Pound slips in wake of election
Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets last week (16 – 20 December 2019).
US markets continued to hit new all-time highs this week, despite confusion over the “phase-one” trade deal agreed between Beijing and Washington. China remained very quiet over the agreement and there were no celebrations in state-owned media. The US House of Representatives voted to impeach Donald Trump, but the move is unlikely to be passed by the Senate. The pound lost its post-election bounce after freshly re-elected Boris Johnson ruled out extending discussions over a trade deal with the EU beyond the end of 2020 in a move aimed to focus minds and speed up the process.
A mega-merger in the auto sector was announced, as Fiat Chrysler and PSA, the owner of the Peugeot, Vauxhall and Opel brands have agreed a merger to create the world's fourth-largest automaker. More consolidation may be ahead next year as the industry struggles with the transition from the internal combustion engine to greener vehicles. In a move that will be bad for US manufacturing data next year, Boeing said it was halting production of its troubled 737 Max in January to preserve cash.
The FTSE 100 rose 3% over the week by mid-session on Friday, boosted by the tumbling pound. Its constituents generate the majority of earnings in foreign currency so the index is boosted by weak sterling. The FTSE rose 0.5% over the week.
Jon Cunliffe, Charles Stanley’s chief investment officer, makes eight predictions for markets in 2020 here.
After a banner year for equities in 2019, John Redwood looks at what lies in store over the course of the next year here.
Boris Johnson plans to write into law that the UK will leave the EU in 2020 and will not extend the transition period after his decisive win in the election last week. The prime minister’s team is working on amending the withdrawal agreement bill so that the transition, also known as the implementation period, must end on 31 December 2020 and there will be no request to the EU for a further extension. This once again raises the prospect of a no-deal Brexit at the end of next year. The news reversed the rally in the pound seen since the election result.
Ratings agencies Standard & Poor’s (S&P) and Fitch said it was now less likely that the UK’s credit rating will be downgraded. They argued that Boris Johnson’s emphatic election win reduced the risk of a no-deal Brexit at the end of January. S&P raised Britain’s outlook to stable from negative while Fitch took the country off its rating watch negative list – although it kept its broader outlook at negative.
The Queen’s speech laid out measures for the current parliament’s agenda. From a business perspective, the new Tory government plans include:
- Public services and infrastructure investment.
- Additional investment in science and skills to improve productivity.
- Giving local communities more power over spending.
- Higher tax credits for research and development.
- Business rate changes.
- A new independent regulator for environmental issues.
A “phase-one” trade deal has been agreed by Washington and Beijing, but there remains some scepticism in the markets. The deal left in place tariffs on the bulk of Chinese imports — more than $360bn worth of goods. According to the US trade representative Robert Lighthizer, China will buy an additional $16bn (£12.2bn) worth of US farm products a year, on top of the $24bn baseline purchases made during 2017. However, the Chinese side has offered no details on its purchase commitments, so there is a degree of scepticism about whether these targets will be achieved. Mr Lighthizer has said that, although the targets would be broken down by individual product, at least some of these would remain classified to avoid distorting market prices. China has also been very quiet on the deal, not lauding the agreement in state-controlled media.
China's finance ministry published a new list of six products from the US that will be exempt from tariffs starting on 26 December. They are mostly chemical products such as white oil, high-density polyethylene, linear low-density polyethylene, polypropylene and food-grade petroleum wax, the Ministry of Finance said. The exemptions last for a year until 25 December 2020.
The US may increase tariffs on European goods as it seeks to slash its chronic trade deficit with the continent, Trade Representative Robert Lighthizer said. He did say, however, that he was looking for a negotiated solution.
Andrew Bailey, currently chief executive of City watchdog the Financial Conduct Authority, will be the next governor of the Bank of England. He will take over from Mark Carney on 15 March.
The UK economy expanded by 0.4% in the third quarter, faster than the 0.3% previously reported. The Office for National Statistics (ONS) also revised down its numbers for 2018 – growth for the year was only 1.3%, down from the previous reading of 1.4%.
