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Last Week in the City: Chinese exports spark slowdown fears

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped UK equity markets this week (4 to 8 March, 2019).

by
Garry White

in Features

08.03.2019

Growth fears re-emerged this week after the European Central Bank unveiled further bank stimulus measures and was more dovish than expected in its comments. Chinese export data was weak and the US trade deficit ballooned, despite Donald Trump’s trade war attempting to do the reverse.

The FTSE 100 rose 0.2% over the week by mid-session on Friday. The FTSE 250 was down 0.7%.

In our third article on inherited wealth, Ben Gilmore, Investment Manager at Charles Stanley, urges individuals not to rest on their laurels when it comes to securing their long-term financial future. Read the piece here.

Brexit

There are three weeks left before Brexit is scheduled to happen. On Tuesday next week there will be another House of Commons vote on Theresa May’s Withdrawal Agreement.  Mrs May is urging the EU to support changes to the Irish backstop. That way, MPs could back her in sufficient numbers to get the deal passed, having turned it down by a majority of 230 in January. However, current expectations are that the bill will be voted down again. This will make the chance of an extension of the Article 50 deadline more likely. Indeed, former Labour Prime Minister Gordon Brown issued a call for a year-long delay to prevent the “national political disaster” of leaving the EU on the wrong terms.

Fewer than half of Britain’s trade deals with non-EU countries will have been rolled over by March, the day the UK is currently scheduled to leave the bloc, according to the Department of Exiting the European Union. Of those 161 agreements, 64 are certain or highly likely to been replicated by 29 March or shortly after, 64 may or may not be – and 33 definitely won’t.

EU airlines will be able to continue to operate flights between the UK and the EU, even if the UK leaves without a deal, the UK government confirmed. It reciprocates plans the European Commission is putting in place, which would allow UK airlines to operate routes to and from the UK to EU countries. They will also be able to make stops in EU countries and fly over EU airspace.

Economics

US jobs data was shockingly disappointing. The rate of hiring in the US slowed sharply in February as the economy added just 20,000 new jobs, the smallest increase in 17 months. Wall Street had expected a figure around 172,000. The US has been adding more than 200,000 new jobs a month for the past year.

A more-dovish-than-expected statement from the European Central Bank (ECB) spooked markets. Economic growth in the Eurozone has slowed to 0.2% in the final three months of last year, half the rate seen in each of the first two quarters of 2018. As a result of the recent weakness, the ECB changed its forward guidance on interest rates to, “interest rates to remain at their present levels at least through the end of 2019”, from “through the summer of 2019”. The ECB also announced further bank stimulus in the form of Targeted Longer-Term Refinancing Operations (TLTROs), which are auctions of multi-year loans at low rates to banks in an attempt to support growth. There was no discussion about restarting quantitative easing. The dovish stance prompted a fall in the euro and the dollar rose to close to a four-month high.  

The trade war was supposed to shrink the US deficit – but it actually jumped in 2018. The Commerce Department said that a 12.4% jump in December had contributed to the record $891.3bn goods trade shortfall in 2018. The overall trade deficit surged 12.5% to $621.0bn, the largest since 2008.

John Redwood argues that twin deficits can damage economies and equity markets here.

Export data from China was shockingly weak, boosting concerns of an economic slowdown. China’s General Administration of Customs reported that exports fell 20.7% in February year-on-year. A consensus view expected the value of overseas shipments to drop by only 6%.

China’s GDP is about 12% smaller than official figures show, after being overstated by about 2 percentage points over the last few years, according to research form the Washington think-tank the Brookings Institution. The data covered the years 2008 to 2016.

The Dow Jones Transportation Average – a barometer of economic activity – has fallen for a record ten sessions in a row. It is composed of railroad operators, shipping companies and airlines that transport physical goods around the world.

John Redwood, Charles Stanley's Chief Global Economist, looks at increases in China’s weighting in emerging markets indices and its current domestic and external issues here.

Australia recorded its second-straight quarter where the economy shrank on a per capita basis. Removing the impact of population growth from fourth quarter GDP figures, the economy declined by 0.2% in the three months to the end of the year, following a 0.1% decline in the three months to September. However, the country is not in a technical recession. Including population growth, the economy expanded 0.2% in the fourth quarter.

