Above page content

    Site map  Cookie policy

Features

Last Week in the City: Beijing offers olive branch to Trump

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (9 to 13 September, 2019).

Garry white employee

by
Garry White

in Features

13.09.2019

Markets rose this week on optimism that there could be a resolution to the trade war after some compromise was seen on both sides, led by the Chinese. However, we have been here before. Sterling rallied on hopes that a no-deal Brexit was now less likely and the timetable form the Saudi Aramco IPO appears to have tightened. The big corporate news of the week came in the form of an audacious bid for the London Stock exchange from Hong Kong Exchanges and Clearing, a move that appears unlikely to succeed.

The FTSE 100 rose 0.8% over the week by mid-session on Friday and the FTSE 250 was up 1.6%.

Brexit

Fears receded that the UK would crash out of the European Union (EU) without a deal, helping sterling rally to its highest level since July. A bill to prevent no-deal officially became law and the Speaker, John Bercow, vowed "creativity" in Parliament if Boris Johnson ignored the law. The new law could force a Brexit delay beyond the current 31 October deadline by requiring the prime minister to request an extension to the UK's EU membership. Parliament was suspended – or prorogued – in the early hours of Tuesday and is not scheduled to return until 14 October. There was also speculation that Hungary’s Vikor Orban has offered Boris Johnson a lifeline by offering to veto any extension. However, the route forward remains unclear.

Government ministers have published a summary of their Operation Yellowhammer assessment of the “reasonable worst case” implications of a no-deal Brexit, after MPs voted to force its release. Riots on the streets, food price rises and reduced medical supplies are real risks of the UK leaving the EU without a deal, the government document said. Opinion on the accuracy of the conclusions remains divided.

Boris Johnson is trying to get an election to unlock the Brexit impasse. What would the effect of an election be on the UK equity market? Garry White takes a look here.

Trade war

There were some rays of hope in the trade dispute between the US and Beijing this week, but there is still significant progress to be made. China initially passed the US a trade-war olive branch. Beijing said it would exempt 16 types of US goods from import tariffs ahead of the latest trade war talks. However, no big ticket US goods such as soybeans were on the list, which included cancer drugs, lubricant oil and certain chemicals. In response, Donald Trump will delay a planned tariff hike on $250bn of Chinese goods on 1 October as a "gesture of good will". This will allow Beijing to celebrate their1 October national day without a fresh escalation. As Bloomberg noted: “Whether this marks a sustained improvement in relations between the world’s two biggest economies, or just a step forward that’s followed by another two back, remains to be seen.” There has also been speculation that an interim deal will be signed before a full agreement. However, President Trump said he wanted a comprehensive trade deal with China, but remains open to an interim agreement.

China's exports to the US slumped by 16% in August, as Donald Trump's tariffs sapped demand for Chinese goods in their biggest foreign market. Chinese imports of US goods dropped by about 22%, suggesting American exporters are also suffering from the trade war.

Japan’s economy grew at a slower pace than initially estimated in the second quarter, as the US-China trade war prompted a downward revision in business spending. Japan’s economy grew an annualized 1.3% in April-June, weaker than the preliminary reading of 1.8%.

Economics

UK recession fears eased after GDP in July rose 0.3% month-on-month, higher than the 0.1% economists had expected. The Office for National Statistics also reported a 0.1% increase in industrial production for July.

Donald Trump continued with his verbal assault on the Federal Reserve, as he continues to seek rate cuts to put rocket fuel under the stock market ahead of his re-election campaign next year. The president called on the “boneheads” at the Federal Reserve to push interest rates down into negative territory. Such a move has been reluctantly used by central banks in other areas to battle weak economic growth, but it risks hitting savers and crimping banks' earnings. He did not react well to the European Central Bank (ECB’s) rate cut on Thursday, after which he said that the continent has succeeded in depreciating its currency to help exporters.

The Trump tax cuts helped the US government's budget deficit soar in the 2019 financial year, surpassing the $1 trillion mark in August, its highest level in seven years.

