LONDON BRIEFING: Pound hit as weak UK economy puts rate hikes in doubt

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The UK economy unexpectedly contracted again in April, leaving the Bank of England in a tough spot when it meets later this week.

Data from the Office for National Statistics on Monday showed gross domestic product contracted by 0.3% in April on a month before, badly missing FXStreet-cited market consensus of 0.2% growth. The reading also marked a deterioration from March's 0.1% fall.

Services activity shrank by 0.3% in April - the largest contributor to April's drop in GDP - reflecting a substantial decrease in human health and social work, where there was a ‘significant reduction’ in NHS Test & Trace activity. Production fell by 0.6%, driven by a fall in manufacturing, and construction activity fell 0.4%.

‘A big drop in the health sector due to the winding down of the Test & Trace scheme pushed the UK economy into negative territory in April. Manufacturing also suffered with some companies telling us they were being affected by rising fuel and energy prices,’ said Darren Morgan, director of Economic Statistics at the ONS.

The ONS added that this is the first time that all main sectors have contributed negatively to a monthly GDP estimate since January 2021.

In the three months to April, GDP rose by 0.2%.

The data comes ahead of Thursday's Bank of England meeting, with markets expecting the central bank to raise interest rates again.

‘The 0.3% month-on-month fall in GDP in April isn't as weak as it looks, but nonetheless increases the chances that the Bank of England opts for a 25 basis points rise in interest rates on Thursday rather than the 50bps hike we are forecasting,’ said Capital Economics.

Added Paul Craig, portfolio manager at Quilter Investors: ‘With sterling sitting where it is just now, things are unfortunately going to get worse before they get better. Just as with the pandemic response two years ago, fiscal and monetary policy is going to have to work hand in hand. This could mean we see the BoE reversing course later on this year as the true extent of the economic damage reveals itself.’

Separately, figures on Monday showed the UK trade in goods deficit, excluding precious metals, widened by £10.3 billion to £61.5 billion in the three months to April compared with the three months to January.

Exports to the EU increased for the third consecutive month in April and are at the highest level since records began, the ONS noted.

Here is what you need to know at the London market open:

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MARKETS

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FTSE 100: down 0.9% at 7,252.71

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Hang Seng: down 3.2% at 21,105.58

Nikkei 225: closed down 3.0% at 26,987.44

S&P/ASX 200: Sydney market closed for holiday.

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DJIA: closed down 880.00 points, or 2.7%, at 31,392.79

S&P 500: closed down 2.9% at 3,900.86

Nasdaq Composite: closed down 3.5% at 11,340.02

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EUR: down at $1.0477 ($1.0518)

GBP: down at $1.2245 ($1.2321)

USD: up at JP¥134.79 (JP¥134.13)

GOLD: flat at $1,862.89 per ounce ($1,862.37)

OIL (Brent): down at $119.80 a barrel ($120.90)

(changes since previous London equities close)

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ECONOMICS AND GENERAL

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Monday's key economic events still to come

Australia Queen's Birthday holiday. Financial markets closed.

1000 CEST EU long-term interest rate statistics

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A leading UK business group has downgraded its outlook for economic growth amid calls for government action to avoid a recession. The CBI downgraded its growth outlook to 3.7% for this year, from 5.1% previously, and just 1% in 2023, from 3%. The CBI said it believes inflation is expected to remain high into the Autumn, rising to 8.7% in October, leading to a ‘historic squeeze’ in household incomes, which will hit consumer spending. Rain Newton-Smith, CBI chief economist, said: ‘This is a tough set of statistics to stomach. War in Ukraine, a global pandemic, continued strains on supply chains – all preceded by Brexit – has proven to be a toxic recipe for UK growth.’

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The UK government on Monday will introduce legislation to unilaterally rip up post-Brexit trading rules for Northern Ireland, despite the potential for a trade war with the EU. London says it still prefers a negotiated outcome with the EU to reform the Northern Ireland protocol, whose provisions have become anathema to pro-UK unionists in the divided territory. But absent a deal through dialogue, the bill would take effect to override Britain's EU withdrawal treaty – although the government insists it is not breaking international law. Northern Ireland Secretary Brandon Lewis said Sunday that the protocol was disrupting trade and had crippled the territory's power-sharing government, due to unionist objections. ‘So it's right that we repair that,’ he said, adding that the need to protect a 1998 peace agreement in Northern Ireland had ‘primacy’ over the protocol.

