A negative tone was initially set in the first trading week of June as the FTSE 100 quickly moved from Monday’s steady start to two days of declines, but Thursday’s widely-expected rate cut from the ECB turned the tables for local indices.
By close of play on Friday, the European Central Bank’s rate cuts and comments on Quantitative Easing were still the top talking point for market commentators. The ECB’s Mario Draghi last year issued the message that the central bank would do ‘whatever it takes’ to address economic weakness in the region; Thursday’s message was one of ‘we’re not through yet’ as policy-makers made a big push to encourage business lending.
The news immediately weighed on the value of the euro, making Eurozone exports more desirable to other nations, as desired. European markets jumped on the ECB news, with Germany’s DAX ploughing through 10,000 points briefly. The FTSE 100’s response was more muted, however, amid concern that UK exporters now face more competition, particularly given the strength of sterling.
In other macro-economic news, the International Monetary Fund on Friday issued a warning to the UK Government that it needed to rein in accelerating house prices and boost low productivity to avoid the UK economic recovery being undermined.
The IMF wants regulators, namely, the Bank of England’s new Financial Policy Committee, to consider imposing limits on banks’ low-deposit lending amid concerns that consumers may be overstretching themselves in an overheating housing market. Such concerns bring up painful memories of six years ago, when overzealous lending to borrowers who can’t afford to repay set the foundations for the financial crisis.
The general perception in the UK is that the economy is recovering relatively well, supported by GDP and unemployment data, and thanks in large part to the strength and resilience of the consumer. But as Threadneedle’s Simon Brazier highlighted recently, as the rates at which banks and businesses will lend to each other rise, and mortgage rates start to creep north, consumer in particular are set for a big hit as household costs climb fast.
On the productivity front, there’s a palpable concern that we think we’re doing better than we actually are. We need faster growth in output to underpin a shift from a consumer-led recovery to an investment-led recovery, which would in theory enable the recovery to solidify while also allowing real wages to increase.
Finally, in company-specific news, a much-talked about event today was the announcement that Game Group plans to return to the market with an imminent IPO just over two years since it went into administration. The video games retailer will be re-named Game Digital and re-listed on the London Stock Exchange at 200p per share, valuing the firm at £340 million versus initial expectations of £400 million. Game Group’s planned success was undermined by an expensive business model that relied on physical stores and international expansion, but after two years in the hands of private equity, backed by a hedge fund, the company’s new strategy will see it focus on a streamlined offering of high street stores in the UK and Spain, and eCommerce and mCommerce revenue-drivers.
Game Group reported profits for the second half of 2013 of just over £50 million, double what it recorded in the same period the year before. Given the consumer-led recovery and lower unemployment in the UK, now could be an opportune time to return to market but today’s macro-events highlight the fragility of such a plan.