Germany should get spending, according to Mario Draghi, the outgoing president of the ECB. Europe’s central bank cut its main deposit rate by 10 basis points to -0.5%, a record low but in line with market expectations. It also announced a massive new bond-buying program in a bid to stimulate the ailing economy. The central bank’s quantitative easing (QE) program will entail €20bn per month of net asset purchases for as long as it deems necessary. Mario Draghi noted that fiscal measures were needed to compliment the bank’s action. Indeed, Mr Draghi’s incoming replacement Christine Lagarde, who gets her feet under the table as ECB President on 1 November, has already called for more fiscal stimulus to complement the ECB’s policy. Mr Draghi also said the ECB had scrapped its plan to look at raising rates in mid-2020 and instead said rates will be in sub-zero territory indefinitely.

The chances of a German recession increased. The Ifo institute cut its 2019 growth forecast for Germany and said a recession would hit Europe’s largest economy in the third quarter. Ifo cut its growth forecast for this year to 0.5% from 0.6%. It also said the German economy would probably shrink by 0.1% in the third quarter, which would amount to a recession after a similar contraction in the previous period. For 2020, the economic research group cut its growth forecast to 1.2% from 1.7%.

Supporting this negative view, industrial output in the Eurozone came lower than forecast in July in the latest evidence of a slowdown in the single currency area’s economy. Industrial production dropped by 0.4% month on month in July, its second consecutive monthly fall after an upwardly revised 1.4% drop in June. Economists had predicted a 0.1% fall.

Geopolitics

The European Union announced its proposed new Commission and it looks like a clash is building between the US and Europe. John Redwood looks at the issue here.

Donald Trump fired his hard-line National Security Advisor John Bolton, saying he disagreed "strongly" with him. The news prompted a spike in the oil price as markets interpreted the move as  reducing the chances of a damaging confrontation with Iran.

Pro-Kremlin candidates suffered losses in local elections in Moscow after a campaign to encourage strategic voting. Although Putin’s United Russia retained its majority in Moscow after Sunday’s vote, its share of seats on the 45-seat city council was slashed from 40 to 25. The Communist party took 13 seats, up from five, while the A Just Russia party won three seats. Both parties are widely seen as part of the Kremlin’s “loyal opposition”. All four candidates from Yabloko, Russia’s oldest liberal party, won their districts. Yabloko was the only genuinely independent party allowed on the ballot in Moscow.

M&A

Just weeks after London Stock Exchange announced its acquisition of data business Refinitiv, the Hong Kong Stock Exchange made a bid to buy the group, in a deal which could be worth close to £30bn. The Asian company intends to apply for a secondary listing of its shares on the LSE, should the deal complete, which it said demonstrated its “commitment to the UK”. The LSE is currently completing the Refinitiv deal, which may be thwarted by the takeover, as it will give it a data business to compete with Bloomberg. However, there is scepticism over whether a deal will be waived through even if the company and shareholders agreed to a sale. 

Shares in troubled shopping centre owner Intu soared following a report in the Sunday Times that Orion Capital Managers was at the early stages of considering a buyout. The company – which owns Lakeside in Essex and the Trafford Centre near Manchester – had fallen sharply as retail insolvencies mounted.

Eddie Stobart Logistics said its third largest shareholder, DBAY Advisors Limited, had made a preliminary expression of interest in buying the company. The news follows the departure of Chief Executive Officer Alex Laffey and suspension of trading last month after it failed to publish its half-year results in time.

IPOs

Saudi Arabia’s Aramco appears to be accelerating its IPO after the promotion of Mohammed bin Salman’s half-brother, Prince Abdulaziz bin Salman, to the post of energy minister. Prince Abdulaziz said this week that the flotation will take place “as soon as possible”. This led to speculation that the float could happen as soon as November. The company is expected to list a 1% sliver of oil behemoth on the Riyadh stock exchange before floating more of the company on an – as yet unnamed – foreign exchange. JP Morgan Chase is close to winning the lead advisory role for the IPO, reports suggested.

Is the We Work IPO at risk? Parent We Company says it plans to go ahead with its flotation despite significant market scepticism over its valuation. Negative press surrounding the company’s structure and valuation prompted Japan’s SoftBank, its largest private investor, to urge management to delay the IPO. This is despite underwriters at JP Morgan Chase and Goldman Sachs testing the appetite for a valuation between $15bn and $20bn – a substantial drop from the $47bn valuation SoftBank gave the company earlier this year. Criticism has surrounded the group’s target valuation after the prospectus revealed massive operating losses, pricey lease agreements and significant executive payouts.

It was a different situation for cybersecurity group Cloudflare. The company raised its IPO price range from $10-$12 to $12-$14 a share.

