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Last Week in the City: Growth fears grip markets

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (12 to 16 August, 2019).

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (12 to 16 August, 2019).
Garry white employee

by
Garry White

in Features

16.08.2019

Global equities had a negative week, as fears about the impact of Donald Trump’s trade war and concerns about the health of the global economy prompted investors to take a risk-off stance. The FTSE 100 did, however, bounce from a six-month low on Friday. Earlier in the week, bond markets flashed a recession signal, with the ten-year Treasury bond yield falling below the yield of the two-year Treasury bond – a so-called “inversion” in the yield curve. Also, UK 30-year yields fell below 1% for first time on record.

However, hopes were raised that the UK will avoid a technical recession. Unexpectedly strong retail sales in July boosted the chance of a positive outcome in the third quarter, after second-quarter GDP fell 0.2%.

The FTSE 100 fell 2% over the week by mid-session on Friday and the FTSE 250 was also 2% lower.

The Charles Stanley Investment Strategy Committee met to review markets and the economic outlook. John Redwood looks at its conclusions here.

Economics

According to the Office for National Statistics, UK productivity decreased by 0.6% for the April-to-June quarter compared with the same period last year. However, the UK jobs market appears resilient, with the strongest earnings growth in 11 years. The unemployment rate rose from 3.8% to 3.9%

There was further grim news from the German economy, which is teetering on the edge of recession. Germany's economy shrank during the second quarter of the year. A decline in exports dampened growth, and GDP fell by 0.1% quarter-on-quarter. Sentiment also appears to have taken a nosedive. The widely-watched German ZEW Survey Expectations for August fell to minus 44.1 from minus 24.5, significantly below a consensus view of minus 28. The survey is an aggregation of the sentiments of approximately 350 economists and analysts on the economic future of Germany in the medium-term.

France’s unemployment rate fell to 8.5% in the second quarter from 8.7% in the first. This represents the lowest jobless rate in the Eurozone’s second-biggest economy since the end of 2008.

The US consumer remains strong. Retail sales rose a healthy 0.7% last month, after a 0.3% gain in June. Online retailers, grocery stores, clothing stores and electronics and appliance stores all reported strong gains.

Growth in China’s industrial output slowed much more than expected in July, rising 4.8% year-on-year. This was the slowest rate since February 2002 and below analysts’ expectations of 5.8%.

Singapore slashed its full-year growth forecast to between zero and 1% from its previous 1.5% to 2.5% estimate. The city state is regarded as a bellwether for global growth because international trade dwarfs its domestic economy.

There has been a concerted downward move in interest rates by many central banks in recent months. Will this continue? John Redwood takes a look here.

Geopolitics

Hong Kong cut its 2019 growth forecast to between zero and 1%, from 2% to 3% after second-quarter GDP fell 0.4% quarter-on-quarter. This follows mass protests in the City which have led to continuing violence. China has called the protestors ‘terrorists’ and troops have amassed on its border with Shenzhen. Shares in Shenzhen Airport – the nearest in China to Hong Kong – gained as protests closed the City’s Chek Lap Kok Airport.

Argentina’s stock markets and its currency both plunged after conservative President Mauricio Macri suffered a shock defeat in the country’s primary election ahead of October’s presidential ballot. Polls suggested former president Cristina Fernandez de Kirchner may return to power, this time as running mate of leading candidate Alberto Fernandez. The peso hit a record low against the dollar, cementing its position as the world’s worst-performing currency this year.

Trade war

The Trump administration said it would delay the imposition of 10% tariffs on a series of consumer goods including some laptops, cell phones, toys and clothing until December, allowing retailers the time to import them without additional levies ahead of the holiday season. This boosted shares in technology companies such as Apple, which would have been hit by the tariffs in the run up to Christmas. It was also a tacit acceptance that tariffs hurt US consumers.

In response to the additional tariff threats, Beijing promised to retaliate against the US if Washington does indeed impose additional tariffs from 1 September. A brief statement released by the State Council’s customs-tariff commission on Thursday said China would have no alternative but to take “countermeasures”.

