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Last Week in the City: The Fed steals Christmas

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped UK equity markets this week (December 17 to 21, 2018).

Garry white employee

by
Garry White

in Features

21.12.2018

The FTSE 100 fell 2.2%% over the week by mid-session on Friday, after a market sell off following a disappointing statement from the US Federal Reserve on the rate of interest rate rises and as oil resumed its slide. The more UK-focused FTSE 250 was down 1.4% over the week.

John Redwood, Charles Stanley’s Chief Global Economist, looks at market prospects for next year after a shaky end to 2018 here.

Economics

Federal Reserve chairman stoked the ire of President Trump by raising US interest rates by 0.25 basis points, as expected. Markets were rattled as they hoped for a more dovish tone than was provided by chairman Jerome Powell. Although the members of the rate-setting Federal Open Markets Committee (FOMC) indicated that there are likely to be just two rate rises in 2019 compared with its previously expected three – it still hinted a further rate rise was expected in both 2020 and 2021. The central bank also noted that it would be keeping a keen eye on economic indicators, so future rate rises are “data dependent”, but markets were disappointed by the tone. Garry White looks at the issues faced by the central bank here.

The Bank of England has warned of growing risks for the economy, saying Brexit uncertainty has "intensified considerably" as global growth takes a turn for the worse. Its monetary policy committee (MPC) left interest rates unchanged at 0.75%, as expected.

Britain’s factories provided some Christmas cheer, after orders rose in December for the second-consecutive month. A pick-up in export demand helped to swell order books, according to the CBI. This kept its order book balance in positive territory (meaning more factories had higher orders rather than lower ones), although at +8 it was down on November’s +10.

There was even some rare good news for Britain’s beleaguered high street. Retail sales jumped more than expected in November, helped by Black Friday promotions and stronger growth in sales of household goods. Figures from the Office for National Statistics (ONS) said sales rose 1.4% from October, despite economists' forecasts of about a 0.3% gain. Significantly, online sales made up 21.5% of all retail spending in November. This is the first time that web shopping has exceeded 20%. However, the outlook for Christmas trading remains subdued.

UK inflation has fallen to its lowest level in 20 months. Consumer prices rose by 2.3% in the year to November, thanks to cheaper petrol and clothes. This means it is moving back towards the Bank of England’s 2% target and stoked hopes that real wages can continue to grow.

UK house-price growth hit a five-year low. The price of the average UK home rose by 2.7% in the year to October, down from 3% in September. Once again, London property prices dragged the national average down – dropping by 1.7% in the last 12 months.

The German economy is cooling down. The widely-watched business climate survey, published by the Ifo Institute fell to 102.0 points in November from 102.9 points in October, marking its third consecutive decrease. “There are clear signs that the long upturn is ending, the German economy is cooling down,” the institute’s president, Clemens Fuest, said.

Geopolitics

MPs will vote on the UK's Brexit deal in the week beginning 14 January, Theresa May has told Parliament. The vote was due to be held last week but was put on hold after Mrs May admitted she was set to lose. Announcing a new date, she said the EU had made it clear the Irish backstop was "not a plot to trap the UK", and urged MPs to see Brexit through.

There was some positive news for Eurozone watchers. The European Commission and Italy reached an agreement over its 2019 budget. The issue had been a major concern for investors but now Rome will not be subject to an “excessive deficit procedure” that could have led to an EU fine - and potentially fuelled euro-scepticism in Italy. European Commission Vice President Valdis Dombrovskis said Wednesday that the “agreement is not ideal” but allows the Commission to avoid legal action against Italy “provided that the measures are fully implemented.”

US President Donald Trump has some issues with former and current staff members. Michael Flynn, Trump’s first national security adviser, appeared in court to be sentenced for lying to FBI agents about his contacts with a Russian ambassador. “This is a very serious offense,” Sullivan said in federal court in Washington, D.C., on Tuesday. “A high-ranking senior official of the government making false statements to the Federal Bureau of Investigation while on the physical premises of the White House.” Sentencing was postponed at Mr Flynn’s lawyers request until his cooperation with federal prosecutors is fully complete.