Fitness start-up Peloton plans to raise up to $1.3bn in its IPO, which will value the company at about $8.2bn. The loss-making company sells $2,000 fitness bikes – fitted with touchscreens which allows access to subscription exercise classes.

Consumer lender Home Credit is poised to test Hong Kong’s capital markets as the first IPO since China’s Alibaba delayed plans for a $15bn listing last month because of the political crisis that has led to street protests. The Prague-based lender, which has a significant Chinese business, could launch its IPO as soon as this month, reports suggested, and is seeking to raise more than $1bn. ESR Cayman, a logistics real estate developer backed by private equity firm Warburg Pincus, is preparing to relaunch its Hong Kong IPO three months after pulling a deal worth up to $1.24bn.

Technology

Apple reclaimed its status as a trillion-dollar company on Wednesday, with its valuation rising above that level for the first time since November 2018 after it unveiled its new iPhones. Management focused on talking up the camera on its new iPhone 11 range.  The company revealed it would charge $4.99 a month for its previously-announced streaming video service, Apple TV+, which is now set to launch on Nov. 1. That price was lower than the $9.99 monthly fee that some analysts had expected. The sharp pricing news hit shares of streaming rivals Netflix, Disney and Roku.

Alphabet’s Google is to pay French authorities almost €1bn to end a long-running investigation into its taxes. The settlement includes a €500m fine and additional taxes of €465m, but it is less than the tax bill authorities had accused Google of evading.

California’s State Senate passed proposed legislation that could allow for drivers in gig-economy companies such as Uber and Lyft to be classified as employees, rather than as independent contractors. This means workers will have more protections, such as overtime, minimum wage and the right to unionise.

Energy

Brent crude future fell 2.4% over the week by mid-session on Friday to trade at about $60 a barrel after the International Energy Agency (IEA) said that it expected a huge oil surplus in 2020, which will push prices lower. The Paris-based agency also said it expects the US to challenge Saudi Arabia’s position as the world’s leading oil exporter, after briefly overtaking the oil-rich nation to claim the number one spot in June. The Saudis were the top exporters in July and August. In the last decade, the US has more than doubled oil production to 12.3 million barrels a day, making it the world’s largest oil producer. Financials

The advertising campaign featuring the disembodied head of Arnold Schwarzenegger to encourage payment-protection insurance (PPI) claims ahead of its 29 August deadline was a considerable success. After warnings from Royal Bank of Scotland and CYBG, the owner of Clydesdale Bank, Yorkshire Bank and Virgin Money, in the prior week, it was Lloyds Banking Group’s turn to warn that claims had accelerated. Lloyds said that at the time of its half-year results in July, it had assumed that PPI claims would continue to come in at the rate of 190,000 a week. However, in the run-up to the final deadline, Lloyds said it received 600,000 to 800,000 a week. As a result it cancelled its share buyback and expects the new claims could cost £1.8bn. Building society Nationwide also revealed that it would take a higher provision for PPI claims of between £20m and £50m.

Supermarkets

Wm Morrison, the UK’s fourth-largest grocer, reported its first fall in quarterly underlying sales since 2016, partly reflecting a tough comparison with last year when sales were boosted by a hot summer. The company, however, said it had maintained momentum in its turnaround plan and had seen “robust progress”, with the profits rising 5.3% in its first half. The group also announced a 2p-a-share special dividend and extended its relationship with Amazon.

Other retail

An average of 16 shops are closing each day, as retailers restructure their businesses and shift online. A net 1,234 stores shut on Britain's top 500 high streets in the first half of the year, according to research by PwC and the Local Data Company. That is up from 1,123 in the equivalent period last year and the highest since the survey began in 2010.

Uncertainty around Brexit has led to another decline in overall retail footfall across the country. According to the latest BRC-Springboard Footfall and Vacancies Monitor, footfall to British shopping locations was down 1.3% overall in August after falling 1.6% in August last year.

Nearly a third of independent investors voted against Mike Ashley maintaining his job as chief executive of Sports Direct. Mr Ashley controls 62% of the company but 31% of the other shareholders who voted at the company’s annual meeting cast their votes against him. Management admitted it no longer has an auditor after Grant Thornton, resigned. The retailer has so far been unable to persuade any other auditing firm to take on the job.

JD Sports reported a 10% jump in like-for-like sales in the UK during the first half of the year, bucking the high street gloom. The wider group, which includes a gym chain and overseas store brands, recorded a 47% surge in revenues to £2.72bn with underlying profits growing by 37% to £235.2m.