The Bank of England (BoE) kept interest rates steady, saying it was too soon to gauge how much Prime Minister Boris Johnson's election victory would lift the Brexit uncertainty that has hung over the economy. For a second month, two of the BoE's nine policymakers voted for a cut to borrowing costs due to fears the job market is deteriorating. However, the majority of the Monetary Policy Committee took a wait-and-see approach.
There was some bad economic news in the UK. The “flash” early reading of the IHS Markit/CIPS UK Purchasing Managers’ Indices (PMI) showed that the decline in both the services and manufacturing sectors accelerated unexpectedly in December. The readings, which pushed up British government bond prices, suggested the world’s fifth-biggest economy is on course to contract in the fourth quarter, survey compiler IHS Markit said.
The UK’s monthly retail sales fell by 0.6% in November, the fourth month in a row without growth, the ONS said.
However, there was some positive news on the UK jobs market. UK unemployment fell to its lowest level since January 1975 in the three months to October this year. The number of people out of work fell by 13,000 to 1.281 million. Also, British consumer confidence increased in December, according to GfK’s measure, with the researcher saying it points to a “clear sense of change”.
Sweden's central bank has raised its core interest rate by 25 basis points to 0%, becoming the first central bank which cut into negative territory to get back above minus rates.
Beijing is faced with a number of headwinds in its financial system. John Redwood argues that it will be a challenging balancing act here.
China’s President Xi Jinping held a three-day visit to the gambling hub of Macau to mark the twentieth anniversary of its handover to China. Mr Xi announced measures for Macau aimed at diversifying its casino-dependent economy into a financial centre, including a new yuan-denominated stock exchange. This is seen as laying the foundation to develop Macau into a “new Hong Kong” should the situation continue to deteriorate in the former British territory.
The US Senate passed a defence bill that contained sanctions against Turkey. Senators voted 86-8 to approve the National Defense Authorization Act (NDAA), which has now been sent to the desk of President Trump for approval. The bill included measures aimed at Turkey, including a prohibition on transferring the fifth-generation F-35 joint strike fighter, or its parts, to Turkey. It is a response to Ankara’s purchase of a Russian S-400 anti-air missile system.
China and Russia proposed easing some sanctions against North Korea – on condition the government commits to Security Council resolutions on denuclearisation, in a move the US described as premature.
Donald Trump has become the third US president in history to be impeached by the House of Representatives, setting up a trial in the Senate that will decide whether he remains in office. Seen as a partisan issue, the Republican-controlled Senate is unlikely to vote for impeachment.
The London Stock Exchange retained its position as Europe’s most active market in 2019 and contributed approximately 30% of total European IPO proceeds, according to PwC. London IPO proceeds were £5.7bn in 2019 down by 26% compared to 2018, when £7.7bn was raised from 63 IPOs. In total, there were 26 IPOs on the London Exchange in 2019, approximately 59% down on 2018.
Investment group JAB Holdings plans to combine Jacobs Douwe Egberts and Peet’s Coffee, a premium US coffee brand, and float the business in Europe, possibly on the Amsterdam Stock Exchange. This will create JDE Peet, the world’s largest listed pure-play coffee group with sales of about €7bn.
Domestos bleach and Magnum ice cream maker Unilever warned that sales growth will miss market expectations this year due to challenging trading environments in some of its largest markets.
US delivery giant FedEx issued its second profit warning this year after quarterly earnings fell sharply on subdued global trade and the end of its relationship with Amazon, the world’s top online retailer. Amazon this week blocked third-party sellers from using the FedEx ground delivery network to handle Prime shipments, due to problems with timeliness of deliveries in major cities.
Recruitment company Staffline lowered its full-year profit guidance due to softer-than-anticipated hiring from its customers in the fourth quarter.
Oilfield services provider Petrofac said it expected a more than 5% fall in full-year revenue, as delays in bidding processes hit new orders for its engineering and construction segment during the second half of 2019.
Controversies involving environmental, social and governance (ESG) issues have wiped more than $500bn off the valuation of companies in the S&P 500 over the past five years, according to an analysis by Bank of America. The bank declined to name any of the companies involved.
Greta Thunberg has accused the chief executives of major companies of being complacent about environmental concerns. Garry White argues that she is wrong here.
