the measures were unveiled. Suspension of a planned VAT rise on islands in the Aegean hit by refugee flows - a second measure - was included in a draft bill put before parliament last night.

The hope is that the euro working group will unblock the debt relief measures it froze last week so that a second review of the economy assessing the headway Greece has made in implementing reforms can be concluded when euro zone finance ministers convene again on 26 January.

12.46pm GMT

The euro continues to fall against the dollar, heading closer towards parity. The decline is mainly a function of the strength of the US currency of course, as further interest rate rises from the Federal Reserve loom large. But the problems of the eurozone, including the troubled Italian banking sector, are also a factor, as is the horrific attack in Berlin.

The euro is currently down 0.5% at $1.0353, its lowest since early 2003.

Another day, anther multi-year high for the dollar. This afternoon saw the euro/dollar drop below last week's low to hit its lowest level since 2003. The world's heaviest traded pair has been falling sharply in recent times as disparity between Eurozone and US monetary policies grow. Whereas the ECB has turned even more dovish by expanding its QE stimulus programme to at least December 2017, the Fed has [raised] interest rates and has talked up the possibility of three further hikes next year. This is basically the driving force behind the euro/dollar's downward move and will probably remain so in the early parts of next year.

[The] next phase of the move could be severe in terms of magnitude. At a minimum, the euro/dollar, I think, would reach parity, possibly before the year is out. I think there is potential for it to drop even lower over time.

12.04pm GMT

Here's our report on the CBI's retail sales survey. Larry Elliott writes:

Retailers have been enjoying their strongest sales growth in more than a year amid signs from Britain's leading employers' organisation of a pre-Christmas consumer spending spree.

The latest health check of high street and online activity from the CBI found that sales so far in December beat expectations, were above average for the time of year, and led to retailers beefing up their orders to suppliers.

11.43am GMT

As if to confirm the CBI's comments about rising prices, the Bank of England's Ian McCafferty has pointed to the prospect of higher inflation, and reiterated the bank's stance that interest rates were as likely to rise as to fall.

In a speech at the Dorset Chamber of Commerce, he said that higher inflation, weaker growth and the fallout from the Brexit vote complicated the outlook for the UK economy:

This confluence of trends - rising inflation, initial demand resilience but a slowdown in growth in prospect and a likely hit to supply over the longer term - provides a challenging background for policy setting...

On the basis of our current understanding of the economy, the balance of risks around the outlook was two-sided, such that from the current level, any further changes in our policy stance in the near future were as likely to be upward as downward...

11.20am GMT

Consumers may be splashing out because they anticipate prices are heading higher, says economist Howard Archer at IHS Markit:

Retailers will certainly be hoping that consumers' willingness to spend holds up over the final part of the vital Christmas shopping period and into the New Year. The CBI survey indicates that retailers are more cautious about sales prospects in January although they still see them at a relatively decent level....

For now, consumers are still benefiting from decent fundamentals, notably relatively decent purchasing power and high employment...

11.17am GMT

Next year looks more challenging for retailers, ING economist James Knightley agrees:

Households are clearly willing to spend, but the headwinds for next year are strong.

The UK's Confederation of British Industry has reported that retailers have had a really strong Christmas trading period so far. A net 35% of retailers saw higher volumes of sales than 12 months ago, up from 26% in November and well ahead of the 20% consensus. This is the strongest reading since September last year and suggests that consumer spending will again make a big contribution to 4Q GDP growth. It also again highlights the resilience of the UK economy despite the Brexit uncertainty.

11.14am GMT

The CBI survey actually takes in the last week of November and the first two weeks of this month, so it includes Black Friday as well as the pre-Christmas shopping spree.

The CBI calculates its balance figure by taking away the percentage of retailers who saw falling sales from those who reported a rise.

It's encouraging to see retailers reporting another month of healthy sales growth leading up to the festive season, which rounds off a fairly solid quarter.

While we still expect to see decent growth in the near term, the pressures on retail activity are likely to increase during 2017, as the impact of sterling's depreciation feeds through.

