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Last Week in the City: The technology cold war begins

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (20 to 24 May, 2019).

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (20 to 24 May, 2019).
Garry white employee

by
Garry White

in Features

24.05.2019

Global markets dipped this week as investors grew concerned about the possibility of a technology cold war between the US and China. Beijing warned Washington that it needed to "correct" its "wrong actions", after the US put Huawei on a list that curbs the ability of US companies to trade with the Chinese group. Theresa May announced she would resign on 7 June, as little progress continues to be made on leaving the European Union. Deutsche Bank was also under pressure after a story that executives blocked employees from raising suspicious activity reports on entities controlled by US President Donald Trump and his son-in-law Jared Kushner between 2016 and 2017.

The FTSE 100 fell 0.8% over the week by mid-session on Friday and the FTSE 250 was down 1.8%.

The Charles Stanley Investment Strategy Committee met this week to review markets and the economic outlook. Here are its conclusions.

Economics

Confidence among German business leaders fell to its lowest level in more than four years in May, according to a widely-watched report from the IFO Institute. Its confidence index fell 1.3 points to 97.9, with the latest reading the lowest since November 2014. Although Donald Trump has postponed the introduction of auto tariffs for six months, a move that would hit Germany hard, Garry White argues that this issue is not going away here.

The minutes of the most-recent Federal Reserve rate-setting meeting were released with officials saying they remained firmly committed to a “patient” policy stance and that rates likely will remain unchanged well into the future.

Japanese GDP unexpected grew 2.1% in the first quarter, beating economists’ expectations of either a flat result or a fall.

Geopolitics

Theresa May announced she will resign as British Prime Minister on June 7, but stay on to act as caretaker until the Conservatives elect a new leader. The pound rallied following the announcement.   EC President Jean-Claude Juncker suggested that the UK was drifting towards another Brexit extension in October, as he criticised MPs for prioritising the prime minister’s removal over finding agreement on a Brexit deal.

European Parliamentary elections took place, with the results released on Sunday. What could the new Commission look like and what are the implications? John Redwood, Charles Stanley’s Chief Global Economist, takes a look here.

US President Donald Trump declared a "national emergency" empowering him to blacklist companies seen as "an unacceptable risk to the national security of the United States" – a move that was clearly aimed at Huawei. There is a 90-day period of grace before the ban starts to allow companies to make preparations for the supply chain disruption. However, on Friday President Trump said Huawei could be part of a trade deal between the US and China, confusing the situation further. The prospects of a “Splinternet” are now building – Garry White looks at the issue here.

The US federal government will spend an additional $16bn to help farmers hurt by the US-China trade war, Agriculture Secretary Sonny Perdue announced. John Redwood argues that something has changed in the Trump administration here.

Cryptocurrency

Craig Wright filed copyright registrations for the bitcoin whitepaper and the early Bitcoin code with the US Copyright Office. It’s the latest step in the Australian’s battle to prove he is Bitcoin’s creator and the man behind the pseudonym Satoshi Nakamoto.

Facebook is finalising plans to launch its own cryptocurrency next year. It aims to set up a digital payments system in about a dozen countries by the first quarter of 2020. The digital coin has been referred to internally as GlobalCoin.

Technology

Elon Musk’s private company SpaceX launched a rocket that will deploy 60 satellites into orbit. It is part of his plan to establish a “megaconstellation” that could beam cheap broadband all over the planet from space.

Apple said it would be “clearer and more upfront” about iPhone battery health and performance, following an investigation by the UK competition watchdog into a software update that caused the phones to slow.

Autos

Is Wall Street’s love affair with Elon Musk’s electric vehicle company Tesla over? A number of negative broker notes were issued on the company this week and its shares hit a 52-week low. However, they bounced back after an email was conveniently leaked from Mr Musk that was upbeat on production numbers.

Just one in four people in the UK would consider buying a fully electric car in the next five years, according to a study conducted by the Transport Research Laboratory. Sales of pure electric cars rose to 1,517 in April 2019, an increase of 588 on the same month last year, according to the Society of Motor Manufacturers and Traders. They accounted for 0.9% of total sales for the month.

Energy

The oil price saw its largest one-day loss of the year on Thursday on growth fears sparked by Donald Trump’s trade war and rising US crude inventories, which hit a two-year high ahead of the peak driving season in the country. Brent crude futures fell 4.7% over the week by mid-session on Friday to trade at about $68.80 a barrel.

Mining & Commodities

British Steel fell into liquidation, threatening thousands of jobs, with its owners, Greybull Capital, blaming "Brexit-related issues". This followed the refusal of a request by the government for a bailout of £75m, which was reduced to £30m.

The price of steelmaking ingredient iron ore has now peaked according to Goldman Sachs. The price had risen sharply after Brazil’s Vale reduced production following a series of mine disasters, benefitting Rio Tinto and BHP Group.