Goldman Sachs took a more pessimistic view on the fallout from the US-Sino trade war. The investment bank cut its estimate of US economic growth in the fourth quarter to 1.8% from 2%. Goldman no longer believes a trade deal will be concluded prior to the 2020 presidential election.

Cargo volumes at the Port of Long Beach in California fell 9.7% in July year-on-year. The slip in container volumes is the result of the trade tariffs and the ongoing trade war. Port of Long Beach executive director Mario Cordero described the trade war as “hitting the West Coast hard.”

The other trade war escalated too. In a tit-for-tat response South Korea removed Japan from a list of trusted trading partners, escalating a dispute with its neighbour that is already disrupting the global supply chain for big tech companies. The situation deteriorated after South Korea's top court ruled that its citizens can sue Japanese companies for using forced Korean labour during World War II. Japan has denied that the two issues are linked.

Brexit

The UK will be “first in line” for a trade deal after leaving the EU, according to John Bolton, one of Donald Trump’s most senior advisers. They would be carried out on a sector-by-sector basis, he said, leading with manufacturing. However, Nancy Pelosi, Democratic speaker of the House of Representatives, said the UK had “no chance” of getting a trade deal approved by Congress if it jeopardised the Good Friday Agreement.

Labour leader Jeremy Corbyn reached out across the political divide to gain support for his plan to lead a caretaker government to stop a no-deal Brexit following a vote of confidence in Prime Minister Boris Johnson.  

The latest Commitment of Traders report from the Commodity Futures Trading Commission showed that short bets against the pound have increased to the highest level in more than two years. Although futures contracts are a small part of the global currency markets, they give an insight into investor sentiment. The pound hit a ten-year low against the euro this week.

Dutch investment bank ING said its central assumption was Brexit would be delayed, with a 40% chance of a general election. The bank raised the probability of a no-deal Brexit to 25% from 20%.

IPOs

Office provider WeWork, now known as the We Company, filed its pre-IPO prospectus in New York. The business recently disclosed 2018 net losses of $1.9bn on revenue of $1.8bn. The group was valued at $47bn earlier this year so the flotation will be the second largest this year in the US after Uber. Japan’s Softbank is expected to be a winner from the We Company float, as an early-stage investor. However, there are questions over its governance as the founders will exert significant control over the company through a second class of stock that carries 20 times the voting rights of ordinary shares.

Cybersecurity group Cloudflare announced plans to list in New York. The documents revealed that revenues jumped 50% in the first half of the year, although net losses widened. The company has been involved in a controversy recently for providing services to 8chan, the online community used by the far right, which was used by the suspects in the Christchurch and El Paso mass shootings. The company eventually withdrew its services from 8chan.

A sale or float of discount retailer Poundland is on the cards after owner Pepkor Europe separated itself from struggling parent company Steinhoff and refinanced its high-interest debts, according to The Times. The newspaper reported Pepkor had already held meetings with advisors and will find bankers next month.

Shares in recent UK IPO Aston Martin Lagonda tumbled to a new low. The shares have lost almost 80% since their October flotation at £19 a share.

Profit warnings

Shares in Benchmark Holdings plunged, as the aquaculture-genetics company said market conditions were challenging and revealed delays in product trials. Management said it has continued to face tough conditions in the global shrimp and Mediterranean seabass markets, which have hurt sales volumes in its Advanced Nutrition segment. This represented a near miss for troubled money manager Neil Woodford, who sold the stake held by his Equity Income fund in December and July.

Germany’s Henkel cut its full-year guidance as a slowdown in Chinese sales hit its Schwarzkopf shampoo business and its adhesives unit suffered from the automotive industry slump.

Agricultural-equipment maker Deere & Co posted weaker-than-expected third-quarter earnings and lowered its full-year sales forecast, as US farmers delayed equipment purchases because of the trade war.

