Trade bad, Brexit good
Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (14 to 18 October 2019).
It was a busy week in equity markets. There was negativity surrounding the interim trade deal apparently agreed between the US and China, as Beijing rowed back on some of its promises after the US House of Representatives passed a bill critical of the country’s reactions to protest in Hong Kong. Boris Johnson agreed a Brexit withdrawal agreement with the European Union, but it remains unclear whether it will pass an expected knife-edge vote over the weekend. Nevertheless, the agreement generated optimism in markets. Saudi Aramco pulled its float again and Chinese GDP growth hit a near three-decade low in the third quarter, accelerating slowdown fears.
The FTSE 100 fell 1.1% over the week by mid-session on Friday, as the pound rallied following the announcement of a Brexit deal. Because most earnings in the blue-chip index are generated in foreign currency, the FTSE 100 tends to be hit by sterling strength. However, the midcap FTSE 250 hit a 12-month high, rising 0.8%.
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To much fanfare, Prime Minister Boris Johnson agreed a deal with the European Union (EU), but he now needs to win a vote in parliament on Saturday. Mr Johnson has insisted he is "very confident" MPs will back his deal, but Northern Ireland’s Democratic Unionist Party has expressed opposition to his agreement, which means he faces a battle to get the agreement through Parliament.
To read the key documents relating to the deal click here.
The optimism surrounding a potential trade deal between the US and China faded this week, despite a partial trade deal being announced on the prior Friday. There has been a lack of detail and another complicating factor in the US-China trade war is the current turmoil in Hong Kong. The US House of Representatives passed a bill this week – the Hong Kong Human Rights and Democracy Act – to the ire of Beijing. The law would end the Hong Kong-US special trading status unless the State Department certifies annually that city authorities are respecting human rights and the rule of law. China expressed “strong indignation” at the move. Also, before China will purchase $40bn to $50bn of US agricultural products – a value President Trump said was agreed on in the “phase one” trade deal, China wants a rollback of $50bn of tariffs before it will agree.
Tariffs on European goods came into force on Friday 18 October in relation to the World Trade Organisation (WTO) ruling on state aid to Airbus. These included trade barriers on men's woollen suits made in the UK, as well as cashmere knitwear and Scotch whisky. Garry White looks at the background to the tariffs here.
Germany has set rules governing 5G mobile networks that will not exclude any equipment vendors on an up-front basis, government spokesman Steffen Seibert said on Monday. “Essentially our approach is as follows: We are not taking a pre-emptive decision to ban any actor, or any company,” Mr Seibert said. The company he is referring to is Huawei, which has been at the centre of the Trump White House trade dispute and the US administration want excluded from western 5G networks. Huawei also issued third-quarter results, which showed it had added more 5G customers, despite the Washington campaign. It has now signed more than 60 contracts with commercial carriers for its next-generation 5G systems. Revenues rose by almost a quarter in the first nine months of the year.
Exports from Singapore shrank for the seventh straight month in September, hurt largely by a sharp fall in electronic shipments. Non-oil domestic exports declined by 8.1% year-on-year, following a revised 9% decline in August, data from trade agency Enterprise Singapore showed. This is important because Singapore is one of the most trade-dependent economies in the world and is often seen as a global indicator for trade.
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Global economic growth will be just 3% this year, the International Monetary Fund forecast, its lowest level since the financial crisis and a downgrade from the organisation’s April prediction of 3.2%.
Britain’s jobs boom weakened in the three months to August, which showed the biggest fall in employment in more than four years. The number of people in employment unexpectedly fell by 56,000 to 32.69 million, the Office for National Statistics said. A consensus view had expected employment to grow by 23,000.
US retail sales unexpectedly fell in September, for the first time in seven months, prompting concerns about the health of the US consumer. The Commerce Department said that retail sales dropped 0.3% last month as households slashed spending on building materials, online purchases and automobiles.
Hopes of a fiscal stimulus in Germany faded after the country’s ruling conservatives reiterated their position to uphold the “black zero” budget policy of not taking on new debt after a media report said they may drop the balanced-budget goal if the economic situation darkens further.
German investors sentiment declined by less than expected in October, according to the latest survey from the ZEW. The headline ZEW economic expectations index fell to minus 22.8 from minus 22.5 in September, coming in ahead of consensus expectations for a reading of minus 26.4.
The German government lowered its 2020 forecast for economic growth to 1.0% from 1.5% but said that Europe’s largest economy was not facing a crisis.
