Burberry leads UK markets higher as traders shrug off S amp P Spanish downgrade

Despite another credit rating downgrade for Spain, the UK market and major indices across Europe have managed to stay positive. Company news surrounding Burberry and WH Smith has particularly grabbed the attention of investors in early trading.

Burberry led UK stocks higher, advancing 8.2% in early trading after a well received trading update. Despite issuing a profit warning last month, it confirmed that total revenue for the first half rose 8% and comparable store sales grew 3%. However, the fashion brand confirmed that sales growth did slow in the second quarter after being hit by the slowdown in China and Britain. Nevertheless the fact that it showed signs of picking up towards the end of the period pleased the market, resulting in a strong rally but the stock still has a lot of ground to make up in order to return to its 1400 pre profit warning level.

Continuing with the retail sector, WH Smith shed 3.5% by mid morning after investors showed their displeasure of the impending departure of Kate Swann, CEO for the newsagent chain. During her nine years she is widely recognised to have maximised returns from what was once considered a business with little growth potential.

With Europe rarely out of the limelight, Standard and Poor’s cut Spain’s sovereign credit rating by two notches to BBB minus, just above ‘junk’ territory. It blamed a deepening economic recession that is limiting the government’s policy options as a main reason. Also tensions between Spain’s regional governments and the central government are rising, leading to less effective policy making.

One such example is Catalonia which is pushing for a referendum on independence from Spain, with 74% now wanting such a referendum and some experts expecting an outcome of Yes 55%, 25% No and 20% Abstention.

Investors are hoping it will prompt Spain to formally ask for a bailout. As a result the yield on Spanish 10-year government bonds came under moderate pressure, rising nine basis points to 5.86%, however, noticeably still below the 6% level. With Spain still denying that they need a bailout the waiting game looks set to continue, especially as the Standard and Poor’s decision hasn’t necessarily shocked the markets as it comes after a similar move from Moody’s.

With the regional elections due in Spain in 10 days, large redemptions are due towards the end of the month and the possibility of another downgrade by Moody’s, Spain and the eurozone will dominate the month of October.

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