11.04am GMT

So far in December retail sales have come in stronger than expected, according to the CBI.

Its retail sales index showed a balance of +35%, up from +26% in November and better than the expected +20%. This is the highest level since September 2015.

10.44am GMT

A quick update on the markets.

Despite the horrific events in Berlin and Turkey, leading shares are attempting to move higher.

Equity indices are trading flat on another sombre post-terror attack day with markets shrugging off renewed geopolitical risk and Travel stocks not suffering their usual knee-jerk weakness. The FTSE100 is treading water with Lloyds (MBNA purchase offers chance for growth) and big Pharma offsetting losses for HSBC, Oil majors and Tobacco despite the weak pound.

Major bourses remain close to highs, but may struggle to improve without a Monte dei Paschi recap/rescue in the bag. The FTSE 100 is sideways 6995-7020, waiting to pop one way or the other. The DAX 30 is holding its December uptrend above 14000, still trying to engineer a breakout to fresh 13-month highs. Dow Jones Futures are knocking at 19920 resistance trying to challenge 19965 all-time highs.

9.45am GMT

The Lloyds/MDNA deal owes something to the regulators, says Laith Khalaf, senior analyst at Hargreaves Lansdown:

Lloyds is backing itself despite the uncertain economic outlook, and this deal will mean the bank has now cornered a quarter of the UK credit card market.

This does mean a special dividend for 2016 has become less likely, but at the same time the additional earnings from the credit card book bolster the dividend-paying prospects of the bank in years to come.

9.23am GMT

News from Greece of a delay in appointing a new chief executive for the country's biggest bank. Greece's Kathimerini reports:

The process for the appointment of a new chief executive officer will resume in 2017, Piraeus Bank's governing board decided on Monday.

Earlier, the majority of the board had voted down the lone candidacy of Christos Papadopoulos due to reservations expressed by the European Central Bank's Single Supervisory Mechanism (SSM).

Piraeus CEO appointment put off for 2017 https://t.co/Ay7olyC6vv pic.twitter.com/Np9kACs8BS

again.. and then the government expects #Greece to have growth when it can't even appoint a CEO to its biggest bank https://t.co/NSTT311iDp

9.19am GMT

Back with the Lloyds deal to buy MBNA, and Neil Wilson, senior market analyst at ETX Capital, has a couple of concerns:

Lloyds says this deal will boost revenues by 650m a year and improve net interest margin about 10 basis points a year. The bank predicts earnings per share to rise by somewhere between 3% and 5% once the deal has been completed.

But we have to be sceptical about a couple of elements. First, this big purchase could take a long time to pay off and by eating up so much cash we have to question whether Lloyds can increase dividends as much as hoped.

The deal eats up 80 basis points of capital, which is about half of the bank's annual net capital generation.

The question we have to ask is whether this is good value for money at a time of great uncertainty in the market - defaults could rise if we start to get higher unemployment. Brexit makes the economic outlook very uncertain and Lloyds has just upped its exposure to UK consumer debt at potentially the worst moment.

8.48am GMT

You may well be fed up of the "festive spirit" already but don't let that stop you taking our Christmas quiz. No prizes but just the chance to show how much attention you've been paying over the past year:

8.37am GMT

Paysafe, the digital payment specialist which saw its shares slump earlier this month after a negative report from a short seller, is continuing its recovery.

The company, which dismissed the claims by Spotlight Research as either old or inaccurate, has jumped nearly 6% to 361p after it announced a buyback of up to 100m.

8.31am GMT

Here's our full story on the Lloyds/MBNA deal:

Related: Lloyds snaps up MBNA for 1.9bn

8.26am GMT

The German and French markets have now edged into positive territory. Connor Campbell, financial analyst at Spreadex, said:

The European markets got off to another slow start this Tuesday, investors struggling to find a reason to send the region's indices any higher.

The FTSE once again lingered around the 7000 mark, lacking any real impetus to push towards its all-time peak from earlier in the year. The pound, meanwhile, has continued to fall against the dollar; it now sits under $1.24, its worst price in around the month. Against the euro sterling has fared a bit better, remaining just above the a1.19 mark...

