Centrica, SSE and Drax shares stage powerful recovery

New government policy in the UK and initiatives overseas are giving Britain’s power sector a big boost. Our City expert has the detail.

Centrica (LSE:CNA) and SSE (LSE:SSE) shares picked up where retailers and pub stocks left off yesterday as the big market moves since the appointment of a new prime minister continued today.

The surge for the blue-chip power firms and FTSE 250-listed Drax (LSE:DRX) reflects the potential impact of market interventions by Liz Truss as well as the EU, with the latter said to be in discussions over a plan for an electricity price cap.

The EU proposal is focused on preventing nuclear and renewable energy plants from earning vast profits due to the price of electricity being set by the cost of gas. The Financial Times reports the price cap level is likely to be €200 per megawatt hour.

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Analysts at Jefferies said today: “If true, we would see it to be a better-than-expected outcome for generation companies. Overall, the policy focus is on redistributing the cost of supply scarcity - we see a need for more actions on bridging the potential supply-demand gap.”

As well as providing relief to consumers, the plan is expected to keep incentives for investments and energy efficiency.  SSE, whose operations span regulated electricity networks and renewables, jumped 90p to 1,777p despite the potential cap on low carbon profits.

The developments come with British Gas owner Centrica reportedly in talks with its banks over additional short-term financing, a move seen as “pre-emptive” as generators face having to post higher sums as collateral due to the surge in wholesale prices.

Centrica shares are now up by almost 12% since Monday morning, with investors relieved at Truss’s plans to support households by freezing bills and her apparent lack of enthusiasm for imposing a windfall tax on the energy industry.

Deutsche Bank now reckons the potential support measures will cost £200 billion and raise the prospect of higher interest rates if medium-term inflation is stoked by the initiatives.

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Retailers and hospitality stocks rallied yesterday on the potential help for household spending power, but a big chunk of those gains reversed today as Marks & Spencer Group (LSE:MKS) fell back 5.7p to 123.95p and Next lost 134p to 6054p.

As we reported yesterday, analysts at Jefferies no longer have “buy” recommendations on Primark business Associated British Foods (LSE:ABF), B&Q owner Kingfisher (LSE:KGF) and the supermarkets Sainsbury's (LSE:SBRY) and Tesco (LSE:TSCO).

They warned of “multiplying consumer pain” as food prices and mortgage costs continue to increase and energy costs become an enduring inflationary headwind.

Heightened global economic uncertainty further weighed on sentiment today after China’s latest trade data showed the impact of this year’s Covid lockdowns and slowdown in overseas demand as prices continue to rise.

Exports grew by 7.1% in August, which was below a market forecast of 12.8% and the previous month’s 18%, while imports edged up 0.3% against the 1.1% expected.

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The figures raised fears over the winter outlook for China’s economy, particularly with many of its key cities still the subject of Covid restrictions. Many commodity prices fell as a result, leaving Anglo American (LSE:AAL) down 41p to 2,765p and Glencore (LSE:GLEN) 7.25p cheaper at 479.6p.

Other blue-chip fallers included AstraZeneca (LSE:AZN), which slipped 166p to 10,348p after analysts at Morgan Stanley removed their “overweight” position in a move reflecting downside risk to near-term earnings expectations for London’s second-biggest stock.

However, the bank added: “Innovation remains the key driver to offset drug pricing pressures and we see many R&D catalysts for AstraZeneca over the next 18 months.”

The EU biopharma sector has provided a relative safe haven for investors during the current inflation crisis, although the bank warns that this will be tested going into 2023 by an increasing focus on earnings momentum and innovation catalysts. US drug pricing legislation and emerging product litigation concerns also create uncertainty, it adds.