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French President Emmanuel Macron's centrist alliance was in danger of falling short of a majority after the first round of parliamentary elections on Sunday saw a surge in support for a new left-wing coalition. Macron's 'Ensemble' alliance ran neck-and-neck with the left-wing NUPES grouping in Sunday's first round, with the former netting 25.75% of the popular vote compared to the latter's 25.66%. Extrapolating from these figures, four polling firms projected that Ensemble would win 225-295 seats in the decisive second round of voting next Sunday, possibly short of a majority of 289 but comfortably the biggest group. ‘We have a week ahead of us to mobilise,’ Prime Minister Elizabeth Borne told reporters. ‘One week to convince, one week to obtain a powerful and clear majority.’

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BROKER RATING CHANGES

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Morgan Stanley raises Rolls-Royce to 'overweight' (equal weight) - price target 118 (132) pence

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Numis cuts LondonMetric Property to 'hold' ('add') - target 300 pence (on Friday)

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COMPANIES - FTSE 100

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Paris-based drug maker Sanofi said two recent trials showed its next-generation Covid-19 vaccine booster candidate, developed with London-based GSK, produced a significant boost in antibody titers above baseline against multiple variants of concern. ‘Covid-19 keeps evolving and the combination of emergence of variants and waning immunity is likely to lead to the need for additional booster shots, at least in some populations,’ said Thomas Triomphe, executive vice president at Sanofi Vaccines. ‘The Beta variant expresses similar mutations across multiple variants of concern, including Omicron, making it a strong vaccine candidate to confer broad protection against multiple strains of Covid-19.’

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COMPANIES - FTSE 250

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Countryside Partnerships said it will consider being bought out should a bidder be ‘prepared to offer a value that the board considers compelling’. The housebuilder and urban regeneration firm said it has received feedback from significant shareholders over the past fortnight since Countryside revealed it had received and rejected two takeover proposals from San Francisco-based investor Inclusive Capital Partners. A ‘meaningful’ number of shareholders believe the firm would be in a better position as a privately-owned company, or as part of a larger business. Talks with any interested third parties will take place within the context of a formal sale process, Countryside said, but bidders will not be required to be publicly identified and will not be subject to a 28 day deadline while they are taking part in the process. Inclusive Capital has indicated it will take part in the formal sale process. Countryside said it is not currently in discussions with any other potential offerer. It said it is suspending its share buyback programme during the sale process.

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Ferrexpo said it will lower production for a period of time as the war in Ukraine blocks its export routes. The iron ore miner in Ukraine said it had produced 4.4 million tonnes of iron ore pellets so far in 2022 as of the end of May, down 8% from the same point in 2021. Ferrexpo has seen a total 400,000 tonne increase in iron ore inventories across the months of March, April and May, which it will seek to reduce as logistics constraints ease. ‘The group continues to receive deliveries of key consumables sufficient for the planned level of pellet output. However, as a result of the damage to infrastructure and increase in inventories of iron ore pellets referenced above, the group will lower production for a period of time, until an alternative logistics route is agreed, damaged infrastructure is reopened and/or Ukraine's Black Sea ports resume activities,’ said Ferrexpo. Chief Executive Jim North said the company will look to increase production when it has ‘greater clarity’ on logistics.

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Sirius Real Estate lifted its annual payout as its rent roll surged. Annualised rent roll increased 73% to €167.0 million for the financial year ended March 31 from €96.5 million a year before. Like-for-like annualised rent roll in Germany increased by 6.4%, while in the UK it rose 7.6%. ‘This strong operating performance was underpinned by continued demand and asset management led rental growth across both our German and UK platforms,’ said Chief Executive Andrew Coombs. Sirius's total dividend for the year amounted to 4.41 cents, up 16% on the 3.80 cents paid out the year before. Since the year-end, the operator of business parks, offices and industrial complexes said it has traded in line with market expectations, supported by continued strong occupier demand, ‘transformative’ investment and ongoing on-shoring of production and supply chains by German and UK manufacturers.

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COMPANIES - SMALL CAP

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Eoghan O'Lionaird will step down as CEO of James Fisher & Sons once a replacement is in place. The marine services firm said a search for a successor is underway. O'Lionaird has been CEO since October 2019. ‘The board remains committed to its strategy of driving recovery in revenue and profitability, exiting non-core businesses and reducing debt during 2022,’ said Chair Angus Cockburn.

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Monday's shareholder meetings

Angus Energy PLC - GM re second tranche of subscription shares and warrants

Elixirr International PLC - AGM

Jupiter Emerging & Frontier Income Trust PLC - GM re voluntary liquidation

Mirriad Advertising PLC - AGM

Ocean Outdoor Ltd - GM re takeover by Atairos

Saga PLC - AGM

Spectra Systems Corp - AGM

VPC Speciality Lending Investments PLC - AGM

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