Also, US Defence Secretary James Mattes announced his resignation after President Trump said he was withdrawing troops from Syria – a decision General Mattes is understood to oppose. In his letter, addressed to Mr Trump directly, he described his views on "treating allies with respect" and using "all the tools of American power to provide for the common defence". President Putin welcomed Trump’s decision to withdraw from Syria, but prominent Republicans such as General Mattes and Lindsay Graham criticised the move.

The threat of a US government shutdown looked like it was going be been averted earlier in the week, after a stopgap spending bill was passed by the Republican majority in the Senate that would have agreed a budget until February 8. However, President Trump said he would not sign the bill as it had no funding for his border wall with Mexico in the legislation.

The Chinese government denied any involvement in the theft of commercial secrets, rejecting accusations from the US and UK that Beijing runs a massive cyber-espionage programme.

Russian state-owned broadcaster RT, formerly known as Russia Today, broke TV impartiality rules in seven programmes after the Salisbury nerve agent attacks, UK media watchdog Ofcom has ruled. In response, Russia said it was launching an investigation into BBC services distributed in Russia.

Energy

Brent crude prices slumped 9.5% over the week by mid-session on Friday to trade at around $54 a barrel on concerns of a supply glut and a slowing economy. There are also doubts over whether Opec’s output curbs will counter surging US supply.

North Sea oil producer Faroe Petroleum reiterated its opposition to a hostile bid by Norway’s DNO, which it said was “inadequate” and substantially undervalued the Aberdeen-based company. DNO, which already has a 20% stake in Faroe, has offered 152p a share, valuing the business at about £610m.

British Gas owner Centrica will mount a legal challenge against Britain's upcoming energy price cap, arguing it has not been calculated fairly. The energy provider said it would apply for a judicial review against the regulator Ofgem, saying it had set the threshold too low.

Brazil’s state-controlled oil firm Petrobras has suspended oil and refined products trading with Vitol, Trafigura and Glencore. This is part of a probe into an international bribery scheme that benefitted traders.

Mining

Glencore’s billionaire head of copper trading, Aristotelis Mistakidis, was among executives fined and banned from being a director by Canada after admitting that its Congolese copper and cobalt unit, Katanga Mining, misstated how much metal it mined. Mr Mistakidis, who is retiring from Glencore at the end of this year, was hit with a C$2.45m fine. In total, fines issue amounted to $22m.

Healthcare

GlaxoSmithKline unveiled plans to merge its consumer healthcare unit with that of rival Pfizer, to create a new business with almost £10bn in annual sales. This is despite numerous denials by management that they were considering splitting up the group. The joint venture will be spun off within three years of completing the tie-up. Management predicted cost savings of about £500m from the deal.

Drug pricing is moving up the agenda in the US and the issue is likely to become a major theme next year. Senator Elizabeth Warren, mooted as a potential 2020 presidential contender, argued the US government should act as a generic-drug manufacturer to force down prices. A bill from Mrs Warren would set up a manufacturing office within the Department of Health and Human Services (HHS) to make select drugs and offer them at affordable prices. For a background report on this issue click here.

Technology

Major technology shares have been falling for the last few months. One explanation could be concerns about a break-up of the internet – particularly between East and West. To discover more about concerns over the “splinternet” click here.

Facebook was once again the subject of much criticism over its privacy policies. The New York Times disclosed fresh details about ways the social network shared access to users' data with other tech companies, including Amazon, Apple, Microsoft, Netflix, Spotify and Yandex. In some cases, the other companies have said they were not even aware they had special access. Facebook, yet again, defended its behaviour.

Uber lost an appeal against a ruling that its drivers should be treated as workers rather than self-employed. In 2016 a tribunal ruled drivers James Farrar and Yaseen Aslam were Uber staff and entitled to holiday pay, paid rest breaks and the minimum wage. That ruling has now been upheld by the Court of Appeal. The company is expected to appeal to the Supreme Court.

One of the great hopes of the UK tech sector, Blippar, collapsed into administration over a funding row. The augmented reality company was co-founded by Ambarish Mitra, and its technology was used in a partnership with the BBC's Planet Earth II series. At one time Blippar was one of the UK's tech "unicorns" – start-up businesses that are worth $1bn or more.

