Friday preview: Importance of May's Brexit speech 'cannot be over-emphasised'

Theresa May's Big Brexit Speech in Florence may dominate the narrative on Friday, though for traders and investors there's PMI surveys and one from the CBI, with results from Sage and Smiths Group.

With the big central bank policy meetings now out of the way, said Deutsche Bank's Jim Reid, May's speech "feels like the next significant hurdle for markets".

Analyst Kathleen Brooks at City Index said the importance of this speech cannot be over-emphasized: "When UK PM Theresa May takes to the stage in Florence on Friday to give her lauded Brexit speech, she had better deliver. Not only will the eyes of the world and the financial market be upon her, but this speech has held up the fourth round of Brexit negotiations by a week."

Ahead of May's Italian sermon, reports and rumours were swirling about what sort of offers or concessions she was likely to make in order to get stalled Brexit talks back on track.

Having this month stressed that while European Commission has appointed Michel Barnier to negotiate the exit with the UK, "the decision will be taken by leaders”, suggesting the speech will be directed over the Frenchman's head to the leaders of the 27 other EU member states.

One strong rumour is that the address will push for Chancellor Philip Hammond's 'status quo transition' of up to two years, while preventing freedom of movement remains a core tenet to guide what post-Brexit model the UK will pursue.

This followed reports earlier in the week that May will offer the EU €20bn to help plug the post-Brexit hole in the bloc's budget, though previous estimates of a so-called divorce bill from the bloc pointed to liabilities of about €60bn.

"We expect it to focus on the UK’s future relationship with the EU, rather than on the financial settlement associated with the UK’s exit from the EU," said RBC Capital Markets.

HSBC said that for a status quo transition, where the UK remains in the single market and the customs union for the duration of the transition phase, "the PM might also use her speech to say that a significant financial settlement is a moral if not legal obligation for the UK.

"Whether this would then be enough for the EC to decide at its 19 October meeting that the UK has made enough progress to move onto the next phase of talks, will depend on the success of the two final rounds [on 25 September and 9 October]."

HSBC thinks that moving onto the next phase, to discuss the UK’s future relationship with the EU, including any possible transition arrangement, would likely increase market optimism about a deal being done by March 2019.

City Index's Brooks noted that the EUR/GBP has been in consolidation mode and GBP/USD has also hesitated, which she says suggested markets are waiting for May’s speech before they make their next sterling move.

"This speech will be a good indicator of whether the UK government has shifted its stance from a hard Brexit to a softer approach, which means that the outcome of the speech could be a binary one for the pound: a softer approach is pound positive, while a hard Brexit could send the pound tumbling once again."

ECONOMIC DATA

May's speech is certainly going to see the GBP-EUR whipsawing about on Friday, while 'flash' purchasing managers' index (PMI) surveys on services and manufacturing for the eurozone and constituent countries will also have some influence on the single currency.

Survey compiler Markit also will publish US services and manufacturing PMIs later in the day.

For the eurozone, the composite PMI remained unchanged at 55.7 in August and for September's 'flash' survey' services is expected to remain at 54.7 last time and manufacturing give up some of its earlier gains to 57.1 from 57.4 to bring the flash measure down to 55.5.

With forward-looking components a mixed bag last time, with manufacturing new orders increased but services new business component decreased further, HSBC said it expected manufacturing PMI to ease a little and for the services PMI should continue its downward trend to 54.4.

COMPANY NEWS

Smiths Group, the FTSE 100 diversified industrial group, is due to publish final results.

In the first half of the year, to end-March, underlying revenue was flat but up 18% on a reported basis and operating profits up 8% on an underlying basis and 27% on a reported basis as currencies provided a benefit.

As in recend periods the over group was solid as poor oil market conditions for the John Crane business were offset by other divisions.

The Medical devices division is expected to be helped by new products while US construction should boost its Flex-Tek arm, while the Detection business is exposed to counter-terrorism and government budgets.

Key numbers to look for will be Medical organic growth after the 2% fall in the first half, said broker Numis, with Detection margins 17.0% in H1 assisted by contract deliveries but likely to have drifted a little in the second half.

John Crane's recovery is expected to be limited, the broker said, given its oil and gas exposure is predominantly an aftermarket business.

"Outside issues include further corporate restructuring of the portfolio, asbestos/Titeflex liabilities and how the investment for growth is going.

"Most interesting elements will not be to do with the numbers; i) any news on new CFO given the abrupt departure of Chris O’Shea, ii) How the Morpho integration is going and iii) how the new product introductions in Medical are lining up."

Interim results are also due from Saga.

"An optimist would say that Saga is one of a select few companies so dominant in its field that its name has slipped into everyday vernacular," said analysts at Hargreaves Lansdown.

"While Google has to settle for being a verb, Saga is aiming to become a way of life for their customers. Unfortunately, this is where the pessimist’s view of the company differs. Maybe due to its over 50s profile, Saga has never commanded the aspirational image it might like."

"Nevertheless, with the baby-boomers hitting retirement, the number of potential customers fitting the affluent pensioner profile is increasing. In these results, we’ll be looking out for customer growth in the key insurance division, and also for signs the group is making headway with its plans to better cross-sell its numerous services."

Numis is house broker to the FTSE 250 group and expects underlying PBT for the half to be broadly flat on the comparative period, which it felt would be consistent with Saga meeting implied full year growth guidance of 5-6%.

"The new strategic initiatives announced with the final results at the end of March this year are still young and are therefore unlikely to impact these results.

"Instead we expect the interim results to show a continuation of the key trends from last year. Specifically the main profit growth driver is likely to be the cruise and holidays segment. In contrast, headline performance of the insurance business is likely to be dampened by a reduction in reserve releases as per previous guidance.

A likely key area of interest for the market will be whether the new motor broking panel is driving overall motor insurance customer growth or merely migrating existing customers from being underwritten in-house to underwritten externally.

Friday September 22

UK ECONOMIC ANNOUNCEMENTS
CBI Distributive Trades Surveys (11:00)

INTERIMS
Saga

INTERIM DIVIDEND PAYMENT DATE
Anglo American, Clarkson, FDM Group (Holdings), Henderson Opportunities Trust, Hikma Pharmaceuticals, Hostelworld Group , Ibstock , Low & Bonar, LPA Group, Marshall Motor Holdings, National Express Group, Paddy Power Betfair, Polypipe Group , Rotork, Stock Spirits Group , Vesuvius, Virgin Money Holdings (UK)

QUARTERLY PAYMENT DATE
Alpha Real Trust Ltd., BP, Real Estate Credit Investments Ltd, UIL Limited (DI)

FINALS
Smiths Group

AGMS
Accrol Group Holdings, Sirius Real Estate Ltd.

FINAL DIVIDEND PAYMENT DATE
Best of the Best, Dixons Carphone , FIH Group , JPMorgan Brazil Inv Trust , Miton UK Microcap Trust, Solid State, SSE, Supergroup