There have been two noteworthy events for the FTSE 100 today, firstly Glencore (LONDON:GLEN) , the commodity trader, plunged to a record low of 238.10p. This is the lowest level in its 4 year history on the FTSE 100, and comes after a torrid start to the year for the company. The once mighty commodity trader has plunged more than 20% during the last 3 weeks.
Glencore is down more than 12% so far today, and other commodity players in the FTSE 100 have not been spared – BHP Billiton is down 7%, Rio Tinto is down 5.5% and Anglo American is down nearly 10%.
The sharp drop in copper prices to a 6 year low has spooked the market along with the World Bank’s cut to global growth forecasts. This has weighed heavily on the non-oil commodity producers, and is the main reason why the materials sector is performing twice as badly as the energy sector today.
Brent – dead cat bounce?
Global growth fears and general weakness in risk appetite has limited the “rally” in Brent crude oil. After falling to a low of $45.19 on Tuesday, Brent is back above $46.50, however, the recovery on Wednesday looks fairly tepid and could be a dead cat bounce as global growth fears and fears of an oil supply glut show no sign of going away any time soon.
Is Tesco’s downfall complete?
The other “shock” for UK equites was the news that Tesco’s credit rating had been downgraded to junk status by S&P, who kept its outlook on the grocer stable. S&P doesn’t seem willing to give the new management team the benefit of the doubt, and explained its decision by saying that the structural and competitive pressures that Tesco is facing means that the “credit supportive measures” announced recently (read cost cutting) are unlikely to be enough to maintain an investment grade rating. The cut to junk status is a major reputational blow to Tesco and if it wants to win back investment grade status then the message from S&P is clear: do more.
Interestingly, the market had a muted reaction to this news, and Tesco’s stock price remains fairly stable, it is currently hovering around 215p. Tesco shares continue to stage a recovery, and this news is unlikely to knock the stock price off course. If anything, the junk rating could be a sign that things at Tesco have finally hit rock bottom and the only way is up! But even at this price Tesco may not attract investors.
The hedge fund billionaire Bill Ackman said that he considered investing in Tesco, but decided against it saying that he had some trouble with retail and the structural changes in the industry. This could be significant. If large investors aren’t willing to take a risk on Tesco then the stock price could struggle to gain traction until larger investors are happy that the industry has turned a corner.
Overall, the FTSE 100 is likely to remain under pressure for as long as the commodity space remains in free fall. We think that stability in the commodity space is needed before we can be constructive on the UK index. The news from S&P and the world’s largest investors, suggests that Tesco may not have turned a corner quite yet.
Figure 1:
Source: FOREX.com
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.
Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.