Market buzz: New calls for Big Four break-up, Grayling to confirm East Coast rail deal

1557: Federal Reserve bank of Atlanta's tracking estimate for second quarter US GDP as per its GDPNow model is unchanged from the day before at 4.1%.

1520: Fed's Bostic says it is his job to make sure that the US interest rate curve does not invert. The Atlanta Fed chief also reiterates he expects three interest rate hikes in 2018, although his outlook could change.

"We don't want to do it so fast that it is disruptive. That is why we are going at a slow, gradual pace. Hopefully we won't get that inversion."

1505: In a separate report, Morgan Stanley also upgrades Tullow Oil to 'overweight' and reiterates 'overweight' on Cairn Energy and Energean.

In yet another report, the investment bank also ups its target for Brent crude oil by 2020 to $90 a barrel and says: "We argue that middle distillate prices will need to rise to a level where demand slows. We suspect this will be the case when gasoil reaches ~$850/tonne,around 25-30% above today's level. We estimate this will drive Brenthigher to ~$90/bbl. The historical analog for this is 2H07/1H08, when tightness in middle distillates also dragged crude prices higher."

1458: Morgan Stanley says it now prefers Oil services over Big Oil for exposure to combined oil price strength and growth in end markets.

And with specific implications for Hunting, it adds: "Multiple expansion and earnings upgrades may drive a return to 'Dreamland', like past cycles. Buy: Tenaris, TechnipFMC, PGS, Hunting, Saipem, CGG and Vallourec."

1409: The east coast high-speed rail route between London and Scotland is to be renationalised for the second time in less than a decade, with the Stagecoach-operated Virgin Trains East Coast to be taken over by the government-controlled “operator of last resort”.

Transport secretary Chris Grayling is expected to confirm the move to the House of Commons later in the afternoon, the Guardian is reporting.

Franchise holder Virgin Trains East Coast recently said it could no longer make payments on its £3.3bn contract with the government.

1400: US stocks are expected to start slightly lower as big storms across the US northeastern seaboard leave almost 400,000 households in New York, New Jersey, Connecticut, Pennsylvania and West Virginia without power, with the storms knocking down power lines and trees across the region.

1355: Despite recent strong revenue growth, Virgin Mobile’s mobile subscriptions are expected to fall slightly over the next five years, according to GlobalData, of interest to BT, Sky and TalkTalk investors.

Virgin Media recently reported earnings for the quarter ending 31 March 2018, announcing revenue growth of 5.2%, with residential mobile revenue a large driver to this growth as a result of higher handset sales contributing towards non-subscription revenue growth of 55.2% year-on-year.

Analyst Jack Chen forecast Virgin's mobile subscriptions will continue on an overall downward trend and fall slightly from just over 3m in 2017 to 2.9m in 2022, with its market share projected to maintain its historical decline and fall by 20 basis points down to 2.9% in the 2017-22 period.

“This downward trend is driven by intense competition from other MVNOs in the country, including Tesco Mobile that has introduced a range of attractive tariffs for data-heavy users and Lycamobile that continuously expands dominance in providing cheap international calls.”

This morning Barclays highlighted Vodafone as its top pick in the telco sector, see solid and growing free cashflow generation over the coming years, more than covering the circa 7% dividend yield. Some of this improvement should be organic, but if the Liberty Global European assets are bought analysts see FCF of at least €5.5bn post spectrum by the 2022 trading year, more than covering the €4.2bn dividend cost. Barclays rating is 'overweight' with a price target trimmed to 260p from 265p.

1338: US housing starts fell more than expected, down 3.7% in April to 1,287K versus a consensus of 1,310K. Building permits fell 1.8% to 1,352K, very close to the 1,350K consensus.

"The details are better than the headlines," says Pantheon Macroeconomics, "because all the decline in both starts and permits is in the volatile multi-family sector, where activity was very elevated in March and has now corrected."

With mortgage rates rising, the economists think "activity probably has now peaked for this cycle, though the trend in multi-family construction can keep rising, given the very low vacancy rate for rental property".

1332: The board of failed UK government outsourcer Carillion and its auditors have been lambasted in a scathing parliamentary report, with a further call for a break-up of the Big Four accountants.

A joint investigation by the commons Business and Work & Pensions committees accused the board of directors of “stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners”.

