Brexit and trade optimism mounts

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (7 to 11 October 2019).

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Markets had a volatile week following another attack on oil infrastructure in the Middle East, the acceleration of an impeachment enquiry into US President Donald Trump and the invasion of Syria by Turkish troops, a move supposedly given the green light by the US president. At the end of the week, optimism was mounting that an illusive Brexit deal could be agreed and there were positive comments surrounding trade talks in Washington, but these remain ongoing.

The FTSE 100 was up 0.5% over the week by mid-session on Friday and the FTSE 250 was up 0.2%.

Brexit

Prime Minister Boris Johnson and Irish leader Leo Varadkar said they could "see a pathway to a possible deal" on Brexit. Mr Varadkar said the "very positive" meeting meant negotiations could resume in Brussels and, on Friday, Brexit Secretary Steve Barclay met EU chief negotiator Michel Barnier in the Belgian capital. European Council President Donald Tusk said he had received "positive signals" from Mr Varadkar that a deal was still possible. As a result, sterling rallied above $1.25.

The government has pledged to cut tariffs on lorries imported into the UK, and apply new tariffs on clothing imports, in the event of a no-deal Brexit. For the first year after the UK leaves the EU, the government will reduce the tariff from 22% to 10%. The move comes after the Road Haulage Association (RHA) pushed the government to axe the tariff altogether. Tariffs on bioethanol will also be adjusted to retain support for UK producers.

Trade

US President Donald Trump sounded an optimistic note at the end of the first day of US-China trade talks in Washington. "We had a very, very good negotiation with China," Mr Trump told reporters after the talks wrapped up. President Trump is scheduled to meet directly with Vice Premier Liu He at the White House later on Friday. Although officials on both sides are speaking positively about the meeting, few expect more than incremental progress.

The positivity came despite the US Commerce Department blacklisting 28 Chinese public security bureaus and companies on earlier in the week over Beijing’s treatment of Uighur Muslims and other predominantly Muslim ethnic minorities. Being placed on the Entity List means that these organisations must apply for additional licenses in order to purchase products from US suppliers. But approval is difficult to obtain, which essentially means they are blocked from doing business with American companies. Xinjiang Uighur Autonomous Region People’s Government Public Security Bureau and several associated government agencies, and tech companies video surveillance manufacturers Dahua Technology and Hikvision, Artificial Intelligence (AI) tech groups Yitu, Megvii, SenseTime and iFlyTek, digital forensics company Meiya Pico and Yixin Technology Company. You can read the Commerce Department’s statement here.

Beijing said that comments by US Secretary of State Mike Pompeo accusing China of human rights violations in its treatment of Muslims constituted a smear against China. Mr Pompeo said in a television interview that China’s treatment of Muslims, including the Uighurs, in western China was an “enormous human rights violation” and Washington will continue to raise the issue.

The US and Japan signed a trade deal which focuses on mostly agricultural products. Japan will cut tariffs for $7bn worth of US farm exports, while Washington will cut US tariffs on $40m in Japanese agricultural goods and ease tariff-rate quotas on the country's beef. The new bilateral deal is more limited than the Trans-Pacific Partnership, which Mr Trump withdrew from in 2017, and leaves out many major disputed categories, including cars and manufacturing equipment.

Japan and South Korea have agreed to meet in Geneva in an attempt to resolve a deepening trade rift. Gary White explains the background to the dispute here.

Last week’s ruling from the World Trade Organisation that Airbus benefitted from illegal subsidies is yet another piece of bad news for Europe. Tariffs are coming. Garry White looks at the issue here.

Economics

The UK economy contracted by 0.1% in August, slightly worse than economists had expected. But July GDP growth was revised up from 0.3% to 0.4%. It appears that the UK might have avoided technical recession, but much now depends on the final GDP figures for the third quarter, which we get in early November.

European Central Bank (ECB) Governing Council member Olli Rehn said a report by the Financial Times stating that ECB President Mario Draghi ignored advice from within the central bank on resuming quantitative easing is “greatly exaggerated”. The FT said the ECB decided to restart bond-buying last month against the advice of its own officials.

There was yet more gloomy data for Berlin to digest. German factory orders fell more than expected in August, with domestic orders proving to be the biggest drag. Orders declined 0.6% month-on-month, which was an improvement on the revised 2.1% drop seen the month before but steeper than the 0.3% dip expected. However, industrial output increased 0.3% from July, beating expectations for a flat reading. Meanwhile, July's drop was revised up to 0.4% from 0.6%.