Alphabet’s Google has settled a “longstanding” tax dispute with Australia’s tax office, after paying an extra A$481.5 million (£255m) on top of its previous tax bill.
Apple faces a shareholder revolt at its next AGM after pressure group SumOfUs successfully submitted a proposal that, if approved by shareholders, would require the company to explain whether its decisions are compatible with its human rights policies. It is asking why the company complies with the Chinese government’s attempts to censor the internet.
Airbnb won a European court ruling that helps clear a path towards its IPO. The European Court of Justice ruled the group cannot be forced to abide by the tougher regulations faced by real estate agencies in France. The EU’s top court decided that French authorities had failed to notify the European Commission about the rules, meaning Airbnb, which is managed from Ireland, escaped more stringent oversight.
Royal Dutch Shell said it expected impairment charges of up to $2.3bn in the fourth quarter and trimmed its forecast for quarterly oil production sales, as the oil major faces slowing demand for oil and gas.
Hunting warned that expectations for annual profit were under threat from a sharpening slowdown in the US onshore oil and gas market as the company approaches its year end. The energy services group said it still expected earnings in 2019 to be within the range of market expectations, but that this result depends on trading in December.
BHP Group, the world’s largest miner, will make small steps back into commodities trading in a plan to boost returns and manage transaction risk, Reuters reported. The return to trading at the world's biggest listed miner for the first time since the mid-2000s will see it add trading capacity across copper, energy and iron ore divisions in what one of the people described as "baby steps".
Anglo American said that the value of rough diamond sales at its De Beers unit rose in the tenth cycle of the year. The value increased to $425m from $400m in the ninth cycle but was down from $544m in the tenth cycle of last year.
Gold miner Centamin accused its Canadian suitor Endeavour Mining of not engaging in a “proper manner” as talks between the two gold miners stalled. Centamin said it will not ask the regulator to extend the 31 December bid deadline, but Endeavour urged it to do so.
Airlines & transport
Boeing will temporarily halt production of its 737 Max airliner in January. The troubled airline manufacturer had hoped to have the aircraft back in the air by the end of this year, but US regulators made it clear that the planes would not be certified to return to the skies that quickly. Production of the jet had continued despite the model being grounded for nine months after two deadly crashes. More than 300 people died when two 737 Max aircraft crashed in Indonesia and Ethiopia after reported problems with a new feature. Boeing is one of the largest US exporters. The announcement hit European suppliers such as the UK’s Senior and Meggitt, as well as France’s Safran.
British Airways, owned by IAG, has struck a deal with its pilots over a dispute relating to pay and conditions that led to a mass walkout in September.
FirstGroup’s management are in a strategic mess. The group is considering a sale of all its North American businesses, in an apparent reversal of strategy only months after saying it would focus primarily on its US bus operations. The group said it had appointed advisers to explore options, including the potential disposal of First Student, which operates about 43,000 yellow school buses, and First Transit, which provides outsourced public transport. The third US division, Greyhound, which operates the famous intercity coaches, was put up for sale in May.
Train ticket platform Trainline, which floated in June, saw revenue jump by more than a quarter in the first nine months of its financial year.
Fiat Chrysler and PSA, the owner of the Peugeot, Vauxhall and Opel brands have agreed a merger to create the world's fourth-largest automaker, worth about $50bn. The auto sector remains in flux as traditional car sales slump as the industry invests in electric vehicles, which consumers are yet to display much enthusiasm over. Fiat Chrysler’s robot unit, which makes machines used in the automation of production lines, will now stay in the merged entity and not be spun off as previously mooted. John Redwood looked at consumer confusion in the auto sector here.
German carmaker Daimler has been exploring options to strengthen its control of Beijing Benz Automotive, its Chinese joint venture with China's BAIC Group, reports suggested. Daimler reportedly faces some opposition within BAIC, which wants to maintain control of a business that has become highly profitable due to strong sales of Mercedes-Benz cars in China. There were reports that BAIC is seeking to expand its stake in Daimler, possibly giving it a board seat, and upstaging its domestic rival Geely, which is also a shareholder.