Geopolitics

Chinese telecom giant Huawei is suing the US over a government ban on its products. The group filed a lawsuit in the US district court in Plano, Texas. “This ban not only is unlawful, but also restricts Huawei from engaging in fair competition, ultimately harming US consumers. We look forward to the court’s verdict, and trust that it will benefit both Huawei and the American people,” Huawei said.

Vodafone warned that should the UK government ban it from using Huawei technology, 5G rollout will be delayed, at huge cost. The government's Supply Chain Review is currently examining whether it should play a part in the rollout of super-fast 5G. Vodafone's chief technology officer, Scott Petty, said a ban would require his company to strip Huawei equipment out of its existing 4G network. "The cost of doing that runs into the hundreds of millions and will dramatically affect our 5G business case," he said.

The National Crime Agency is leading an investigation into a suspected cyberattack on a British institute that seeks to counter Russian disinformation, Sky News reported. The report said it was highly likely that Russia's military intelligence service, the GRU, carried out the hack-and-leak of files from the Institute for Statecraft. The move may have been in response to Britain implicating the GRU in the Salisbury spy poisoning last year and pledging to "shine a light" on the agency's covert activities, the report quoted Whitehall sources as saying. Garry White looks at the increasing incidence of cyberattacks over the last six months, particularly from Chinese state actors, here.

Three dozen countries, including all 28 EU members, called on Saudi Arabia on Thursday to release 10 activists and cooperate with a UN-led investigation into the murder of journalist Jamal Khashoggi at its Istanbul consulate. It was the first rebuke of the Kingdom at the UN Human Rights Council since it was set up in 2006 and came amid growing international concern about Saudi violations of basic freedoms such as freedom of expression. US Senator Marco Rubio accused its crown prince Mohammed bin Salman of going “full gangster”.

Paul Manafort, the former chairman of Donald Trump’s election campaign, was jailed for almost four years for bank and tax fraud uncovered during the special counsel investigation into Russian election interference.

North Korea could repeat Vietnam’s development success story, but maintaining the power of the Kim family matters more. Garry White examines what investors need to know about North Korea here.

Cryptocurrency

Earlier this year reports noted the chief executive of cryptocurrency exchange QuadrigaCX, Gerald Cotten, had died in India in December. He was the only person to have the password to the virtual currency holdings of 115,000 customers, worth about $137m. Investigators have now accessed Mr Cotten’s laptop, but found the digital wallets that should have held cryptocurrency were empty. This has led to speculation he may have faked his own death.

Consumers buying Bitcoin are behaving like problem gamblers, becoming delusional and obsessed with their investments, the City watchdog warned. Investors influenced by friends and social media celebrities are buying Bitcoin and other cryptoassets in an attempt to "get rich quick", according to the Financial Conduct Authority (FCA). It said many are putting in their money, with no protection against losses, without fully understanding what they are doing. However, only 3% of respondents to an FCA survey said they had ever bought cryptocurrency.

Charles Stanley’s Chief Executive Paul Abberley explains why investors should be extremely wary of digital coins such as Bitcoin here.

Technology

Facebook will increasingly shift its focus away from public posts to encrypted, ephemeral communications on its trio of messaging apps, Mark Zuckerberg said in what was regarded as a significant blog post. In a 3,200-word missive, Mr Zuckerberg says that encryption will be one of the keys to Facebook’s future in WhatsApp, Instagram and Facebook Messenger. He also said that the company is willing to be banned in countries that refuse to let it operate as a result. Additionally, the group will no longer allow advertisements that include misinformation about vaccines as part of an effort to reduce the spread of “vaccine hoaxes” on the platform, the company said following criticism.

Amazon is rethinking its physical retail move. The retailer will shut down all of its 87 pop-up store locations in the US, but will expand into bookstores.

Energy

Brent crude prices were little changed over the week by mid-session on Friday, trading at about $65.10.

Norway will divest oil and gas investment from its $1 trillion sovereign wealth fund. It is believed to hold close to $40bn in oil and gas shares. The fund argued that it made little sense for Norway to be doubly exposed to the oil markets through its operation and sovereign wealth fund.

ExxonMobil said it planned to ramp up spending significantly, investing in multiple oil ventures over the next few years in an aggressive gambit to increase oil production and boost profits.

Vehicles

Holdings in platinum-backed ETCs surged 15% this year as investors bet that carmakers will start to use the metal in petrol car catalysts due to the short supply of palladium. Palladium is the standard metal used in petrol car catalysts, but industrial demand is set to outstrip mine supply by almost 1m ounces this year.

