European markets have opened slightly lower this morning, as concerns over bond market recession warnings, continue to weigh on investors’ minds. There’s been a lot of talk of yield curve inversions as a portent of an approaching recession, however the more significant development is the decline in 30 year yields below the Fed funds rate, something that has never happened before.
Attention is also focussed on Italy after yesterday’s big gains on the FTSE MIB, as the key players from Five Star and the Democratic party of Italy meet to try and agree a coalition agreement before today’s Presidential deadline.
It would appear that the role of 5 Star leader Luigi di Maio continues to be a sticking point, and while it may not be an insurmountable obstacle, any coalition is likely to be a fairly brittle construct, given the differences between the two sides. New elections still seem the most probable outcome, with the only question being over timing, whether it be this year, or early next year if an agreement is reached.
Oil giant BP (LON:BP) is in the news this morning after yesterday’s announcement that they would be selling its Alaska business for $5.6bn to Texas based Hilcorp Energy. These assets include the fields at Prudhoe Bay and the Alaska pipeline and will complete next year.
This appears to be a recognition by BP (LON:BP) management that with oil prices falling, and the acquisition of BHP's (LON:BHPB) shale assets still weighing on its margins, that they need to accelerate the reduction on their currently high debt levels of $45bn, and bring their gearing back down below 30%. The company’s breakeven price for oil at its most recent update was just below $50 a barrel, which when Brent crude was at $70, and WTI was in the mid $60’s was a decent margin.
That is no longer the case and with concerns about future demand rising, and the best years for its Alaskan fields probably behind them, it appears that the case for a disposal has become more compelling. It’s just a pity it’s taken management so long to bite this particular bullet, still better late than never.
WH Smith (LON:SMWH) has also given its latest pre-close trading update for Q4. Consistently rated as the UK’s worst retailer by Which magazine, WH Smith has been a mainstay of the British high street for several years, though it is less ubiquitous than it once was. The high street business continues to trade in line with expectations, but it is the travel business where most of the profits come from with 428 stores open outside of the UK. This is also expected to deliver results in line with expectations for the year.
Thomas Cook's (LON:TCG) rescue deal has been confirmed with £900m being pumped into the business in order to see it over the winter period. Fosun is contributing £450m while acquiring 75% of the equity of the Group tour operator, while the group’s core lending banks and noteholders contributing the remaining £450m, and acquiring 75% of the Group airline. As a result the shares have fallen sharply, though how many existing shareholders are left to dilute remains to be seen, with recent Turkish investor Neset Kockar missing out on the new shareholder structure.
While management have said that they intend to maintain the company’s listing they have conceded that there are circumstances that might see it cancelled. It would certainly be a brave investor who got involved now, given the scale of the challenges already facing the sector.
Supermarkets are early outperformers after Investec upgraded Morrisons (LON:MRW) to buy from hold, also helping pull Sainsbury's (LON:SBRY) up as well.
US markets look set to open unchanged with attention likely to be focussed on yesterday’s surprise announcement that Philip Morris (NYSE:PM) and Altria (NYSE:MO) are looking to come back together has received a lukewarm reception from investors and it’s not hard to see why. One of the primary reasons for the original split in 2008 was concern over rising regulatory risk in the US market.
The remerger idea appears to have come about as a result of declining traditional cigarette sales, and the growing popularity of e-cigarettes and vaping products. This isn’t likely to be the silver bullet both sides think it could be given recent concerns over the health impact of these new products on a younger demographic of 18-35 year olds which has seen a number of premature deaths as a result of lung conditions.
It would appear that any deal is likely to be more suited to Philip Morris (NYSE:PM) shareholders than Altria (NYSE:MO) given that Altria has a much more diverse product portfolio having taken 45% stakes in Canadian cannabis company Cronos Group, and a 25% stake in vaping company Juul, as well as stakes in AB Inbev.
Quite frankly while any merger could well deliver economies of scale on areas of the business where there is overlap, the same regulatory concerns that drove the original demerger haven’t gone away, and it wouldn’t unduly surprise if this deal were to fall through.
Brown Forman (NYSE:BFb) is also expected to update the market with its latest Q1 numbers where we’ll get to see how much the latest tariff increases have impacted its margins. These tariff increases seem to have caused its sales numbers to come up short in Q4, though net income rose to $159m, a rise of $0.10c a share. The tariffs have raised concerns in the industry that any escalation could see increased barriers to trade if tariff levels get increased. For now global demand is holding up but any escalation could see margins hit further. It is estimated that Brown Forman has lost $125m as a result of EU tariffs. Profits are expected to come in at $0.37c a share.
Dow Jones is expected to open unchanged at 25,777
S&P 500 is expected to open unchanged at 2,869
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