Morning market comment: European markets, commodity prices, UK budget and Majestic Wine

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European markets fall as US takes a break

European markets are declining this morning as the US takes a break for Thanksgiving holiday.

In London, utilities are front and centre but not in a good way. Centrica, the owner of British Gas, lost 8% after it reported a decline in customer numbers. Severn Trent was also bid lower despite higher profits because it warned of higher costs and National Grid was sold off as part of the utility basket of shares. Mining companies didn’t fare much better though in theory, lower oil prices should have helped them because of lower costs.  Luxury brand Burberry was the only stand out gainer with Standard Chartered and Just Eat notching only slightly higher.

Let’s go lower

When politics and the fundamentals of commodity markets go head to head politics usually wins, as is the case this morning. Brent Crude and WTI oil prices have dropped 0.76% and 0.71%, respectively after President Trump thanked Saudi Arabia for increasing output and added: “But let’s go lower!” For Trump having lower oil prices is the equivalent of giving average Americans a tax cut as it reduces their day-to-day costs. He has criticized the oil cartel Opec and Saudi Arabia in the past for protectionism and has repeatedly called for lower prices. Now the market has to find its new normal after dropping almost 27% in the last six weeks. The decline was sharper than usual because before Brent hit $86 it was ramped up by speculators expecting a heavy fallout from Iranian sanctions. Not only did this not materialise but two of the largest global producers, Saudi Arabia and Russia, increased production. Though lower oil prices will be bad news for oil speculators they will benefit a number of industries which use oil as raw material or as part of their daily operations, including airlines.

UK Budget deficit still weighs on sterling

Sterling is in mildly negative territory against the euro but is holding its ground against the dollar, still weighed down by Wednesday’s news that the UK budget deficit in October was larger than expected. Government spending increased compared with a year ago and the income from tax, though higher than in 2017, was not enough to balance the books. At this rate, Britain will breach the borrowing target announced in last month’s budget, the prerequisite for Chancellor Philip Hammond to start easing the country’s austerity programme. The country remains cautious ahead of Brexit and the latest data shows that employers are holding back on wage increases until Britain’s situation becomes clearer.

Majestic Wine’s profit loss

Profits were expected to fall due to increased investment in the business but not by as much as this.

Majestic Wine clearly is feeling the pinch as Brexit uncertainty and lacklustre wages growth deter spending on non-essential items. The online wine market, meanwhile, is getting more crowded, with dozens of competitors now vying for a bigger slice of the pie.

Management remains confident enough in their strategy to keep pouring ever-more investment dollars into the online offering despite the tough times. That’s refreshing to see and by some measures, the investments are bearing fruit. Revenue at Naked Wines is growing and margins are expanding, while repeat customers contribute a greater proportion of sales and staff retention rates improve. Investors, however, will want to see a big improvement in the most important figure of the bunch — net profit — before getting quite as excited as management.