There was some grim news from China, as third-quarter GDP came in worse than expected, hitting a 27.5-year low. Growth slipped to 6% over the quarter, lower than the 6.1% pencilled in by economists. Further data also indicated the trade dispute with the US is taking its toll. Chinese exports and imports also fell by more than expected in September.
Donald Trump’s green light for Turkey’s President Recep Tayyip Erdogan caused much consternation to both his opponents and supporters. The US president sent a threatening letter to the Turkish leader and the country agreed to a ceasefire in northern Syria to let Kurdish-led forces withdraw. All fighting will be paused for five days, and the US will help facilitate the withdrawal of Kurdish-led troops from what Turkey terms a "safe zone" on the border. It is unclear whether the fighters of the Kurdish YPG will comply. To read President Trump’s letter to the Turkish president click here.
US Vice President Mike Pence and President Donald Trump’s personal lawyer Rudy Giuliani said they will not cooperate with a US House of Representatives impeachment inquiry. This prompted Democrat Adam Schiff to say that would strengthen the case against the president. Everything Mr Trump does now seems to be geared to the presidential election, which is still more than a year away. The Democrats are also laying out their policy stalls. John Redwood looks at the campaign and its potential impact on markets here.
The US carried out a secret cyber operation against Iran in the wake of the 14 September attacks on Saudi Arabia’s oil facilities, Reuters reported. It said that the attack took aim at Tehran’s ability to spread “propaganda”.
US companies doing business in Hong Kong are growing more pessimistic about the ongoing unrest, according to a new study by the American Chamber of Commerce. A total of 61% of companies surveyed said they were considering moving operations from Hong Kong or were making contingency plans. The figure includes businesses which said they had difficulties hiring people from overseas while also experiencing a talent drain.
Catalan separatists, who attempted to break away from Spain in 2017, were handed jail sentences of up to 13 years by the country’s Supreme Court, sparking a series of protests. Former Catalan Vice President Oriol Junqueras was handed the stiffest sentence while eight other activists were given lesser terms of between nine and 12 years. Carles Puigdemont, the regional leader, remains in exile in Brussels after fleeing Spain two years ago.
The flotation of Saudi oil group Aramco took another twist this week, as the company delayed its IPO days before it was expected to release its prospectus to float between 1% and 2% of the company on the Riyadh Stock Exchange. Aramco sources told reporters that the oil major wants to reassure investors by presenting results covering the period of the attack on its oil facility last month. However, it is also unlikely that the $2 trillion valuation demanded by de facto Saudi leader Prince Mohammed bin Salman could be achieved in the current market, when a number of high-profile IPOs have been pulled.
Space tourism venture, Virgin Galactic, is closer to listing its shares publicly than some may expect, founder Richard Branson said in an interview. Through a merger announced in July with Social Capital Hedosophia, or SCH, a special-purpose acquisition company created by venture capitalist Chamath Palihapitiya, the company is planning to list on the New York Stock Exchange. While the company has said it plans to list in the fourth quarter of this year, Mr Branson hinted that it may be in the early part of the period.
DNEG unveiled plans to list on the London Stock Exchange, raising £150m in the process. The group is a digital visual effects and animation studio, which works on feature films and television. For visual effects, the company has won five Oscars, including one for Blade Runner 2049, four Baftas, with one for Interstellar, and one Emmy for the recent Sky series Chernobyl.
Shares in African mobile networks operator Helios Towers were up slightly on their market debut in London on Tuesday. However, the company priced its IPO at 115p a share, the low end of its pricing range.
US biotech investor RTW Investment plans to raise up to $350m for a healthcare fund that will be listed in London. Its shares will start trading on 30 October.
Softbank is reportedly preparing a financing package for WeWork that would give it control over the cash-strapped company that recently pulled its IPO. Some analysts believe the group could run out of money as soon as next month. The group also announced a series of job cuts. In its third quarter numbers, Goldman Sachs revealed it had – so far – taken an $80m hit on its investment in the troubled office rental group. With $22 billion in long-term liabilities as of 30 June, including $17.9bn tied to long-term leases, WeWork is desperate for a major cash infusion.
Australia’s biggest IPO of the year was scrapped. Latitude Financial pulled its $3.2bn listing for the second time in just over a year. Its owners - US private equity group KKR, Deutsche Bank and Varde Partners – pulled the float as there was “low demand” for the shares in the lead-up to its listing. Superannuation funds led by the nation’s largest, Australian Super, decided not to purchase shares in the company.
