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Last Week in the City: Currency markets flinch

Garry White, chief investment commentator, looks at the market-moving events that have shaped the UK equity markets this week (6 to 10 August 2018).

by
Garry White

in Features

10.08.2018

All eyes were on currency markets this week, as concerns over a no-deal Brexit hit the pound, the Turkish lira collapsed as the country’s economic woes took a turn for the worse and the rouble fell on new US sanctions against Russia. As a result, the dollar index, which measures the greenback against a basket of other currencies, hit its highest level since June last year.

Trade war concerns continued and the oil price fell for the sixth week in a row.  However, the S&P 500 is within a whisker of its record high and Nasdaq posted its longest winning streak – eight consecutive days – since October last year.

Goldman Sachs estimated that boards of US companies will authorise $1 trillion of share buybacks in 2018, boosted by Donald Trump’s tax cut and incentives to repatriate cash held overseas.

The FTSE 100 rose 0.5% over the week by mid-session on Friday, boosted by the weaker pound due to the high proportion of foreign currency earners in the index.

Quote of the week

 “Tourism companies don’t usually like it when it’s hot – and it is hot. People want to go on holiday when it rains.” - Fritz Joussen, chief executive of package holiday operator TUI Group.

TUI shares slumped after management said the summer heatwave in northern Europe would prevent it from beating its forecasts.

Economics

UK second-quarter GDP accelerated after anaemic growth in the first three months of the year. The economy expanded 0.4% quarter-on-quarter or 1.3% year-on-year, in line with market expectations.

Geopolitics

Donald Trump’s trade war escalated. The US administration on Tuesday unveiled a list of roughly $16bn worth of imports from China that will be hit with 25% tariffs. The products include semiconductors, chemicals and machinery parts. China retaliated, unveiling 25% tariffs on $16bn of US goods on 33 product lines including crude oil, diesel, cars and medical equipment.

Iran sanctions came into effect this week, with Iran holding naval exercises in the Strait of Hormuz. For a look at the potential market implications, click here.

US senators introduced a bi-partisan bill to impose stiff new sanctions on Russia following a nerve-agent attack in the UK earlier this year and to help combat cybercrime. The bill includes restrictions on new Russian sovereign debt transactions, energy and oil projects and Russian uranium imports, and new sanctions on Russian political figures and oligarchs. It also expressed strong support for NATO and would require that two-thirds of the Senate to vote in favour of any effort to leave the alliance. The move hit the rouble, which fell to its lowest level since 2016. Russian prime minister Dimity Medvedev warned any escalation would be a declaration of “economic war”.

Tension between Saudi Arabia and Canada hit a low point. The war of words was sparked by a series of tweets from Canada's Foreign Ministry, when Ottawa expressed concern over arrested activists in Saudi Arabia. Riyadh called the move a violation of its sovereignty and sought to impose a string of diplomatic sanctions against the North American country.

The pound fell sharply on concerns about progress in Brexit negotiations. Worries centred on the likelihood of a “no deal” Brexit, after trade secretary Dr Liam Fox said this scenario was now more likely than a formal deal being struck.

John Redwood, Charles Stanley’s chief global strategist, looks at current political tensions in Italy here.

Emerging markets

Fears that Turkey could be heading for an economic crisis caused the lira to hit another all-time low. Falls accelerated on Friday after the European Central Bank expressed concern about European bank exposure to the country and after President Erdogan declared: “Even if they got dollars, we got our people, our God”. President Erdogan’s unusual economic beliefs have been a major driver of the crisis – he said high interest rates cause inflation and has also appointed his son-in-law to run the country’s central bank. However, the threat of US sanctions has also had an impact. Donald Trump threatened last month to slap "large sanctions" on the Middle Eastern nation if it refuses to free Andrew Brunson, an evangelical pastor. Banks exposed to the country include Spain’s BBVA, Italy’s Unicredit and France’s BNP Paribas.

Cryptocurrencies

Prices of cryptocurrencies such as Bitcoin and Ethereum fell after the US Securities and Exchange Commission said it will postpone the decision on approving what would be the first-ever Bitcoin exchange-traded (ETF). The regulator has extended the deadline in which it must reach a decision by 30 September. Indeed, the total market capitalisation for all cryptocurrencies just fell to its lowest point in 2018, according to coindesk.com. The total market capitalization of all cryptocurrencies excluding bitcoin fell to just ahead of $118bn – an 8.5 month low – whereas the total market cap of bitcoin was $111bn.

Technology

Tesla shares jumped after chief executive Elon Musk said he had “funding secured” to take the electric vehicle maker private at $420 a share. But have the comments breached SEC regulations? To find out more about this story click here.  