Investor confidence has slumped in the Eurozone. The Overall Sentix Economic Index, which tracks investor sentiment, was minus 16.8 in October, a fall on September’s minus 11.1 and well below the consensus for minus 13.0. It was also the lowest reading since April 2013.

Geopolitics

Donald Trump apparently gave Turkish President Recep Tayyip Erdogan the go-ahead to proceed with his long-planned move against Kurdish fighters who make up part of the Syrian Defence Forces and who lost thousands of men fighting with the US against ISIS. Republicans criticised the president for allowing Turkey to attack US allies in Syria as the he offered varying reasons for giving Turkey the green light, including the fact that Kurds did not fight alongside the US in World War II. Turkey launched its military operation to flush Kurds allied with the US out of north-eastern Syria sparking outrage in Congress, creating rare bipartisan unity about the risks to the Kurds, US national security interests, regional stability and the fight against ISIS.

The White House argued that the impeachment enquiry against President Trump was constitutionally dubious. Republicans said that it would set a precedent. The House took a formal vote in the last two impeachments of Presidents Richard Nixon and Bill Clinton, but there is no law stating the House must hold a full vote to authorise an impeachment enquiry before one is started. The impeachment relates to Mr Trump asking Ukraine to investigate the activities of Democratic rival Joe Biden and his son Hunter.  Additionally, two Ukrainian-born business partners who dined with President Donald Trump at the White House and worked with his personal attorney Rudy Giuliani were subpoenaed by House Democrats as part of its impeachment inquiry — just hours after they were arrested on federal campaign finance charges.

Apple has deleted the HKmap.live app that allows Hong Kong protesters to track police movements from its App Store. The tech giant said the app allowed protesters to ambush police in what have become increasingly violent clashes between authorities and anti-government activists. Criticism is building of companies that bend to Chinese demands. It also looks unlikely that pre-season basketball games for the Brooklyn Nets and Los Angeles Lakers in China will not go ahead because of controversy surrounding a tweet sent by Houston Rockets general manager Daryl Morey showing support for anti-government protesters in Hong Kong.

Talks between Pyongyang and Washington appear to have met an impasse. North Korea said that it had no desire to engage in “sickening negotiations” with the US anymore, rejecting Washington’s suggestion that negotiators from both countries meet again in Stockholm in two weeks. In a statement issued a day after bilateral talks broke down in Stockholm last weekend, the North Korean Foreign Ministry said it would not meet with American negotiators again until Washington took “a substantial step” to “complete and irreversible withdrawal of hostile policy.”

Profits warnings

Shares in UK construction and building materials companies dipped after a profits warning from UK company SIG. The business makes specialist insulation, roofing and air handling products across Europe – from cladding and tiles to fans and ducts. Management warned shareholders that its business is struggling, due to weak demand and rising political uncertainty. As a result, underlying profits this year will be “significantly lower” than last year. It said the recent deterioration in trading conditions had accelerated over recent weeks, and political and macro-economic uncertainty had continued to increase. Shares in Kingfisher, Travis Perkins, Howden Joinery and Grafton Group fell following the news.

Pagegroup delivered its second profit warning of 2019, blaming challenging trading conditions in the UK, France and China and deteriorating economic conditions in markets such as Germany. The recruiter cut its forecast for 2019 operating profit to between £140m and £150m, down from earlier market estimates of between £156.5m and £168m. Rival Robert Walters also said it would see no increase in profit this year.

French advertising giant Publicis slumped after management cut its 2019 revenue forecast for the second time in three months, amid a continued squeeze on traditional advertising by US. consumer-goods companies.

Dutch healthcare-technology giant Philips warned the trade war between the US and China will prevent it from hitting targets for profit margin improvement this year.

Ukraine-based iron-ore miner Ferrexpo reported a drop in third quarter production and cut its annual production guidance blaming the current market environment.

Private Russian agricultural commodity giant Louis Dreyfus warned that trade tensions and a pig epidemic would continue to weigh on its business for the rest of the year after first-half profit fell 20%. The US-China tariff dispute has shaken up the soybean market while the spread of African swine fever further dampened demand for soy-based livestock feed by decimating pig herds in China and other Asian countries.