A flagship car-sharing service run by BMW and Daimler has pulled out of the UK because of a lack of interest. ShareNow, which has operated as DriveNow in London since December 2014, said "low adoption rates" had forced it to pull out of the capital as well as two other European cities, Florence and Brussels.
Volkswagen was slapped with a record fine by Australia's consumer watchdog to settle lawsuits over the carmaker's global emissions scandal. The A$125m (£66m) penalty is the highest ordered by a court for breaches of Australian consumer law.
Hedge funds that shorted shares in Tesla are sitting on losses of $575m after the valuation of the electric carmaker touched its highest level in more than a year, reports noted.
Major UK banks all passed the Bank of England’s stress tests. It said lenders were strong enough to withstand deep recessions at home and abroad, but would struggle to stay afloat without slashing staff bonuses and shareholder payouts. The central bank also increased capital requirements, doubling the size of the “countercyclical capital buffer” from 1% of risky assets to 2%. This represents a tightening of financial conditions in the UK as the money is not available for lending.
The Bank of England also launched an ambitious attempt to quantify the risk that climate change poses to the financial system. Banks and insurers will face climate stress tests in a similar way to the financial stress tests they already do. It could ultimately result in banks and insurers having to hold more capital if they do certain kinds of business. This would, once again, tighten financial conditions.
It looks like margins at retailers may take a hit after research from Deloitte showed that discounts on clothing and products in the lead up to Christmas could be the biggest in almost ten years. The consultancy expects average discounts to hit 50% by Christmas Eve. Its forecast came as data provider Springboard said shopper numbers were lower than the same time last year.
Sports Direct shares rallied by 30% after the retailer posted a jump in profit and revealed that it was beginning to see “green shoots of recovery” at House of Fraser. However, founder Mike Ashley said it was likely that more unprofitable House of Fraser stores will close over the next 12 months. Mr Ashley also lashed out at politicians and regulators after his stake in Debenhams was wiped out when it was taken over by a consortium of investors.
UK meat producer Cranswick said it had acquired Packington Pork from the Mercer family. The transaction would increase Cranswick's self-sufficiency in UK pigs processed to more than 25%, securing direct control over a “significant part of its supply chain for premium pigs, reinforcing its commitment to developing a sustainable and traceable farm to fork operation”, the company said. The company has benefitted from African Swine Fever, which has decimated the Chinese pig population and boosted the country’s imports of pork. For more click here.
Shares in NMC Health plunged by almost a quarter after US activist investor Carson’s Block’s company Muddy Waters said it was shorting the shares because of concerns about the company’s financial statements. NMC took 24 hours to respond, saying it would provide a detailed response in due course, calling the criticism of its financial statements “baseless.” You can read the Muddy Waters statement here.
The billionaire Sackler family started to take far more money out of Oxycontin-producer Purdue Pharma after the company pleaded guilty to misleading marketing in 2007. The family transferred about $10.7bn out of the drugs group from 2008 to 2017, court documents revealed, compared with $1.3bn between 1995 and 2007. The Sacklers own Purdue Pharma, which is accused of fuelling the US opioid crisis through drugs such as OxyContin.
Media & entertainment
Cineworld offered to buy Toronto-listed Cineplex, Canada’s largest cinema operator, for £1.6bn in cash. The deal will add 165 movie theatres to Cineworld, bringing its total estate to 954 sites. Chief executive Mooky Greidinger said the combination of Cineplex and US firm Regal, which Cineworld agreed to buy two years ago, “will create the leading North American cinema operator”.
Publisher Pearson will sell its remaining 25% stake in publisher Penguin Random House to German partner Bertelsmann generating net proceeds of about $675m. The deal will end Pearson's association with consumer publishing. The group also said chief executive John Fallon would retire in 2020 once a successor had been appointed.
After rallying following the trouncing of Labour in the general election, which had wanted to privatise utility companies, regulator Ofwat unveiled the toughest restrictions on investor payouts since privatisation 30 years ago. Ofwat also said water companies, including United Utilities, Severn Trent and Pennon, would have to cut the average customer bill by £50 over the next five years.
Electricity regulator Ofgem also said it will crack down on returns the owners of electricity network companies will be allowed to make to their investors from April 2023.
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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.