Shares in the SoftBank’s mobile telecommunications unit plummeted 15% in Tokyo on their first day of trading. The business is one of Japan's biggest wireless carriers and has provided the foundation for SoftBank chief executive Masa Son's vast tech empire. By listing a big chunk of it, SoftBank (SFTBY) raised about $23.5bn. This makes it Japan's largest-ever stock float — and the world's second largest after Alibaba's$25 billion listing in New York in 2014. Unfortunately, it flopped due to market conditions and concerns over Softbank’s exposure to technology from Chinese group Huawei.

Financials

Eleven banks have been chosen to join a £350m scheme to encourage small businesses to move away from Royal Bank of Scotland in a bid to boost competition. Challenger banks including Monzo, Metro and Starling as well as Santander, Co-operative and TSB were selected by the Banking Competition Remedies body (BCR) and funding amounts will be revealed in February. The organisation was set up to distribute a £775m RBS fund designed to boost business banking competition, established as a condition of its £45bn government bailout during the financial crisis.

Barclays was issued a $15m fine by a New York regulator over attempts by chief executive Jes Staley and senior management to unmask a whistle blower. The fine and ruling ends the final investigation over Staley’s efforts in 2016 to identify a whistle blower who wrote to the bank’s board over the hiring of Tim Main as head of the bank’s financial institutions group in New York.

Spanish-listed Santander was fined £32.8m by the UK financial watchdog, for a failure to handle the accounts and investments of deceased customers properly. The Financial Conduct Authority has imposed the penalty, after concluding that Santander had often failed to do the right thing when a customer died.

Malaysia is seeking $7.5bn in reparations from Goldman Sachs over its dealings with scandal-linked state fund 1MDB, its finance minister said. Malaysian prosecutors filed charges against Goldman Sachs earlier in the week in connection with its role as underwriter and arranger of three bond sales that raised $6.5bn billion for 1MDB, the first criminal action against the US bank over the scandal.

Retail

The gloomy high street tone is now being felt on line. Shares in online fast fashion group Asos fell by more than a third after it warned that trading has taken a nasty plunge in the run-up to Christmas. However, rival BooHoo.com rushed out a statement to confirm it was trading in line with expectations in the wake of the surprise announcement. This comes just days after Sports Direct’s Mike Ashley warned that last month was the worst November for the retail sector in living memory.

Chintzy retailer Laura Ashley announced it will be closing 40 of its 160 stores across the UK. The company, which is owned by Malayan United Industries, plans on using the closures to build on the brand's presence in China.

The parent company of high street chemist Boots has recorded poor first-quarter sales and profits in its international arm, which it blamed on weak market conditions in the UK. US listed Walgreens Boots Alliance said international sales were down almost 6%.

It wasn’t all doom and gloom for retailers. Fishing specialist Angling Direct saw its sales soar in the four months to the end of November. The group reported a 31.5% increase in sales to £14.6m, boosted by a 24% rise in online sales and record Black Friday trading.

Consumer

Anheuser-Busch InBev, the world's biggest brewer, is teaming up with Canada's Tilray to research cannabis-infused drinks. It's the latest major company to start exploring the marijuana market following decisions to legalise recreational use in Canada and a number of American states. New Zealand has also announced a vote on whether to legalise recreation use too. It will be held in 2020. For a look at why alcohol producers are concerned about this new trend click here.

Industrials

Former Nissan chairman Carlos Ghosn was re-arrested on fresh charges, dashing any hopes he could be released on bail. Mr Ghosn has spent the last month in prison, accused of misusing funds and hiding $80m (£63m) of income. Friday's arrest was on a new charge of aggravated breach of trust.

John Redwood, Charles Stanley’s Chief Global Economist, looks at the current difficulties faced by the global car industry here.

Utilities

Energy provider SSE scrapped its plan to merge its retail business with rival Npower, blaming "very challenging market conditions". The deal would have created the UK's second-biggest energy supplier. The two said in November they would have to renegotiate the deal, which had been cleared by the regulator, because of the government's new price cap.

Travel

Shares in Paris-listed Airbus fell sharply after Le Monde reported that the aircraft manufacturer is facing an investigation by the US Department of Justice into suspicious practices that includes alleged corruption in commercial contracts between France and Kazakhstan.

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