Copenhagen-listed Novozymes issued its third profit warning in six months. The world’s biggest industrial-enzyme maker blamed a sharp slowdown in US ethanol production. He said the company was hit by “bizarre” circumstances and that growth would return next year.

IPOs

London saw the fewest companies going public in the third quarter in a decade. Financial consultancy EY noted that just four companies launched IPOs in London between July and September, compared with 15 in the previous quarter.

The Saudi Aramco IPO appears to be getting closer. The Wall Street Journal reported that the state-owned oil company could sell 1% to 2% of its shares on Saudi Arabia's domestic exchange as soon as November ahead of a listing on an unnamed foreign exchange.  Aramco is poised to release its prospectus in Arabic on 25 October and follow up with an English version two days later, the report noted.

Reports suggested EG Group, one of the world’s largest independent petrol station and convenience store chains, which is based in Blackburn, was considering an IPO next year that could value it at more than £10bn.

WeWork, which pulled its controversial IPO last month, is now facing a cash crunch, according to the Financial Times. The report said its financing situation was so bad it may need to raise cash as soon as November. Management have also told staff that job cuts are coming, with between 10% and 25% of its staff laid off.  

Kazakh financial group Kaspi.kz, which controls the Central Asian country's third largest bank, has postponed a London listing due to market conditions. Shareholders who had planned to sell down stakes in Kaspi.kz’s listing included Baring Vostok funds and Goldman Sachs, while Morgan Stanley, UBS, Citigroup and Credit Suisse were jointly coordinating the offering.

African Export-Import Bank is considering an IPO of global depository receipts (GDRs) on the London Stock Exchange's main market. The bank, also known as Afreximbank, exists "to facilitate, promote and expand intra- and extra- African trade".

M&A

The Competition and Markets Authority (CMA) has announced it is considering whether to investigate the £1.3bn acquisition by Stonegate Pubs, which owns the Slug and Lettuce chain, of rival Ei Group, which was previously called Enterprise Inns. The CMA said there would be a substantial lessening of competition within any market or markets in the United Kingdom for goods or services.

Technology

The Organisation for Economic Cooperation and Development (OECD) unveiled proposals for a new tax regime to ensure multinationals pay their fair share of tax. Global internet groups such as Alphabet’s Google and Facebook have pushed current tax rules to the limit, as they legally book profit and situate their assets such as patents in low-tax countries like Ireland regardless of where they do their business. The overhaul will have an impact of a few percentage points of corporate income tax in many countries, with no big losers apart from big international investment hubs, the OECD said. To read the detailed proposals click here.

After recent reports that Mastercard and Visa may pull out of the development of Facebook’s cryptocurrency Libra, PayPal became the first company to drop out of the project, as the embattled project continues to face queries from regulators around the world.

Samsung, which issued a profit warning in March, told investors that its operating profit would likely plunge 56% in the third quarter, as the company continued to struggle with sluggish demand for memory chips. However, the shares rose on signs of a nascent recovery, after memory chip shipments were higher than expected.

The technology sector has led stock market gain over the last decade. John Redwood looks at the proof here.

Energy

Iran said missiles struck one of its tankers in the Red Sea, the latest in a series of attacks on oil infrastructure in the region, sending the oil price higher. Brent crude futures rose by almost 3% over the week by mid-session on Friday to trade at about $60.10 a barrel.

The International Energy Agency says there will be an oversupply of oil next year as it cut its forecast for oil demand by 100,000 per barrels per day to 1.2m. It noted that demand for oil from Opec countries will reduce because of higher supply from the United States, Brazil and Norway.

Other retail

British retailers had the worst September since records began. The British Retail Consortium (BRC) said a 1.3% drop in sales last month meant the annual increase in activity had dropped to just 0.2% in 2019 – its lowest level since 1995. Although wages are currently rising faster than prices, retailers said the BRC’s monthly survey with KPMG showed that consumers were reluctant to part with their money at a time of heightened political and economic uncertainty.

Concerns are rising over the outlook for Pizza Express, which is saddled with £1.1bn of debt, which works out at about £1.6m per outlet. The pizza chain is reportedly in early talks to refinance two tranches of borrowing worth a combined £665m. About half of the interest payments are made to its Chinese parent company, Hony Capital.

