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Last Week in the City: Oil enters a bear market

Garry White, chief investment commentator, looks at the market-moving events that have shaped the UK equity markets this week (November 5 to 9, 2018).

by
Garry White

in Features

09.11.2018

Global oil benchmarks entered a bear market this week, falling more than 20% from its peak at the start of last month. This followed an easing of supply concerns as oil inventories rose and as the US granted waivers from Iran sanctions to some of its major customers, including China. Concerns about a Chinese slowdown mounted after some weak data, including car sales. As expected, the Democrats won control of the House of Representatives in the US midterm elections.

The FTSE 100 was essentially flat over the week by mid-session on Friday, rising 0.1%.

John Redwood, Charles Stanley’s Chief Global Economist, explains our current view on asset allocation here.

Economics

UK GDP grew by 0.6% quarter-on-quarter in the three months to September – its fastest rate since the fourth quarter of 2016. The figure was in line with expectations and annual growth was 1.5%. However, this could be the high watermark for growth. “The economy saw a strong summer, although longer-term economic growth remained subdued. There are some signs of weakness in September with slowing retail sales and a fall-back in domestic car purchases,” the Office for National Statistics said. “However, car manufacture for export grew across the quarter, boosting factory output. Meanwhile, imports of cars dropped substantially helping to improve Britain’s trade balance.”  

The US Federal Reserve left interest rates unchanged this week, but is widely expected to raise rates at its December meeting. “The labor market has continued to strengthen and ... economic activity has been rising at a strong rate,” the US central bank said, leaving intact its plans to continue raising rates at a gradual pace. The only negative in the statement was the central bank’s highlighting of a moderation in business investment. Other data releases showed that US mortgage applications had fallen to their lowest level in four years, as rates continue to rise.

Despite the trade war rumbling on, China’s exports are still rising. Exports jumped 15.6% year-on-year during October in dollar terms – the first full month that tariffs on $200bn of Chinese good came into effect. This is down to the roughly 10% fall in the yuan, which has made exports more competitive, but is also a function of companies making purchases before the US tariffs rise to 25% form 10% later this year. This stirred hopes that a deal could be reached at the G20 summit later this month between the two countries, as the impact of tariffs is having little effect because of the runaway US economy and the devaluation of the yuan.

Germany's industrial production rose for a second straight month in September, defying expectations for a modest decline. This followed a series of negative data releases. However, as Aristotle once said, one swallow does not a summer make.

John Redwood, Charles Stanley’s Chief Global Economist, looks at central bank policy and muted levels of inflation here.

Geopolitics

As we expected, the US midterm elections resulted in Democrats taking the House of Representatives and the Republicans maintained control of the senate. Donald Trump’s legislative agenda appears to be over for the next two years, which may increase his interest on foreign policy. In an attempt to hold out an olive branch to Democrats, President Trump said there could be bi-partisan efforts on issues such as drug pricing and infrastructure. The S&P 500 rallied in the three trading sessions around the election, tabling its strongest performance since 1982.

President Trump has sacked his attorney general Jeff Sessions, replacing him with the controversial arch-Mueller critic Matthew Whitaker. This prompted concerns in some quarters that the president was trying to shut down the investigation into Russian meddling in the 2016 election. Mr Sessions had infuriated President Trump by recusing himself from special counsel Robert Mueller’s investigation last year. One market reaction to the move was a leap in cannabis-related stocks, as Mr Sessions had been blocking the industry legalisation at the federal level.  Shares in Tilray jumped almost a third on the news. For a backgrounder on this issue from May this year click here.

Brexit talks continue with no agreement in sight. The Democratic Unionist Party (DUP) accused Theresa May of breaking promises over plans to avoid a hard border between Northern Ireland and the Republic of Ireland post-Brexit. DUP leader Arlene Foster claimed the prime minister was "wedded to a border down the Irish Sea" as a fallback option for avoiding checks, if no free trade deal is reached in time.

The UK and France will remain "tied by bonds of friendship" for decades after Brexit, UK foreign secretary Jeremy Hunt said. Officials said the visit was aimed at showing the friendship between the two nations was "bigger than Brexit".

The European Commission warned that Italy’s fiscally aggressive budget would lead to the country breaching the 3% deficit target set by Brussels. Italian bonds were pressured by the news and yields rose.

IPOs

Eurotorg Holdings, the biggest grocer in Belarus, delayed its plans to list its shares in London, blaming current market conditions. Management said it would pursue its IPO when capital markets conditions become more favourable for emerging markets.

Kazatomprom, the world's largest producer of nuclear fuel uranium, has secured investors for its listing of 15% of the company in London, press reports suggested. The flotation is regarded as a test of Kazakhstani President Nursultan Nazarbayev’s large state-asset sale program.

Technology

Apple suppliers in Asia saw their shares slip following a media report that the iPhone maker had told its smartphone assemblers to halt plans for additional production lines dedicated to its new iPhone XR. This followed disappointment in the previous week caused by news that the company will no longer report how many iPhones, iPads and Macs it sells each quarter. This was taken as a sign that management expected growth in unit sales will slow.

The chief executive of Japan’s Softbank condemned the murder of journalist Jamal Khashoggi by Saudi security forces, but said his company must continue to work with Riyadh. Saudi Arabia is the major investor in Softbank's $93bn (£71bn) Vision Fund.