Shares in engineer Renishaw fell after management issued its third profit warnings of the year. The maker of specialist instruments posted a fall in first-quarter profit and revenue as it said trading is expected to remain challenging throughout the rest of 2019.
Building materials group Grafton Group warned that its annual profit would miss expectations, as the UK construction sector grappled with uncertainties linked to Britain’s looming exit from the European Union. This followed a similar warning from peer SIG. The news also hit shares in Travis Perkins, Howden Joinery and Kingfisher.
Pubs group Marston’s said it expected to report a fall in pre-tax profits due to lower earnings at its destination and premium businesses where higher wage costs hit margins.
Molten metal flow engineering specialist Vesuvius warned that it now expects annual earnings to fall as market conditions continued to weaken through the third quarter.
French carmaker Renault cuts its 2019 revenue and profit guidance, citing difficulties in markets such as Turkey and Argentina as carmakers grapple with a broad-based slump in auto sales. Management said sales were likely to drop between 3% and 4% this year.
Danone shares also plunged as the world’s biggest yoghurt maker, listed in Paris, lowered its full-year sales outlook.
The UK government announced plans to increase its powers to block proposed takeovers by overseas companies looking to buy British companies. Currently, the UK government can intervene in the foreign purchase of any company that plays a role in national security, the provision of media plurality or the stability of the financial system. In the Queens’s speech, the government said wanted to be able to intervene in deals of any size in any sector that could pose a risk to national security. Bids to acquire satellite group Inmarsat and defence company Cobham are currently being scrutinised.
Another British technology success story will be bought by a foreign buyer. Private-equity group Thoma Bravo offered $3.9bn for cybersecurity group Sophos. Management recommended the offer, which has a risk element attached as it is priced in dollars. Should the pound jump, the value of the offer will be reduced. This adds to the list of companies that have been purchased by foreign buyers following a period of weakness in sterling. Garry White looks at the issue here.
WH Smith unveiled plans to buy US company Marshall Retail Group for $400m as it pushes ahead with its entry into the US market. The deal will double the size of its international business. MRG has 170 stores in North America, 59 of them inside airports, which are being targeted by WH Smith's travel arm for their high footfall and captive audience. The US company also has shops in resorts and tourist sites such as Las Vegas.
Seplat Petroleum Development agreed the £382m purchase of fellow Nigeria-focused energy group Eland Oil & Gas. Seplat offered 166p per Eland share, a 29% premium to Eland's closing price in London the night before the offer. Seplat owns assets in the Niger Delta region of Nigeria, as does Eland.
Logistics group Wincanton said it was considering buying troubled peer Eddie Stobart. While it is yet to table an offer, Wincanton said it is “undertaking a diligence exercise on Eddie Stobart and its assets” to assess the merits of a tie-up. Under Takeover Panel rules, Wincanton has until 5pm on 15 November to make a bid or walk away. Stobart shares remain suspended after the discovery of accounting errors in its books.
Neil Woodford was removed as investment manager of his £3.5bn flagship investment product - the Woodford Equity Income Fund – which will be wound up and the cash returned to investors. The former star fund manager had planned to reopen the fund, but the administrator, Link Fund Solutions (LFS), said on Tuesday it was in the best interests of investors for it to be wound up. Woodford said he opposed the move. “This was Link’s decision and one I cannot accept, nor believe is in the long-term interests of LF Woodford Equity Income Fund investors.” It was also revealed that Woodford Investment Management (WIM) is to close. WIM will step down from managing the other two Woodford investments, Patient Capital Trust and Woodford Income Focus Fund.
Underlying dividends across UK companies fell 3% in the third quarter of 2019, the biggest slide seen in three years, according to data from Link Group’s UK Dividend Monitor. It blamed the fall on a “generalised slowdown” in earnings and Vodafone’s decision to slash its payout earlier this year. On a headline basis, the total paid still grew by £2.3bn to a third quarter record of £35.3bn. The growth was driven by sterling weakness and special dividends of £3.2 billion – up nearly four times compared to the same period last year, which largely came from mining companies and banks.
In a Democratic debate ahead of the primaries to choose a candidate to face off against Donald Trump in next year’s presidential election. Candidate Elizabeth Warren renewed her vow to break up Alphabet-owned Google, Amazon and Facebook should she win the White House.