Former Nissan boss Carlos Ghosn has left prison in Japan on bail, more than three months after being arrested. A Tokyo court made the surprise decision to allow his release on Tuesday, setting bail at about $9m.

Nissan is also evaluating plans to cut back production line shifts at its Sunderland plant, which could threaten 400 jobs. The Japanese car maker is considering cutting the number of shifts on the production line that makes the Qashqai and X-Trail SUVs from three to two, Sky News reported.

Retail

Sports Direct founder Mike Ashley launched a shock move on Debenhams. Mr Ashley has a 30% stake in the struggling department store group, which issued a fresh profit warning last week, outlined plans to leave Sports Direct and take the helm of Debenhams.  He’s called an extraordinary general meeting of the company to appoint him to the board and remove all but one of the other directors.

The John Lewis Partnership cut its annual staff bonus to the lowest level in 66 years, as it said underlying profits had slumped. The company said 83,900 workers would receive a bonus worth 3% of annual pay, down from 5% last year.

Stationery specialist Paperchase became the latest high-street retailer to propose a company voluntary arrangement (CVA), a deal which could include rent reductions at many of its stores and the possible closure of some outlets.

Fashion chain LK Bennett fell into administration. The high-end womenswear chain informed its 500 staff last week that the administrators would be called in unless a buyer could be found.

Shares in fashion retailer Quiz collapsed after it issued a second warning on profits this year amid an "uncertain consumer spending backdrop". The company, which is promoted by people who feature on the reality TV show The Only Way Is Essex – said sales at stores open for more than a year slumped by 11.1% in the first two months of 2019.

Jack Wills swung to a £7.5m loss in its latest annual results, as sales of its preppy clothing fell. It said "challenging" conditions in the retail sector and constrained consumer finances had contributed to slower sales. The fall in profit, however, was largely due to higher costs that hit margins.

Amidst all the gloom there was one upbeat high street story as Greggs sales topped £1bn for the first time. Last year it saw strong demand for its breakfast ranges as well as its steak bakes and sausage rolls and the group had a significant marketing victory in January after launching its vegan sausage roll. The Quorn-filled pastry was a hit on social media.

Consumer

Shares in gambling companies such as William Hill, Paddy Power Betfair and GVC, the owner of Ladbrokes, fell on suggestions the government might introduce a further tightening of regulations on the sector in the Spring Statement next Wednesday.

Shares in British American Tobacco rose after Food and Drug Administration Commissioner Scott Gottlieb resigned suddenly. The news comes just a few days after Gottlieb reportedly brought a proposal for e-cigarette flavouring restrictions to the White House. His resignation was taken as a sign of stalling tobacco control legislation in the US. 

Packaging company RPC Group said it had agreed to be acquired by US plastics maker Berry Global Group, ditching an earlier offer made by Apollo Global Management. Berry Global is offering 793p in cash for each RPC share, valuing the company at £3.34bn. The offer is 11p higher than Apollo’s offer.

Recycled packaging group DS Smith sold its plastics division to private equity firm Olympus Partners for £450m. Proceeds from the divestment will be used to reduce debt.

Financials

Legal & General became Britain’s first £1 trillion fund manager after seeing off a stock market downturn. The insurer’s fund arm, Legal & General Investment Management, added £42.6bn of assets last year, despite the worst market conditions for a decade. Profits were boosted by reserves releases, as people are dying earlier than expected, so money set aside to fund pensions can be transferred. The company said it had taken advantage of the “globalisation of asset management” to reach the figure.

Shares in insurer Aviva dropped, despite solid annual results, after a switch in dividend policy disappointed investors. The insurer is now changing to a “progressive” policy rather than committing to pay out half of its earnings and said it would likely result in more modest rises.

Insurer Admiral posted a better-than-expected 2018 profit inflated by Ogden rate-related reserve releases, the group said its overall pre-tax profit was "favourably impacted" by the change in the Ogden rate which is used by courts to work out how much insurance companies need to pay out in the event of life-changing injuries to customers. The total dividend for the year was up11%.

Property

The UK's largest estate agent Countrywide reported widening losses and said the uncertainty surrounding Brexit was hitting business. Countrywide trades under a variety of estate-agent brands, including Bairstow Eves, Bridgfords, Hamptons, John D Wood and Mann.

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.

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