Co-chair Rachel Reeves attacked auditors KPMG, PwC and EY, saying all three “should also be in the dock for this catastrophic crash” and called for the Competition and Markets Authority to look at the break-up.

1217: A better wholesale outlook was the "big positive" for Burberry, according to analysts at Berenberg, with luxury accounts responding well to the appointment of new creative director Ricardo Tisci. "This is important as bears have been arguing that worse than expected wholesale performance would be the reason for company’s outlook being unachievable."

The buyback is "another key positive" from management, alongside good cost control, which means Berenberg is now only awaiting the new collection from Tisci in September "to see the potential positive impact on LFL performance from his creative vision for the brand".

"Comments from [chief operating and financial officer] Julie Brown around the response from wholesale accounts on the appointment of Mr Tisci are positive in this regard. For investors looking for turnaround names, we believe that Burberry offers one of the most exciting restructuring stories in the luxury goods sector. Results this morning demonstrate that the story remains in tact, and we continue to be positive."

1215: BoA Merrill Lynch noted that Burberry's fourth-quarter LFL store sales growth of 2% was well below luxury sector peers but line with consensus. With shares trading for 23 times 2019 EPS, a 30% premium to history, analysts are reiterating their 'underperform' rating but increasing the price objective to 1600p from 1500p driven by an FX upgrade.

"Given limited visibility over the timing and quantum of a potential brand turnaround, we see Burberry's 30% premium valuation to history as unjustified."

1212: Analysts at Jefferies see no change to consensus expectations likely after the trading update from National Express that notes a positive performance across all divisions, "though the contribution from acquisitions to reported growth numbers is unclear".

"With reported numbers of limited insight therefore, beyond the positive general tone, most interesting to us is pricing gains achieved seen exceeding wage growth in school bus & further beneficial movement in Spain's concession renewal process."

Investec is having another go at its estimates, saying the strength of current trading and recent acquisitions "suggest that PBT will be slightly ahead of our forecasts, particularly given recent US$ strength".

1100: It's all kicking off in the eastern Med. The Turkish lira is down to a record $4.50 after President Erdogan said he wanted to take more responsibility for monetary policy in the country, while Italian two-year bond yields are up 10 basis points, extending the gap over benchmark German bund yields, after a report that as part of negotiations to form a new government, populist parties 5-Star and League plan to ask the ECB to forgive €250bn of the country's debt.

Erdogan said in an interview with Bloomberg that he planned on being more involved in monetary policy following his expected re-election in a June 24 snap election, where a victory would give him five more years in office armed with the expanded powers he grabbed last year.

“Investor confidence in Turkey is already at severely low levels,” said Jameel Ahmad, currency strategist at FXTM. “If Erdogan is able to insert more influence around central bank policy and economic matters we can’t rule out the possibility that the lira will weaken all the way to 5 against the dollar by the end of the summer.”

1052: JD Sports shares are down as it emerges that London-based hedge fund Odey Asset Management has taken 7.1% stake in Finish Line, a US-based retailer that the FTSE 250 has agreed to buy for $13.5 a share, or close to £400m.

With UK rival Sports Direct having already bought a 19.3% stake in Finish Line, which it confirmed at the end of April, it is being reported by Bloomberg that Odey bought 8.2% of Finish Line's outstanding stock in the first quarter.

1051: UBS on Micro Focus noted it was likely that the consensus was at the bottom of the guided decline of 9-12%, whereas it will now be nearer the top.

UBS wonders "what growth is implied for the 6 months to October 2018?" The consensus is looking for $3.9bn sales for the 12 month period, down 7% as reported and perhaps 8-9% at constant currency, and EBITDA of $1,421m.

Assuming revenues were down 10% at constant FX in the 6m to April, hitting the -6% goal for the full year implies a 2% constant FX decline in the 6m to October, while to hit the -9% implies an 8% decline.

With a consensus forecast of $2bn for the second half, UBS analysts think it "unlikely" that full-year consensus moves much on this update, "but confidence in the achievability of it should improve".

1044: Rolls-Royce has agreed an inflation-beating pay deal for 22,000 workers for the next three years, with pay up 3.7% in 2018, in line with RPI within a 1.5-4% range in 2019 and RPI-plus-0.25% in 2020.

Trade union Unite, which negotiated the agreement with the company, also said a deal had been agreed for Rolls-Royce to keep its final salary scheme open for current active members until at least January 2024 and from 2021 will increase its contributions to the savings of the 10,000 employees enrolled in defined contribution schemes. Under changes to the scheme pension savings for younger people will also increase.

