LONDON MARKET MIDDAY: China Threatens Retaliation Over Hong Kong Bill

(Alliance News) - Stock prices in London were lower at midday on Thursday after US lawmakers passed a bill supporting Hong Kong's rights, potentially putting US-China trade progress in jeopardy.

US lawmakers took the last step to approve legislation supporting protesters in Hong Kong in an almost unanimous vote on Wednesday, before sending it on to President Donald Trump for a signature.

China on Thursday accused the US of seeking to "destroy" Hong Kong and threatened retaliation after Congress passed new legislation supporting the pro-democracy movement that has thrown the city into nearly six months of turmoil.

Foreign Minister Wang Yi said the passage of the Hong Kong Human Rights & Democracy Act "indulges violent criminals" which China blames for the worsening unrest and aims to "muddle or even destroy Hong Kong".

In addition, a foreign ministry spokesman vowed that China would "take effective measures to resolutely fight back", giving no details.

The FTSE 100 was down 48.62 points, or 0.7%, at 7,213.87. The FTSE 250 was down 152.57 points, or 0.8%, at 20,322.68, but the AIM All-Share was up 1.42 points, or 0.1%, at 900.74.

The Cboe UK 100 index was down 0.6% at 12,236.62. The Cboe UK 250 was down 0.8% at 18,262.07, and the Cboe UK Small Companies was flat at 11,313.71.

In Paris the CAC 40 was down 0.3%, while the DAX 30 in Frankfurt was down 0.2%.

"Trump's likely signing of the Hong Kong bill raises the prospect that the US and China will find something other than trade to quarrel over - if the president was looking for an excuse to renew their trade spat then he has a tailor-made opportunity here to both hit China on trade and present himself as a champion of human rights and democracy. For someone so devoted to his public image, especially now the impeachment hearings are piling on the pressure, the opportunity may be too big to pass up," said IG Group's Chris Beauchamp.

On the London Stock Exchange, Centrica was the best blue-chip performer, up 8.0% after the British Gas owner backed annual guidance after what it said has been a "solid" second-half performance.

The utility delivered growth in customer accounts, higher margins, and returns in business energy supply in North America, it said, as well as strong trading in Europe. This has helped offset the impact of further outages at the non-operated Dungeness B and Hunterston B nuclear power stations, in Kent and North Ayrshire respectively. Nuclear operations were put up for sale earlier this year.

Centrica backed 2019 guidance of adjusted operating cash flow at the lower end of GBP1.8 billion to GBP2.0 billion, and net debt within GBP3.0 billion to GBP3.5 billion. The firm has cut capital investment guidance to GBP800 million from GBP900 million, and increased efficiency savings for the year to GBP300 million from GBP250 million.

GlaxoSmithKline was up 0.9% after UBS raised the drugmaker to Buy from Neutral.

At the other end of the large-cap index. Johnson Matthey was down 7.5% after the specialty chemical firm said interim profit was hit by problems in its Clean Air division.

Pretax profit fell 8% to GBP225 million for the half-year to September, and the underlying figure also declined by 8% to GBP231 million. The company said profit was hit by around GBP15 million of one-off costs in the Clean Air division due to higher freight costs and manufacturing inefficiencies. This, Johnson Matthey continued, stemmed from the phasing of the completion of a new plant in Poland.

Looking ahead, Johnson Matthey expects full-year performance to meet the market's expectations.

Aviva was down 1.8% after Deutsche Bank cut the insurer to Hold from Buy.

In the FTSE 250, Direct Line Insurance was the best performer, up 6.0% after the insurer late Wednesday said its third-quarter performance was encouraging.

Direct Line said its total gross written premiums for the three months to September 30 rose 0.4% to GBP858.0 million from GBP854.5 million the year before. This included a return to growth for motor to GBP457.8 million, up 0.3% from GBP456.4 million.

In terms of financial targets, Direct Line is aiming to improve its operating expense ratio to 20% by the end of 2023 so it is more sustainably competitive. In 2018, Direct Line's operating expenses came to GBP722 million, or GBP644 million before depreciation and amortisation. The company hopes to cut this GBP644 figure by over GBP50 million by 2021 to under GBP590 million.

Further, Direct Line gave details on plans for capital returns saying: "At the group's current valuation, where the regular dividend yield is materially higher than market comparators, the board's preference is to return any surplus capital, after ordinary dividends, by way of a buyback programme."

At the other end of the midcaps, Royal Mail was by far the worst performer, down 16%. The postal operator reported a significant rise in interim profit, but warned its transformation plan is off track.

Royal Mail's pretax profit for the six months to September 29 multiplied to GBP173 million from GBP33 million, though the adjusted figure was down 20% to GBP146 million. Revenue climbed by 5.2% to GBP5.17 billion.

However, Royal Mail warned the outlook for the letters business in the UK remains challenging, due to lower-than-expected UK economic growth and business uncertainty. For its current financial year, Royal Mail sees a 7% to 9% fall in addressed letter volumes, excluding the upcoming UK general election, which brings a surge of political mailings. Next year, volumes could fall between 6% to 8%.

"Royal Mail's investment case always rested heavily on the argument that years of public ownership had left the group bloated, underinvested and with lots of low hanging efficiency savings to harvest. Well that may have been true up to a point, but any low hanging fruit is long gone, and a heavily unionised workforce is making future cost savings difficult, if not impossible, to deliver. The combination of falling revenues and stubbornly high costs is stamping out the group's profit margins," commented Hargreaves Lansdown analyst Nick Hyett.

The pound was quoted at USD1.2645 at midday, up from USD1.2909 at the London equities close Wednesday, with three weeks to go until the UK general election.

On the UK political front, opposition party Labour said its manifesto would bring about "real change" to overhaul the UK's "rigged" society as it pledged to boost wages, tackle climate change and re-nationalise key utilities.

Leader Jeremy Corbyn revealed the full details of his election manifesto in a speech in Birmingham. It includes promises of free broadband for all homes and businesses by 2030 and more money for the health service.

On Brexit, the party will keep to the position decided at its autumn conference of renegotiating an exit deal with the EU by March and then putting those terms to a public vote within another three months, with Remain as an option.

The manifesto will contain intentions to significantly boost NHS spending, create a GBP10 minimum hourly wage for all, and tackle climate change by creating jobs in a "green industrial revolution".

Stocks in New York were set for a lower open with the DJIA, S&P 500 index and Nasdaq Composite all pointed down 0.1%.

US central bankers last month dismissed the idea of taking interest rates into negative territory, according to meeting minutes released on Wednesday.

Evidence for the benefits of negative interest rates - lenders must pay borrowers rather than the other way around - has proven "mixed" in countries where it has been tried, according to members of the Fed's rate-setting Federal Open Market Committee.

By Arvind Bhunjun; arvindbhunjun@alliancenews.com

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