8.21am GMT

It was to be expected perhaps, after the events in Berlin and Turkey, but stock markets are struggling for direction at the start of trading as investors remain cautious.

The FTSE 100 is down 0.04% while Germany's Dax has dipped 0.04% and France's Cac is 0.03% lower. But the Spanish and Italian markets have managed to both edge higher.

8.18am GMT

Speaking of deals, the controversy over the maker of the new five pound note using animal fat in the production process has not put off a Canadian company from buying the business. Reuters reports:

Canadian label and packaging maker CCL Industries Inc said it would buy Innovia Group, whose unit is the supplier of Bank of England's new plastic five pound note that has fallen foul with vegetarians, for about C$1.13 billion ($842 million).

U.K.-based Innovia Group is a maker of specialty bi-axially oriented polypropylene films used for labels, packaging and security applications...

CCL is buying Innovia debt free and net of cash from a consortium of U.K.-based private equity investors managed by The Smithfield Group LLP.

8.01am GMT

Back with the Lloyds deal to buy MBNA, and Shore Capital reckons the move could rule out any special dividend to shareholders. Analyst Gary Greenwood said:

Although there is no change to guidance for a progressive ordinary dividend payment, this may colour management's thinking towards special dividend payments for the current financial year as management may wish to retail additional capital. Current guidance is for the group to generate capital before dividends equivalent of around 160 basis points of risk weighted assets in the current financial year. This is equivalent to around 5p per share and compares to our current full year dividend forecast of 4p, which includes a 2.55p ordinary payment and 1.45p special. It is likely that the anticipated special dividend may therefore be missed or reduced in order to finance the deal, albeit we would expect further surplus capital to be generated in subsequent years.

Overall, the anticipated financial performance and shareholder value creation that is expected to be generated by this transaction is impressive, in our view, and suggests a better use of capital than simply returning it to shareholders. That said, Lloyds will be broadly doubling up its exposure to credit cards at a particularly benign point in the bad debt cycle and ahead of a potential slow-down in the UK economy once the terms of the UK's exit from the EU are reached. While there is some latitude in the financial metrics to absorb potentially higher impairments, the risk cannot be ignored. In addition, we see limited scope for organic growth given the high post transaction market share and attention such growth may attract from the competition authorities.

7.56am GMT

Here's more on the Bank of Japan's more positive view of the country's economy. Reuters reports:

The Bank of Japan kept monetary policy steady and took a more upbeat view of the economy on Tuesday, reinforcing market expectations that its future policy direction could be an increase - not a cut - in interest rates.

Reflecting a pick-up in emerging Asian demand and factory output, the central bank upgraded its language to signal its confidence that the economy is headed for a steady recovery.

As widely expected, the BOJ kept unchanged its pledge to guide short-term rates at minus 0.1 percent and the 10-year government bond yield around zero percent.

Underscoring its optimism on the outlook, the central bank even revised up its view on private consumption - considered a soft spot for the Japanese economy, the world's third largest.

The market reaction to this move has generally been a stronger USD/JPY. Although the BOJ economic outlook is more upbeat, it isn't enough to compete with the Fed and its rate-hiking cycle for 2017, which will continue to give the US dollar the yield advantage. Japanese stocks like it though, and the Nikkei is up 0.5% already, as a weaker currency, a brighter economic outlook and a low interest rate environment boost the Japanese corporate outlook.

7.24am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

On a quiet trading week in the run-up to Christmas, Lloyds Banking Group has just provided a bit of merger excitement.

This shouldn't have been a surprise to most people given recent yen weakness which has come as a welcome relief to Japanese policymakers, after several failed attempts this year to weaken the yen. Even so the yen still remains above the levels it was when the Bank of Japan first pushed rates into negative territory in January, and reinforcing the reality that the only way the yen is likely to weaken further is as a result of future US policy moves.

Our European opening calls:$FTSE 7011 -0.08%
$DAX 11414 -0.11%
$CAC 4822 -0.01%$IBEX 9320 -0.17%$MIB 18889 -0.42%

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