Shares in satellite communications group Inmarsat fell after management said its revenue for the year would only just meet expectations at $1.3bn, at the bottom of its previous guidance range of between $1.3bn and $1.5bn.

Shares in US chipmaker Qualcomm plunged after it issued a gloomy first-quarter outlook. Its fourth quarter results were strong but management guided to sales in the current quarter of between $4.5bn and $5.3bn, compared with the Wall Street consensus of $5.6bn. This reflected a slowdown in Chinese smartphone sales.

Energy

US crude West Texas Intermediate (WTI) entered a bear market this week, falling more than 20% from its four-year highs in early October. Brent Crude prices fell into a bear market on Friday, having fallen around 18% from last month’s highs. Prices were weak once again, with Brent crude futures losing 3.4% over the week by mid-session on Friday to trade at around $70 a barrel.  

The United States re-imposed sanctions against Iran's oil exports on Monday to punish Tehran for its involvement in several Middle Eastern conflicts. However, to prevent an oil-price spike, the Trump administration granted Iran's biggest buyers – China, India, South Korea, Japan, Italy, Greece, Taiwan and Turkey – sanctions waivers.

The merger of UK energy providers SSE and Npower (owned by Germany’s RWE) has been delayed because of the government’s introduction of an energy price cap, the two companies said.

National Grid reported a 6% fall in first-half operating profit due to the impact of the US tax reform, storms in the US and the return of allowances it had received for its shelved Avonmouth pipeline project. However, chief executive John Pettigrew said the group was “on track” to achieve asset growth at the top end of its 5-7% range in the medium term.

Healthcare

Strong demand for AstraZeneca’s new drugs — especially those for cancer — drove a return to sales growth in the third quarter and the drugmaker said it now anticipated years of sustained improvement.

Hikma Pharmaceuticals raised full-year revenue expectations for its injectables division, its largest unit, for the second time in three months. The company supplied more opioid painkillers amid a shortage in the US due to production problems at Pfizer.

Supermarkets

Sales growth at Wm Morrison stores open for more than a year slowed during the third quarter after revenues at the supermarket chain were boosted in the previous quarter by favourable weather, the Royal Wedding and the World Cup. Like-for-like sales grew 5.6%, below City expectations of 6.1%.

J Sainsbury said the consumer spending outlook was "uncertain" as retailers gear up for the crucial Christmas trading season. The UK's second-largest supermarket chain maintained full-year guidance alongside its half-year results, but warned the grocery and clothing sectors were "highly competitive" and "very promotional". Synergies from its Argos purchase are ahead of expectations.

The proposed merger of Walmart’s Asda and Sainsbury will cause substantial harm to customers, rival chain Waitrose warned.

Other retail & consumer

The number of UK shops, pubs and restaurants lying empty has soared by more than 4,400 in the first six months of this year. Closures increased by nearly 17% to 24,205 across 3,000 towns, cities, retail parks and shopping centres monitored by the Local Data Company. The number of new openings of shops, restaurants, pubs and other leisure destinations fell 2.1% to 19,803 over the half year – leaving 4,402 more gaps on the high street.

Spending in British shops fell 2% year-on-year during October, according to a survey by accountancy and business advisory firm BDO. This followed a 2.7% annual fall in September. However, including online sales, like-for-like turnover rose by 1.0%.

Marks & Spencer reported falling clothing and food sales and warned that it saw little improvement in sales this year. Like-for-like sales, which strip out the impact of new stores, were down 2.2% for the six months to the end of September. Food sales were down 2.9% and clothing and home sales slid 1.1%.

Halfords said it continued to expect broadly flat full-year profits after it dropped by almost a fifth in its half-year report. Management said shoppers were holding back on spending on discretionary items, which was hitting bike sales.

Primark-owner Associated British Foods revealed full-year profit rose 15%, as growth in premarket offset its weak foods business, which has been hit by weak sugar prices.

New Look’s management suggested that almost 100 of its UK stores may end up closing down as part of its ongoing turnaround scheme, much more the 60 that was originally earmarked earlier this year. However, the group returned to profit in the first half of the year.

Fashion house Burberry said it had seen an "exceptional response" to the creative vision of its new designer Riccardo Tisci as it reported a slight dip in first-half revenue and operating profit as it continues to reposition the brand as “firmly in luxury”.

The collapse of House of Fraser resulted in multi-million-pound losses at Mulberry, maker of the Alexa handbag. Interim revenues fell 8%, with UK sales down 11%.

Pub group JD Wetherspoon may raise its prices in the coming months as the pub chain warned of weaker trading and higher staff costs. In a trading update for its first quarter, the pubs firm said that while it would not immediately pass on a higher wage bill to customers through price rises, it was under review, prompting a slump in its share price.

Bookmaker William Hill warned of lower full-year profits following the closure of a number of customer accounts to combat problem gambling and money laundering, as well as the government’s clampdown on fixed-odds betting terminals (FOBTs).

Media

Shares in ITV fell after management predicted a softening in fourth quarter advertising as retailers held back on high-spending advertising campaigns. Its overall performance for the first nine months of the year was in line with its expectations.

The Walt Disney Co gained EU approval for its purchase of significant assets from 21st Century Fox. To secure approval, Disney agreed to sell several European TV channels, as the industry grapples with the rise of streaming services such as Netflix.

Outsourcing

A profit warning from security group G4S sent its shares tumbling. Management now expects full-year profits will be 5% below current consensus expectations.

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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