Japanese tech investor Softbank posted a 49% rise in first-quarter operating profit, boosted by the sale of its stake in Indian e-commerce firm Flipkart and the sales of the majority of chip designer ARM Holding's Chinese operations to a local consortium. The sales show that SoftBank is able to monetise its investments – an issue that has been a concern for some investors.

Asian chipmaker TSMC has been hit by a virus that got into its systems possibly delaying chip shipments to major customer Apple.

Snap, which owns the Snapchat app, saw daily active users fall quarter-on-quarter, but profits still beat Wall Street expectations. It was also revealed that Saudi Prince Alwaleed bin Talal had bought a 2.5% interest in the group, worth $250m. 

Energy

The oil price fell for a sixth-consecutive week as trade war fears continued. Brent crude futures fell by 2% over the week to trade around $71.70 a barrel by mid-session on Friday.

Fears about global oil supplies have receded, according to the International Energy Agency, which a warned of a potential shortage last month. “Concerns about the stability of oil supply have cooled down somewhat, at least for now,” the IEA said. “We have seen increases in production, mainly in Saudi Arabia and Russia, a surge in U.S. exports in June” and “a partial, but fragile recovery in Libya.”

Russia’s Rosneft, in which BP owns a near 20% stake, posted record cash flow in the second quarter, as Russian oil companies hit a sweet spot of rising crude prices and a weakening rouble. Management also approved a $2bn buyback programme to purchase 3.2% of its outstanding shares.

Iraqi Kurdistan-focused Genel Energy is likely to significantly increase its oil production guidance next year, chief financial officer Esa Ikaheimonen said. The boost is expected to come from 11 wells currently being drilled in three fields in the region, eight of which are expected to begin producing this year.

Centrica-owned British Gas said it was increasing the price of its standard variable tariff by 3.8%, blaming rising wholesale costs. The decision means 3.5 million UK households will receive higher bills from 1 October onwards.

Mining

Randgold Resources shares fell after it posted a decrease in profit from mining, increased costs, and lower gold sales and production which led to a year-on-year drop in profit for the second quarter.  

Miner BHP Billiton asked the Chilean government for five days of mediated talks to end a pay dispute at Escondida, the world’s largest copper mine. 

Russia’s Rusal gave investors the first glimpse into how sanctions are hitting the Russian aluminium producer, showing that it’s still making money despite lower sales. The US has introduced sanctions on companies associated with oligarch Oleg Deripaska.

Property

UK house prices rose by 3.3% in the second quarter of the year, hitting a new record of £230,280, according to the latest Halifax house price index. However, the organisation noted that “housing activity remains soft”.

Upmarket estate agent Savills has posted an 18% drop in half-year profits after sharp declines in commercial and residential deals, and warned that the deadlocked Brexit negotiations made it hard to make predictions for the rest of the year.

John Redwood argues that the UK commercial property market is thriving here.

Travel

Have airline shares peaked? Garry White takes a look at recent results in the sector here.

Retail

The new owner of Homebase may unveil plans to close about a quarter of its stores next week, threatening more than 1,000 jobs, press reports suggested. Hilco Capital, which struck a deal to buy the DIY chain for a nominal sum in May, is expected to outline proposals for a Company Voluntary Arrangement (CVA) that will pave the way for roughly 60 of Homebase's 249 outlets to be shut.

Card Factory shares fell after the company issued a profit warning, blaming “extreme” weather in the first half of the year. The greeting cards and gifts retailer said it now expects full-year underlying earnings to come in between £89m and £91m, compared with previous forecasts of £93.5m.

House of Fraser was bought by Mike Ashley’s Sports Direct for £90m in cash after it almost slipped into administration.

Consumer

Domino’s Pizza shares slumped after profits were hit by overseas investments, despite a good performance in the UK. “Whilst our international businesses continue to make good progress with customers and sales, it has taken us some time to refine the operating model and cost base at store level, particularly in Norway,” Domino’s said. 

Financials

HSBC’s second-quarter results were a little shy of market expectations, as expenses rose. The bank also said it would pay the US Department of Justice $765m to settle its case over the sale of mortgage-backed securities in the lead up to the financial crisis.

Recently merged group Standard Life Aberdeen posted a fall in profits as clients continued to withdraw funds. The fund manager said £16.6bn left the business in the first half of the year.

Insurer Legal & General said it expected to book an exceptional profit of £400m this year, as its customers live for a shorter time than it originally expected. Interim profits slipped because of lower investment income.

Healthcare

Shares in private healthcare provide Spire Healthcare slumped after management said this year’s profits will be "materially lower" than expected due to spending cuts in the NHS. Its shares hit an all-time low.

Outsourcing

Shares in G4S fell after the security services provider reported a large drop in interim profit and revenue due to currency movements and business disposals. Pre-tax profit slipped 37% in the first half of the year.

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