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*** Rover’s sputtering motor finally dies…
*** Gloom on Wall Street…British Chambers of Commerce “disappointed and worried”
*** Is oil off the boil?…and more
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- Labour is “the party of modern wealth creation”, the prime minister told us last Thursday. Just a day later, he was rushing up to Birmingham to announce a support package for MG Rover workers after the group’s sputtering motor was finally switched off.
- Rover’s administrators had announced that attempts to broker a last-ditch rescue deal with the Shanghai Automotive Industry Corporation (SAIC) had failed: SAIC had pulled out of talks. 5,000 workers face redundancy now that Rover looks set for liquidation.
- So why did the Chinese get cold feet? Well, they began to have second thoughts about a joint venture with Rover a few weeks ago once it became clear that Rover was losing a staggering £25m a month, as the latest MoneyWeek explains. The gaping hole in Rover’s pension fund didn’t help either.
- Throw in slowing sales in their domestic business, and you can see that SAIC’s riding to the rescue was about as likely “as fish and chips becoming China’s national dish”, as Access Asia put it on Friday. With Rover in bankruptcy, they can pick up whatever they need without taking on any liabilities.
- All this was pretty clear ten days ago when failure to secure a deal sent Rover into administration. Yet the government decided to send £6.5m up to Birmingham to keep workers off the dole last week, supposedly because a last minute rescue agreement with SAIC was still possible. That - and the prompt announcement of the £150m support package on Friday - had nothing to do with all the marginal seats around Rover’s Longbridge plant, of course.
- Back in the City, however, traders were more concerned with a slump on Wall Street as US consumer sentiment slid and manufacturing activity in the New York area hit a two-year low. Disappointing earnings reports from IBM and Sun Microsystems also helped wipe over 1.6% off the Dow Jones index on Friday and send it to a new low for the year.
- Along with further falls by mining stocks and steelmaker Corus as metals prices continued to weaken, gloom on Wall Street ensured that the FTSE 100 finished the week at 4,891, having slid by 1% on Friday and 1.8% throughout the week. Miners Antofagasta and BHP headed the blue chip loser board, both losing 10% over the week. The overall sector fell by 7% in five days. Only steel stocks did worse, dragged to a 7.8% loss by Corus amid signs of weakening steel demand in the US.
- All this had investors reaching for the pills. The pharmaceutical sector was the market’s strongest performer last week, buoyed by its US counterpart after Eli Lilly won a landmark patent case, which tempered concerns over the threat from generic drugs. AstraZeneca and GlaxoSmithkline led the FTSE 100 last week, with gains of 4.6% and 3% respectively.
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- Rover aside, Labour’s strategy of highlighting the robust state of the economy seems to be falling apart faster than Michael Jackson’s face.
- Friday brought news of the biggest fall in London house prices for eight months. Estate agent Haart said prices slipped by 3% in March, reducing the average price of a home to £221,256. In south-west London, asking prices were slashed by 7%. What’s more, it now takes an average of 16 viewings before a sale is agreed, up from eight last year.
- Meanwhile, the British Chambers of Commerce highlighted a decline in sales and confidence in both the manufacturing and the services industries in the first quarter, which it called “disappointing and worrying”. The same goes for last week’s results in the retail sector, with GUS’s Argos, Woolwoths and Laura Ashley reporting flat or sliding like-for-like sales.
- Factor in Apax’s withdrawal from a bid for Woolies, and this means we should be hearing rather less about possible private equity bids in the retail sector in the next few weeks. Given the gloomy backdrop, why would the venture capital firms “want to catch a falling knife?” asked one trader. This Thursday’s retail sales data for March are unlikely to make encouraging reading.
- The fact that oil has come off the boil of late, with US futures sliding to a seven-week low just under $50 before stabilising above this threshold on Friday, is one of the few bright spots on the macroeconomic front. Near-record levels of speculation in the market and climbing US inventories point to further drops.
- Yet the International Energy Agency, which contributed to the sell-off last week by scaling back its overall demand forecast for 2005, pointed to limited global spare capacity in both oil production and refining as reasons not to expect a significant price slide. Note too that its demand forecast reduction of 50,000 barrels per day is a drop in the barrel in an 84 million barrels per day market.
- Simon Wardell of Global Insight also isn’t pencilling in a big plunge. He thinks traders may already be fretting about a tightening market in the second half, when consumption is set to pick up as winter sets in. As Lex puts it in the FT, “it’s too early for oil consumers to breathe a sigh of relief”.
Signing off until tomorroAndrew van Sickle
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