Shares in US-listed luxury goods group Tapestry tumbled to their lowest in more than a decade after the fashion house forecast a surprise fall in first-quarter revenue and profit. Management blamed this weakness on the millennial-centric brand Kate Spade, which Tapestry has grappled to turn around since buying it in 2017. As a result, full-year guidance was downgraded.

Company of the week

Shares in General Electric (GE), the US engineering company founded by lightbulb inventor Thomas Edison, fell to their lowest level since 1993. This follows accusations from Harry Markopolos, a private financial investigator, who flagged warnings about Bernard Madoff's $65bn Ponzi scheme. Mr Markopolos claimed the group was hiding an accounting scandal, concealing $38.1bn in potential losses. He also alleged the company's cash situation was far worse than disclosed. GE called it "meritless, misguided and self-serving speculation". Lawrence Culp, chief executive of GE, also accused Mr Markopolos of "false statements of fact" and said he had not checked his facts with GE before publishing. Read the 175-page report here.

Technology

The regulatory squeeze on Big Tech looks set to continue. The UK Government plans to give broadcasting regulator Ofcom new legal powers to police, investigate and fine video-sharing and live-streaming platforms to protect children from “harmful” content including violence, child abuse and pornography, reports suggested. 

China’s Huawei unveiled the first product running its own proprietary operating system – the Honor Vision smart TV. The operating system, called HongmengOS (HarmonyOS) was launched earlier this month. Huawei is still “unclear” on whether it can use Google’s Android operating system in the future, given the fact it is still on a US blacklist known as the “entity list”, the company said.

Verizon is selling Tumblr, just two years after buying the social network as part of its $4.48bn Yahoo acquisition. Founded in 2007 as one of the first “microblogging” services, Tumblr has been acquired by Automattic, the web-services company best known for running blogging platform Wordpress.com, for an undisclosed price tag.

Snap unveiled its latest set of smart glasses, which allow users to record video and pictures with a new 3D camera and share them with friends. The company that makes the Snapchat app said the Spectacles 3 cost $380 and can be pre-ordered now ahead of availability in Autumn.

The Chinese consumer is still spending, despite concerns about the trade war. Online retail giant Alibaba reported a more than 40% jump in sales in its latest quarter, beating analysts’ expectations.

China’s Tencent reported a 35% increase in second-quarter profits. Earnings were subdued in the equivalent period of last year as China suspended new licences for video games due to concerns over their addictive nature.

Energy

Brent crude futures rose 0.2% over the week by mid-session on Friday to trade at about $59.40 a barrel, despite concerns about global growth.

State-owned oil group Saudi Aramco released its first-ever interim earnings report and even held a conference call for analysts. The move came after its successful $12bn bond sale, which has rekindled the belief that the oil giant plans to resurrect its IPO plan. Profits fell 12% in the first half of 2019 to $46.9bn, hit by lower oil prices. The company produced 13.2m barrels of oil equivalent per day during the period, far above production from rivals such as Royal Dutch Shell, which produced 3.7m per day, or BP at 3.8m. Aramco paid $46.4bn in dividends in the period.

Gibraltar freed an Iranian oil tanker detained last month on suspicion of sanctions busting, despite a last-minute plea by the US authorities.  The UK territory received written assurances from Iran that the ship would not discharge its cargo in Syria.

Energy firm Cuadrilla has resumed fracking at its site in Lancashire. Drilling began at the Preston New Road site in October last year, but operations were halted on a number of occasions due to underground tremors. No fracking has taken place on the site since December.

Mining

Glencore lost its court case to stop Australian tax authorities using business information that was leaked as part of the so-called Paradise Papers. Glencore had argued that information revealed by the Paradise Papers – a leaked dossier that included information on clients of the Appleby law firm in Bermuda – should not be available to tax authorities as the information had been stolen. The court disagreed.