John Lewis reported its first-ever interim loss. The group, which owns the department store chain and Waitrose supermarkets, reported a loss of £25.9m, down from a profit of £0.8m last year.

Associated British Foods said it expected its Primark high street operation would have lower margins next year. Management revealed that the strengthening of the US dollar this year and the recent weakening of sterling will increase the cost of goods for its 2019-20 year. The company kept its guidance for the 2018-19 year, forecasting that solid profit performances at Primark and its grocery business would offset a decline in its sugar operations.

As major companies such as M&S, which was ejected from the FTSE 100 last week, stumble, it’s important to consider the rapidly rising businesses too. John Redwood takes a look at the issue here.

Consumers

Donald Trump is preparing to ban flavoured e-cigarettes in the wake of six vape-related deaths. The US president said the federal government plans to ban thousands of flavours used in e-cigarettes after parents, politicians, and health officials voiced their concern. The new came after it was revealed that four dominant e-cigarette manufacturers face a probe into the health impacts of their products, as the US House Energy and Commerce Committee asked on Wednesday about the group’s research and marketing practices. The committee sent letters to Juul Labs, 35% owned by Marlboro-maker Altria Group, Fontem Ventures, owned by Imperial Brands, Japan Tobacco, and Reynolds American, a unit of British American Tobacco. Imperial Brands said it was “deeply concerned by reports linking respiratory illnesses and deaths to the use of vaping products – we believe it is imperative that the CDC investigates these instances and urge the publication of the results as soon as possible”.

Impossible Foods, the main rival to listed plant-based meat group Beyond Meat, said its meatless burgers will be available at retail outlets in an as yet unnamed city from 19 September. Over the past month alone major players including Kroger, Smithfield and Kellogg have launched rival products. Cereal maker Kellogg this week launched its meatless product – called Incogmeato – that will also “bleed” like the Impossible Burger.  

Defence

The new generation of Royal Navy frigates will be designed and built by a consortium led by Babcock International.  The company has been named preferred bidder for the £1.25bn contract for five Type 31 warships. The deal secures hundreds of jobs at Rosyth in Fife, where the ships will be assembled, with construction work spread between yards across the UK.

Autos

There was more bad news for the global auto industry as India’s monthly passenger vehicle and car sales recorded their steepest fall ever in August. Passenger vehicle sales plunged 31.57% year-on-year, falling for the 10th straight month, the Society of Indian Automobile Manufacturers said.

Nissan is looking for its third chief executive in as many years. Current boss Hiroto Saikawa will resign on 16 September, bowing to pressure after he admitted to being improperly overpaid by around $440,000.

Airlines

Passenger numbers at Hong Kong airline Cathay Pacific fell 11.3% in August as anti-government protests in Hong Kong hit demand. The airline said inbound traffic to Hong Kong in August had fallen by 38% and outbound traffic by 12% compared with the previous year, and it did not anticipate September would be any less difficult.

Pilots at British Airways, owned by IAG, are reportedly plotting a ten-day mega strike that would cost £400m and “break” the airline. Captains angry at the loss of pay and travel perks have already held two days of action — with another due in two weeks.

Travel & transport

Trainline raised its full-year revenue guidance after total ticket sales in the first half jumped 20%. The ticket-selling platform, which completed a £1.7bn IPO in June, said it now expected revenue to rise more than a fifth, driven by a strong UK performance and more consumers buying via mobile.

Property

Bovis Homes has revived talks to buy Galliford Try’s housing businesses after improving its potential bid to almost £1.1bn and adding cash to the proposed deal. The deal will more than double Bovis’ house-building operation and also enlarge its affordable homes business. Galliford also revealed a 27% fall in annual profits this week.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

 

Get in touch

Find out more

Our focus on clients has endured since the foundation of Charles Stanley in 1792 and has helped make us one of the UK's leading wealth management firms. Your interests give shape to everything we do.

Please call us to talk about your circumstances or complete the enquiry form.

020 3797 1783

Make an enquiry

If you have some questions we'd be happy to help.

Get in touch

Stay updated

Subscribe to our weekly email newsletter.

Subscribe here

Local Office

Your local office

Your local Charles Stanley office can help advise you on a wide range of investment management services.

Select an office

Share

Newsletter banner signup