Unite regional officer, Tony Tinley said: "Unite has negotiated a three year pay deal for thousands of Rolls Royce workers that beats inflation. At a time when pay is falling flat and employers are putting pressure on your conditions it pays to have a well organised union in the workplace to negotiate a good deal on your behalf."

1034: Gold is beginning to recover after the London Metal Exchange suffered its biggest loss in 18 months yesterday, dropping 1.8% to the lowest level this year to $1,294.35 per oz, dropping below $1,300 for the first time since December as Treasury yields rose on signs of robust US economic growth that bolstered expectations for Federal Reserve’s rate hikes.

"Gold’s movement is focused on the dollar and interest rates. Early recovery could see safe-haven targets as North Korea suspends high-level talks with South Korea while threatening to call of planned US-North Korea summit in June, citing objections to military exercises being conducted by the US and South Korea," analysts at SP Angel say, noting that the yield on 10-year Treasuries holds steady around 3.07%, with some analysts targeting 3.5%.

They point to the North Korean news agency getting in a tizzy over the South's air exercise with the US that it felt is “a deliberate military provocation to the trend of the favorably developing situation on the Korean Peninsula" and warned the US "will have to think twice about the fate of the DPRK-US summit".

The suspension is retracing progress on the peninsula, SP Angel says, following the summit meeting between Kim and Moon at the demilitarised zone last month.

Most markets in Asia were on the back foot at the end of Tuesday’s sessions.

1025: Micro Focus revenues were confirmed by the company as being towards the better end of its guidance range of -9 to -12%, making the shares look "too cheap" for analysts at Numis.

The H1 performance coupled with circa $10m forex benefit could give H1 revenue over $1.95bn, Numis said, down around 8% at the headline and down 10% excluding one unusually large licence, compared to the broker's recent forecast of a 12% fall to $1.88bn.

"We leave our FY forecasts unchanged, although clearly our expectation of FY revenue down 10% ccy implies no underlying improvement in H2 which feels quite cautious, particularly given operational progress. 9x PE/12% Dec-19 EqFCF yield looks materially too cheap."

1020: The government is expected to finally confirm the maximum stakes on fixed odds gambling terminals this week, with a limit of £2 expected, after last year's cut to £50 from £100.

"A £2 max stake, is a worst-case scenario for operators with betting shops," say analysts at Whitman Howard, estimating it will reduce operators’ revenues and profits significantly, though these estimates exclude any self-help initiatives available to management teams, such as shop closures, automation and further omni-channel rollout.

The broker estimates that if the Treasury increasing a point-of-consumption tax from 15% to 20% for online, would offset the taxes lost on FOBTs and help fund losses to the horse racing industry, the latter likely to be affected by the lower FOBT limits. "The increased POC tax would likely lead to further consolidation in a highly fragmented UK online market."

0957: Shares in housebuilder Crest Nicholson are down to lows last seen in November 2016 after it reported that profit margins are being squeezed by the softer housing market.

Analysts at Canccord Genuity said the new margin guidance was around 100 basis points below where consensus forecast was. "We would expect consensus to come back by mid-single digit percentage rates; with flat PBT for FY2018 against the previous year looking likely now. While the shares have been de-rated and revenue targets remain on track, the shares are likely to remain at a discount to the wider sector due to the margins performance and the likelihood that they may come under their medium-term targeted £1.4bn revenue."

0929: London stocks are edging higher, led by Micro Focus and Burberry after well received updates, and with US deal news lifting Paddy Power Betfair. Investors were digesting news that North Korea has suspended talks with South Korea over the continuation of military drills with the US, and threatened to pull out of a planned summit with the US if it continues to pressure it to unilaterally abandon its nuclear weapons programme.

North Korea's news agency got in a tizzy over the South's air exercise with the US that it felt is “a deliberate military provocation to the trend of the favorably developing situation on the Korean Peninsula" and warned the US "will have to think twice about the fate of the DPRK-US summit".

Mike van Dulken at Accendo Markets pondered whether this was merely game-playing for Kim, "taken straight from Trump's negotiation playbook".

Centrica is bottom of the FTSE 100 list after it was downgraded to 'underweight' by Morgan Stanley, while Homeserve is top of the FTSE 250 after being upgraded to 'buy' from 'neutral' with the target price up to 930p from 890p.