Retail

There was some mixed news for Britain’s high streets. The number of empty shops in UK town centres is at its highest for four years. The vacancy rate in July was 10.3%, the highest level since January 2015, according to a survey by British Retail Consortium and Springboard. Footfall also fell by 1.9% in July, the worst July performance for seven years. However, UK retail sales unexpectedly rose in July. The quantity of goods bought increased 0.2%, buoyed by the annual Amazon Prime Day, according to the Office for National Statistics. The figure wrong footed City economists, who had pencilled in a 0.2% decline for the month.

Bosses of more than 50 retailers – including Ann Summers, Debenhams, Deichmann Shoes, Fenwick, Harrods, John Lewis, Marks & Spencer, New Look, Primark and River Island – wrote to the Chancellor urging him to change tax rules to boost the UK High Street. The group said it wanted him to fix the "broken business rates system", which it called outdated. It said the tax had jumped by 50% since the 1990s and had contributed to some retailers going out of business.

There was another slump in Sports Direct shares as it continued to communicate poorly with markets. The group has less than a month to find a new auditor after Grant Thornton walked out on the embattled retailer. The announcement came a day after the athleisure retailer published its annual report stating that it proposed Grant Thornton be reappointed by shareholders at next month’s meeting. Other big audit groups have declined to get involved with a business that some claim is ungovernable.

There was no “get well soon card” needed for Card Factory, which bucked the gloomy retail trend after reporting rising sales and promised a special dividend next year. The mid-cap group posted interim like-for-like sales growth of 1.2% and total sales growth of 5.5% as it accelerated the pace of new store openings.

Department store Macy’s issued a profit warning after it was forced to offer heavy discounts to shift stock. 

US supermarket behemoth Walmart, which owns Asda in the UK, posted strong second-quarter results and raised its earnings guidance for the year.

Consumer

Private-equity owned Dr Martens revealed profits had surged by 70% in the year to March, boosted by the success of designs such as its “vegan” range of boots. Online sales also rose by two-thirds to £72.7m, accounting for 16% of total revenues for the company, which is expanding in international markets. Vegan boots – made from plastic – now account for 4% of the shoemaker’s sales. As a result, Permira is now looking at a sale or float of the business which it bought in 2013 for £300m.

Patrick Brown, chief executive of plant-based meat group Impossible Foods said we should tax meat to boost veg-based diets. Veganism has gone mainstream and, following the explosive IPO of Beyond Meat earlier this year, there’s a rush to invest in herbivorous food. Garry White asks whether you should join the vegan gold rush?

Watches of Switzerland, the UK’s biggest seller of Rolex watches, reported like-for-like sales growth of 10.8% in the first quarter, helping total revenues increase 17.8%. The company listed in London in May and its shares are trading slightly above their IPO price.

Financials

Royal Bank of Scotland will name Alison Rose as its new chief executive in the coming weeks, succeeding Ross McEwan, reports suggested. Ms Rose, head of RBS's commercial arm, is considered the preferred candidate, but chair Howard Davies has said the bank would consider external candidates too.

Admiral shares jumped after the insurer posted interim results that were slightly ahead of expectations. Results were boosted by an increase in UK customer numbers and a swing to profitability at its home insurance unit.

Prudential confirmed that it will split into two later this year, separating the UK business from the rest of the group. The demerger from Prudential will result in two separately listed companies, both based in London, with shareholders automatically invested in both.

Litigation finance company Burford Capital said it believes it has found evidence of trading “consistent with illegal market manipulation” after its shares collapsed following a “bear attack” by a US short-seller Muddy Waters. The Financial Conduct Authority said it is making “wide-ranging enquiries” into the circumstances. In response, Muddy Waters said it will report the company and its directors to the City regulator, alleging they misled investors.

Airlines & aircraft

Airbus is stretching its lead over Boeing in aircraft deliveries as Boeing continues to be held back by the grounding of its 737 Max. Boeing delivered 19 planes in July, down from 39 in the same month last year. It also reported that it received no new orders for the Max in July — the fourth straight month without an order. Airbus reported 69 deliveries last month, including 52 A320neo and A321neo jets that compete with the Max.

