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BT Shareholders Openreach For The Stars

Published 12/03/2017, 05:28
Updated 25/04/2018, 09:10

Banks and oil help stocks rebound

Stock markets spent most of Friday in positive territory with investors still unwilling to bet against higher prices despite strong odds of a rate increase in the US next week. Data showing solid US job growth makes a rate hike at next week’s meeting of the Federal Reserve a near certainty.

The highest yields on German bunds for a month, which have moved in concert with US treasuries on expectation of a rise in US interest rates, supported European banking shares. Crude oil steadying nearing a three-month low boosted the energy sector. One of the Square (NYSE:SQ) Mile’s favourite rumours, that of Exxon (NYSE:XOM) buying BP (LON:BP) was an additional support for the shares of Big Oil.

BT (LON:BT) shareholders Openreach for the stars

Agreement reached over the ‘legal separation’ of BT from Openreach sent shares of the former to the top of the UK equity benchmark. Investors have been drawn in by the removal of short term uncertainty surrounding the separation.

Investors are making the bet that competitors like TalkTalk and SKY PLC (LON:SKYB) pull back from lobbying Ofcom for BT’s complete separation from Openreach. We tend to think TalkTalk would be better to focus on its own security issues given the revelations of customers being defrauded for Indian call centres, and Sky has the Twenty-First Century Fox Inc (NASDAQ:FOX) takeover to deal with. However, the longer term reaction could be different. What is quite likely a first step towards complete separation of BT from one of its biggest profit centres and a clear competitive advantage is not a positive for the share price.

Euro rallies with nonfarm payrolls

The US dollar fell on profit-taking after non-farm payrolls data showed the US produced 235k jobs in February, well ahead of expectations. Slightly slower than anticipated wage growth was another reason for dollar bulls to temporally throw in the towel.

The euro got some early support from a bigger than expected rise in German wholesale prices. The subtle but significant admission from ECB president Mario Draghi yesterday that monetary stimulus is unlikely to increase has caused considerable euro short-covering. The widely held view that the euro will see parity to the dollar is in our view unlikely this year.

Sterling soft as Article 50 lines up

A pullback in the US dollar did little to support the British pound which traded in a tight range near 7 week lows after UK industrial output data disappointed. Signs of an industrial slowdown in combination with consumers reigning back spending signal softer GDP growth in the first quarter.

The potential for Article 50 to be triggered as early as Tuesday next week will colour the market’s reaction to the next Bank of England policy move. It wouldn’t be surprising to see a kneejerk reaction lower in Sterling once Article 50 is triggered, but since the announcement itself will bring no new information, we’d expect a recovery not long after. Perhaps the biggest near-term risk to Theresa May triggering Article 50 would be an accompanying request from the SNP’s Nicola Sturgeon for a Scottish referendum. Even though the government have already indicated they wouldn’t permit a second referendum, it’s another layer of political uncertainty for markets to contend with.

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