Facebook’s proposed digital currency had another blow this week. A draft report by the G7 said cryptocurrencies such as Libra pose a risk to the global financial system. It warned that even if Libra's backers address these concerns, the project may not get approval from regulators. Recently, Mastercard, Visa, eBay and PayPal all pulled out of the Libra project, citing regulatory uncertainty. The G7 taskforce that produced the report includes senior officials from central banks, the International Monetary Fund and the Financial Stability Board, which coordinates rules for the G20 economies.
IBM missed Wall Street estimates for quarterly revenue in the third quarter, as its global technology services unit was hit by weakness in some European markets, sending its shares lower.
Shares in German payments group Wirecard slumped after the Financial Times published documents on the company's accounting practices, which it said appeared to indicate an effort to inflate sales and profits. Management rejected any charge of impropriety.
The European Commission said Broadcom, the world's leading supplier of chips used for TV set-top boxes and modems, was engaging in anti-competitive practices and ordered it to stop. Broadcom is using clauses containing exclusive or quasi-exclusive purchasing obligations and granting customers commercial advantages conditional on the customer buying systems-on-a-chip for cable modems exclusively or quasi-exclusively, the regulator alleged.
Alphabet’s Google unveiled its next-generation smartphone, the Pixel 4, at a big product launch event in New York.
In the latest blow to Netflix, AMC Theatres, the biggest cinema chain in the world, said it will launch a streaming service that will allow members of its loyalty program to rent or buy films and watch them at home, the first such offering from a cinema operator. Shares in Netflix have fallen by about a quarter in the last few months as competition heats up. Indeed, its third-quarter results missed guidance when it came to new subscribers, but earnings were ahead of market expectation resulting in a rally in the share price. This was the last earnings report before Apple and The Walt Disney Co launch their own streaming services in direct competition to Netflix. In 2020, the streaming market will get even more crowded with the launch of WarnerMedia's HBO Max and NBCUniversal's Peacock. The BBC and ITV are also set to launch their own service, Britbox, later this year.
Brent crude futures fell by 1.2% over the week by mid-session on Friday to trade at about $59.80 a barrel, hit by sliding hopes of a resolution to Donald Trump’s trade dispute with China.
The European Investment Bank (EIB), the lending arm of the European Union, postponed a decision on whether to stop financing fossil fuel projects until November, to work out final details of the move away from coal. The bank's president, Werner Hoyer, is pushing for the bank to take the lead in financing sustainable projects and proposed in July to stop its fossil fuel lending by the end of 2020.
Mining & commodities
Brazilian group Vale, the world’s largest iron ore miner by volume, saw production bounce back in the third quarter, as mines close following the collapse of a tailings dam in January. However, it was still down 17% year-on-year. The price of the steelmaking ingredient spiked as Vale closed operation for safety checks, benefiting rivals such as Rio Tinto and BHP Group.
Rio Tinto’s third-quarter iron ore shipments rose 5% year-on-year, helped by higher demand from Chinese steelmakers. Production rose 10% quarter-on-quarter as operational challenges at its major operations in the Pilbara region of Western Australia were ironed out.
BHP Billiton said it will make a final investment decision on its long-delayed $17 billion Jansen potash project in Canada around February 2021. Potash is a potassium-rich salt mainly used in fertilizer to improve the quality and yield of agricultural production.
J Sainsbury beat its rivals to become the only major UK supermarket to report sales growth in the last 12 weeks, according to the latest data from market researcher Kantar. The grocer’s sales increased 0.6%, its fastest rate since October last year, while the other “Big Four” supermarkets - Tesco, Walmart’s Asda and Wm Morrison – saw sales decline 0.2%, 0.9% and 1.8%, respectively.
Is Lidl about to launch a home delivery service? The company, which celebrated 25 years of operating in the UK this week, has posted a job advert for a digital project manager to “deliver a new online platform”. This would mean further competition of the UK’s Big Four grocers.
The number of shoppers heading to UK high streets, retail parks and shopping centres has fallen by 10% over the last seven years, the latest research shows, according to the British Retail Consortium (BRC) and the Springboard data company. In September, retail footfall dropped 1.7% year-on-year, and 1.6% on a three-month basis.
Despite an improvement in wages, UK shoppers grew more cautious about spending in the three months to September. Monthly retail sales volumes were flat in September, but annual sales growth picked up to 3.1% from a weak 2.6% in August, the Office for National Statistics said.
Profits at online fashion giant Asos slumped by more than two-thirds after restructuring costs and operational problems took their toll. "Regrettably this was more disruptive than we originally anticipated,” Asos said. Pre-tax profits tumbled 68% to £33m in the year to August.