Food

Pret a Manger is buying food chain Eat in what its chief executive says is an effort to "turbo-charge" its Veggie Pret chain. Clive Schlee said the purpose of the deal was to meet demand from vegetarian and vegan customers. Vegan food is the latest hot market trend with US-listed plant-based burger group Beyond Meat continuing to soar. Garry White argues that a bubble could be forming in the vegan and vegetarian sector here.

Sausage and sandwich supplier Cranswick posted profits annual in line with lowered market expectations. The company’s pork exports to the Far East soared last year amid a pig epidemic which has swept across China. African swine fever has killed hundreds of millions of pigs in China, leading to rising meat prices in the country. Garry White looks at the issue with pigs here.

Celebrity chef Jamie Oliver’s privately-owned restaurant group went into administration, putting up to 1,300 jobs at risk. The group, which includes the Jamie's Italian chain, Barbecoa and Fifteen, appointed KPMG as administrators.

The Competition and Markets Authority is proposing that any merger between Asda – owned by US retailer Walmart – and J Sainsbury should be blocked for ten years. Value retailer B&M played down market speculation it was considering bidding for Asda, which Walmart is now expected to spin off into a separate listing.

Retail

Sales in Mothercare’s UK operation slumped almost 9% last year, as its losses widened to £87.3m. The company said sales had fallen following reduced consumer confidence after last year's restructuring.

Halfords scaled back its investment plans and is to cut costs more aggressively following a 24% dip in annual profits.

Privately-owned Arcadia, Philip Green’s retail empire, confirmed plans to shut 23 stores as part of a company voluntary arrangement (CVA). All of the retailer's 11 Topman and Topshop stores in the US are also set to close.

Consumer

An American activist investor called for Merlin Entertainments, the theme park operator behind the London Eye and Madame Tussauds, to seek out a buyer to take the group private. The FTSE 250 group, which was ejected from the FTSE 100 index 18 months ago, confirmed it had received the demand from Valueact Capital, a US-based activist known for its turnaround campaign at Rolls-Royce.

Royal Mail announced a cut in the dividend to 15p from 25p last year.

Travel and transport

US aviation regulators defended their response to the two fatal Boeing 737 Max plane crashes. The Federal Aviation Administration said it didn't have the information needed to ground the 737 Max after the Lion Air crash. Two French families filed lawsuits against Boeing over the crash of the Ethiopian Airlines 737 Max in March.

Troubled travel company Thomas Cook was forced to reassure customers after its share price continued to fall. The package-holiday group has been reassuring telling customers that it is "business as usual". The company also revealed it has received a bid for its Northern European business from private equity group Triton Partners.

Ryanair reported its lowest profit in four years and forecast another slide this year, as air fares fell due to fierce competition in Europe. Following two profit warnings since October, Europe’s biggest budget carrier posted a profit after tax of €1.02bn for the year to 31 March, down from €1.45bn the previous year. Management warned fares would continue to fall, hitting shares in easyJet and British Airways owner IAG.

Financials

Deutsche Bank shares slid to fresh lows as its boss announced “tough cutbacks” for the investment bank following a fraught year of money laundering allegations and failed merger talks. At an eight-hour AGM in Frankfurt that, chief executive Christian Sewing said the bank would push ahead with a further €1bn in cost cuts this year, following similar moves in 2018 that led to 6,000 job losses. Earlier in the week, the German bank was forced to admit that software used to screen customer transactions for money laundering was faulty and some suspicious transactions were not flagged to authorities. That revelation followed a report in the New York Times that Deutsche Bank executives blocked employees from raising suspicious activity reports on entities controlled by US President Donald Trump and his son-in-law Jared Kushner between 2016 and 2017.

Tesco Bank is stopping new mortgage lending and is looking for ways to sell its existing mortgage portfolio. The bank, which started offering mortgages in 2012, has more than 23,000 mortgage customers, with total lending balances of £3.7bn.

Utilities

Regulator Ofgem cut the allowed returns energy networks such as National Grid are allowed to make. In the next five year regulatory period, a return of 4.3% is allowed, down from 7% to 8% in the current period.

Healthcare

Four pharmaceutical companies were accused of illegally colluding to restrict the supply of an anti-nausea tablet, driving the price paid for it by the NHS up by 700%. The Competition and Markets Authority (CMA) said the cost of Prochlorperazine rose from £6.49 per pack to £51.68, after suppliers agreed not to compete. The drug is often prescribed to cancer patients undergoing chemotherapy. One of the businesses, Alliance Pharma, denied the allegations. The other groups involved are Focus, Lexon and Medreich.

The issue of drug pricing is a hot topic in the US. "Drug prices are coming down, first time in 51 years because of my administration, but we can get them down way lower working with the Democrats," President Trump said in an address in the White House Rose Garden on Tuesday. However, there is no evidence to back up his claim. The President has vowed to cut off working with Democrats until they stop investigating him, which has put bipartisan drug pricing talks at risk. For a background look at the issue, click here.

Germany’s Merck will buy private cancer biotech Peloton Therapeutics for an upfront payment of $1.05bn in cash. The acquisition will add Peloton’s novel late-stage renal cell carcinoma candidate to Merck’s oncology pipeline.

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