Almost all House of Fraser stores could shut after the crucial Christmas shopping season, as Mike Ashley's bad bet through his athleisurewear group Sports Direct appears to be heading for a sorry end. Sports Direct paid administrators £90m for House of Fraser after it collapsed last year, took control of 64 sites including 59 stores, three office buildings and two warehouses. Seven sites are now empty and Sports Direct is either not paying rent or is about to end the leases for the vast majority of the remaining ones, fresh papers from administrators EY have showed.

Despite good headline figures in its first quarter update, shares in homewares retailer Dunelm fell. Dunelm saw both like-for-like and total sales increase in what it described as a “particularly strong” first quarter of trading. The company did not raise its expectations for the first time in a while and margins are expected to be hit by foreign exchange headwinds towards the end of the financial year.

Consumer

GVC Holdings, the owner of sports betting and gaming businesses such as Ladbrokes Coral and Gala, reported a 12% rise in net gaming revenue in its latest quarter. As a result, it upped its full-year guidance.

Pubs chain JD Wetherspoon has joined the meatless-meat bandwagon. Following a successful six-month trial in 40 of its pubs, the group is putting plant-based burgers made by the UK start-up The Meatless Farm on the menu of all 880 of its UK outlets.

Financials

Hong Kong's stock exchange has dropped its multibillion-dollar bid for the London Stock Exchange. The bid from Hong Kong Exchanges and Clearing was worth £32bn and was dependent on the axing of the London exchange's planned purchase of US financial data provider Refinitiv.

HSBC plans to lay off up to 10,000 staff as it embarks on a fresh cost-cutting, reports suggested. The cuts would mostly affect high-paid roles and shrink the global workforce by 4%.

The Financial Conduct Authority fined interdealer broker Tullett Prebon £15.4m related to an investigation over some trades between 2008 and 2011 that involved attempted manipulation of Libor, the inter-bank lending rate.

Healthcare

US drug firm Johnson & Johnson has been told to pay $8bn in punitive damages to a man over claims he was not warned that an antipsychotic drug Risperdal could lead to breast growth. Johnson & Johnson will appeal the ruling, which it said was "grossly disproportionate".

GlaxoSmithKline said it was recalling the popular heartburn medicine Zantac in all markets, days after the US Food and Drug Administration found “unacceptable” levels of probable cancer-causing impurity in the drug.

Property

UK house prices are rising at their slowest rate for more than six years, according to lender Halifax. Annual house prices were just 1.1% higher in September than they had been a year earlier, the worst performance since April 2013. The average UK property cost £232,574, 0.4% lower than August.

Autos

Dyson, the technology company best known for its vacuum cleaners, fans and hand dyers has scrapped its project to build electric cars, claiming the business did not make financial sense. The company, headed by founder Sir James Dyson, said its engineers had developed a "fantastic electric car" but it was not “commercially viable”. Dyson had planned to invest more than £2bn in developing a "radical and different" electric vehicle. The company said major carmakers were at an advantage because they could use revenues from existing vehicle production to subside development of electric vehicles.

It’s not all negative news from the auto sector. Mercedes-Benz enjoyed record sales in the third quarter, as a strong showing in China boosted the German luxury brand. The manufacturer sold 181,233 cars in China in the three months ending in September, up 13% year-on-year.

Travel & transport

European air safety regulators have reportedly told their US counterpart they want more testing on the troubled Boeing 737 Max flight-control systems before the plane is cleared to re-enter service. The EU’s Aviation Safety Agency told the Federal Aviation Authority it was not satisfied with demonstrations of the reconfigured safety systems on the planes, which were involved in two crashes in Indonesia and Ethiopia that killed 346 people. Also, pilots at Southwest Airlines are suing Boeing for lost pay after allegedly “deliberately misleading” them about the 737 Max aircraft, in a case which could spark a wave of lawsuits around the world. Additionally, American Airlines pulled the planes from its schedules until 16 January next year, later than any other US airline.

Budget airline easyJet said its results for the year have been helped by strikes at Ryanair and IAG-owned British Airways. Management now sees full-year profits between £420m and £430m.

Privately-owned Hays Travel has agreed a deal to buy all 555 Thomas Cook stores in the UK, offering work to hundreds who lost their jobs. The Official Receiver's statement said the property deal, for an undisclosed sum, provided opportunities for a "significant number" of former Thomas Cook workers.

For more information please get in touch 020 3504 8307 or email us at madeforyou@charles-stanley.co.uk 

Garry White is Chief Investment Commentator at Charles Stanley &Co. Limited, which is authorised and regulated by the Financial Conduct Authority.

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