Sports Direct founder Mike Ashley called for a Europe-wide investigation into the dominance of Nike and Adidas in the sportswear market. The retailer issued a statement in the light of reports that Nike had told independent retailers that it will stop supplying them within two years because their sales methods were “no longer aligned” with the US company’s own strategy. Sports Direct referred to concerns that Adidas would follow suit.
A slowdown in India and China put a brake on Unilever's quarterly sales growth. Sales in these fledgling markets rose 5.1% in the third quarter, down from 7.4% growth in the previous quarter. Emerging markets contribute 60% to the company's overall sales.
InterContinental Hotels said revenue per available room (RevPar), a key measure of industry profitability, fell 0.8% in the third quarter as tougher trading conditions in the US and China hurt growth. The weakness in China was exacerbated by civil unrest in Hong Kong, where RevPAR was down 36%. However, management maintained its guidance for the full-year despite the challenging backdrop.
Switzerland’s Nestlé launched vegan alternatives to bacon and cheddar cheese this week and said it will start selling the products to its restaurant and food service clients in the US and Europe next year. The announcement follows the launch of Nestlé's Awesome Burger, a plant-based burger that looks and tastes like meat. With the three new products, Nestlé plans to carve out a space for itself in the rapidly expanding plant-based market. In recent months food giants Tyson, Smithfield, Perdue and Hormel have all launched meat alternatives following the wildly successful IPO of Beyond Meat. Shares in Beyond Meat have fallen by 48% since their June peak, but are still showing gains of about 340% since they listed in May.
Domino’s Pizza is shrinking. Britain's biggest pizza delivery company will end its international operations, after a "disappointing" performance. Operations in Switzerland, Iceland, Norway, Sweden and Germany will end. In reporting the company's third quarter results, chief executive David Wild said the industry backdrop "remains challenging".
US third-quarter reporting season kicked off this week with a welcome upbeat report from JP Morgan Chase. The bank beat profit and revenue expectation as strength in consumer banking and investment banking helped offset a "more challenging" interest-rate environment. Morgan Stanley, Citigroup and BofA Merrill Lynch also beat Wall Street’s earnings estimates. However, Goldman Sachs earnings fell more than expected, with trading the only bright spot in its four major divisions. Wells Fargo also missed market expectations.
Shares in Indivior, which was spun out of Reckitt Benckiser in 2014, jumped after the pharma business upgraded its expectations for the second time in three months, as its flagship anti-opioid addiction drug Suboxone maintained market share ahead of generic competitors.
House-builder Bellway reported a jump in full-year profit amid strong demand but said cost inflation could hit its margins. The shares fell after management said it would deliver "moderate volume growth" in the year ahead.
Barratt Developments said that the new financial year has started well, with good demand for new homes, and that it continues to expect to grow volumes towards the lower end of its medium-term target.
Industrial property group Segro, which has benefitted for strong demand for warehousing for internet shops, said a strong third quarter saw it sign contracts worth £15.3m of new headline rent. This took the total for the nine months to 30 September to £48.6m, though this was below the £52m worth of new agreements signed in the same period in 2018.
Elon Musk’s Tesla was added to a Chinese government list of approved automotive manufacturers, granting the electric-vehicle maker a certificate it needs to start production in the country. This will be China’s first foreign-owned car plant.
Volvo launched its first all-electric vehicle – and the chief executive of the Swedish group took a swipe at Sir James Dyson in the process. Håkan Samuelsson said Sir James should “go back to making vacuum cleaners” following the British inventor’s aborted attempt to build an electric car. Mr Samuelsson said: “He underestimates how hard the car sector is to enter”.
Harley-Davidson suspended the production and delivery of its electric motorcycle, LiveWire. During final tests, the company discovered a problem that related to the vehicle's charging equipment. The company said tests to pinpoint the issue were progressing well, but it did not say when production will resume.
Travel & transport
National Express will operate more buses in Morocco than the UK from next year. The company signed a €1bn multi-year contract to run the bus service in Casablanca. The contract in Morocco's largest city means National Express is now the sole operator in five of the country's six biggest urban areas, it said.
United Airlines raised its full-year earnings guidance, easing some fears over the financial impact on US airlines of the Boeing 737 Max grounding.
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Garry White is Chief Investment Commentator at Charles Stanley &Co. Limited, which is authorised and regulated by the Financial Conduct Authority.