Turbine maker Rolls-Royce faced further issues with its aeroplane engines after parts from one of its Trent 1000 engines appeared to drop from a jet taking off in Rome. According to local reports and images on social media, 25 cars and a dozen houses in the Rome suburb of Fiumicino were damaged by fragments from the aircraft. Issues with the Trent engines have been known for some time and the company has set aside £1.6bn to sort out problems since 2016. Credit rating agency Moody's also downgraded its rating on Rolls-Royce, citing weak cash flow and high leverage levels at the jet engine maker.

Budget airline Norwegian Air will end flights between Ireland and the US next month, blaming the grounding of the Boeing 737 Max. "We have concluded these routes are no longer commercially viable," it said. Norwegian Air said last month the grounding of the Boeing 737 Max plane could undo its plan to return to profitability.

Cathay Pacific chief executive Rupert Hogg resigned after the Hong Kong-based airline was swept up in a series of controversies surrounding the involvement of its staff in anti-government protests.

Travel and transport

Mid-cap shipbroker Clarkson shrugged off turmoil in global trade and a “challenging" market to post an increase in sales and profits in the first half of the year. Profits were up 7% and revenues 10%. Chief executive Andi Case said the freight market for dry cargo was “a huge disappointment” during the period because of disruptions in the supply of iron ore, used to make steel.

John Menzies, which has transformed itself over the last two decades from a retailer into an aviation servicing company, reported a first-half loss compared to a profit last year, hit by weak cargo volumes and cuts in flight schedules because of the global grounding of Boeing’s 737 Max jets. The company provides ground handling, fuelling and cargo handling services for airlines.

Package holiday group Thomas Cook is in further talks with creditors over the injection of an extra £150m, on top of the £750m already announced. The company said it has made significant progress in finalising the key terms of a cash injection from its largest shareholder, China's Fosun, and creditors.

Tour operator TUI reported strong growth in revenues despite the grounding of its Boeing 737 Max jets. The pan-European travel company, which has a fleet of 15 jets that remain grounded, said it expected a total €300m charge for the year over the issue.

Shares in Auto Trader were hit after a new online marketplace for used cars launched in the UK called heycar.co.uk. It is backed by German car giants Daimler and Volkswagen.

Media

Shares in advertising agency M&C Saatchi tumbled after management revealed there had been an “accounting error” that necessitated a £6.4bn charge in its accounts. The sum included £4.9m worth of specific issues identified in a review and another £1.5m to provide for further potential issues that may arise. The issues mostly relate to the timing of revenue recognition and incorrect accounting of some assets and liabilities.

Former WPP chief executive Sir Martin Sorrell’s advertising company S4 Capital bought IMA, Europe’s largest “influencer” marketing company for €10m. In a sign of how the advertising industry is changing, IMA selects influencers to create tailored online marketing campaigns for brands including Microsoft, Heineken, and private-equity owned Samsonite.

There was another mega-deal in the US entertainment industry. CBS and Viacom are to merge to create a company with $28bn in revenue and brands such as MTV, Comedy Central and Paramount Pictures. The deal will reunite the two firms, which were previously under the same corporate umbrella until a 2006 split. The move comes amid an increasingly competitive landscape dominated by Netflix and Disney-Fox.

Utilities

Following a large power outage in London and the South East, watchdog Ofgem called for an urgent detailed report from National Grid and the government’s Energy Emergencies Executive Committee to consider the incident. National Grid said the root cause of the issue was not with its system, and was a rare and unusual event caused by the almost simultaneous loss of two large generators.

SSE, the UK’s second-biggest energy company, which supplies almost six million households, is in talks to sell its household supply business to upstart Ovo Energy. If a deal is finalised, it would catapult Ovo into the ranks of the big energy suppliers, in a major shake-up of the industry.

Property & Construction

Shares in Balfour Beatty rallied after its underlying profit more than tripled in Britain where it is working on lower risk contracts. Management upped its guidance for net cash at the end of the year.

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