China eases trade tensions

Garry White looks at the events that have shaped equity markets this week (26 to 30 August, 2019).

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Garry White

Markets were pleased this week with China’s response to new US trade tariffs that come into effect on Sunday. Government representatives said Beijing wouldn’t immediately retaliate against the latest tariff increase and wanted to focus on removing new tariffs, to prevent a further escalation of the trade war.

In the UK, the pound fell again after Boris Johnson’s government was granted permission to prorogue parliament as part of his strategy to leave the EU by 31 October. It appears that Saudi Arabia has rejected London for the secondary listing of Aramco, according to press reports, and shares in blue-chip Micro Focus slumped, putting it at risk of being relegated from the FTSE 100 at its reshuffle next week. Also at risk of being removed from the blue-chip index is Marks & Spencer, which has been a constituent of the FTSE 100 since it was established in 1984.

The FTSE 100 rose 0.7% over the week by mid-session on Friday.

Concern about the implications of the UK’s withdrawal from the European Union has meant the pound has fallen and international investors have avoided UK shares. This is likely to change. Garry White argues UK assets are cheap here.

Many charity and pension trustees and some individual investors are asking if they can use their investment portfolios to make the world a better place. The answer is yes, you can.

Economics

Consumer confidence waned in the UK. According to GfK’s running Consumer Confidence Index, the August reading decreased to minus 14 compared to minus 7 recorded in the same month last year.

However, the US consumer remains in rude health. Personal consumption jumped 4.7% year-on-year in the second quarter, faster than the 4.3% previously reported and the quickest since the end of 2014.

The second reading of US GDP for the second quarter saw the figures revised lower, to 2% from 2.1%. US President Donald Trump has pledged to boost GDP growth to annual rates of 3% or better, but many economists see GDP slowing sharply after hitting 2.9% last year.

There was more gloomy data from Germany’s troubled economy. Retail sales fell by 2.2% in July. Analysts had pencilled in a fall of 1%.

There was some good news for France as its economy is growing faster than expected. New data shows that French GDP rose by 0.3% in the second quarter of 2019, up from the initial estimate of 0.2%.

Trade war

The US is due to implement a new set of tariffs from 1 September. Products to be hit on Sunday range from meat and cheese to clocks and musical instruments. The second round of duties is due to kick in on 15 December, with products on the list including mobile phones, laptops, monitors, game consoles, some toys and LED lamps. China has adopted a grown-up stance to the deadline, with Ministry of Commerce spokesman Gao Feng suggesting Beijing will not immediately launch retaliation when they kick in on Sunday. This helped boost markets at the end of the week.

Britain will decide whether Huawei equipment should be included in the rollout of its 5G mobile networks by the end of the year, according to Digital Secretary Nicky Morgan. She stressed that the UK needed to make the "right decision" to help keep its networks secure, but China has warned the UK that excluding Huawei from its 5G network "sends a very bad signal".

Huawei's next flagship smartphone will not come with Google's popular apps including Maps and YouTube. Google confirmed that due to a US government ban on sales to Huawei, it could not license its apps to the Chinese smartphone giant. It also means the next Huawei phone will not have access to the Google Play app store, which could leave customers without access to other popular apps and limit sales of the device.

Geopolitics

Some short-term stability in Italian politics now looks likely after the leaders of Italy's centre-left Democratic Party and populist Five Star Movement agreed to form a coalition government. It was agreed that Giuseppe Conte should stay on as prime minister. The planned joint administration will serve until the next scheduled elections in 2023.

Hong Kong pro-democracy activist Joshua Wong, leader of the 2014 Umbrella Revolution, was arrested on suspicion of organising illegal protests. A number of the high-profile protesters were also arrested ahead of a planned demonstration this weekend. Garry White asks whether Hong Kong’s status as a financial hub is at risk here.

Argentina has defaulted on its debts for the ninth time in its history. S&P Global Ratings cut Argentina’s foreign and local-currency credit ratings to “selective default” after the South American nation said it would delay payments on as much as $101bn of debt.

Brexit

Boris Johnson has said talks with the European Union will be stepped up in the coming weeks in a bid to secure a new Brexit deal. UK negotiators will now meet their EU counterparts twice a week, a significant increase on the current rate. The news came after Prime Minister Johnson was granted permission to prorogue parliament as part of his strategy to leave the EU by 31 October.

IPOs

Saudi Arabia’s revived plans for a $2 trillion IPO of its state oil company appears to have ruled out London and Hong Kong for its listing because of rising political uncertainty, the Wall Street Journal reported. Aramco may instead look to Tokyo to host the second phase of what would be the biggest public offering in history. The report said people familiar with Saudi Aramco’s plans expect the company to split the listing into two stages; the first on the Saudi stock exchange later this year, and the second in 2020 or 2021.

McAfee has hired underwriters for an IPO this year that its owners hope could value the cybersecurity company at $8bn, reports suggested. McAfee, partly owned by Intel, is working with Morgan Stanley and Bank of America. A final decision on a listing hasn’t been made and the company’s plans could change, the reports noted.

Peloton, the indoor fitness start-up that thinks it can “kill the gym”, filed paperwork for its IPO on Nasdaq. Peloton is best known for its internet-connected indoor bikes and subscription cycling classes that can be streamed live or on-demand into homes.

Private equity-backed German software company TeamViewer plans to list on the Frankfurt Stock Exchange this year. The float is expected to be completed by the end of 2019. TeamViewer, currently owned by Permira, sells software for online meetings and remote desktop access, with over 20 million support sessions occurring daily on its platform.

One of China's largest artificial intelligence companies has filed for an IPO in Hong Kong. Megvii Technology was most recently valued at approximately $4bn in its last funding round in May. The news came despite recent protests and political strife in the former British territory.

Profit & sales warnings

FTSE 100 listed Micro Focus’ share price slumped after it issued a dramatic revenue warning to investors, saying sales could fall by double its previous forecast. The British IT company blamed macro factors such as Brexit uncertainty and economic concerns for its woes as customers held off from buying new technology.  The business had guided to between a 4%and 6% fall in revenue for the full year to the end of October. The shares may therefore be relegated from the FTSE 100 when FTSE Russell performs its quarterly index rebalancing next week.

Luxury jeweller Tiffany & Co said that pro-democracy protests in Hong Kong could contribute to its full-year sales being lower than forecast. Hong Kong is the luxury jeweller's fourth-largest market, after the US, Japan and mainland China.

Shares in the sub-prime lender Amigo plunged by more than half after it warned growth would come to a halt due to a looming crackdown by regulators and the rising risk of an economic downturn sparked by a no-deal Brexit. Amigo specialises in guarantor loans, which use friends and family to guarantee repayments on loans to people who might otherwise struggle to borrow.

Aim-listed Cambridge Cognition warned that interim losses looked set to widen after revenues dwindled and costs grew at the neuroscience software group that produces tools to help with brain health.

Shoe Zone shares fell by a third after its chief executive quit with no notice and it said the retailer will miss its sales targets.

Technology

Norway’s $1 trillion sovereign wealth fund should be able to invest in private companies, its manager has argued, to allow it to get greater exposure to technology groups. Such companies are staying private for longer because of the availability of venture capital and sovereign wealth funds. Garry White looks at the incredible shrinking universe of listed stocks here.

Apple apologised following revelations that it paid third-party workers to listen to voice recordings of Siri users. The practice known as "grading" has been used by several tech firms as a way of improving the quality of speech recognition. However, Apple, Alphabet’s Google and Microsoft all halted such work recently following a public outcry.

Facebook is tightening its rules on US political adverts to combat potentially misleading campaigns ahead of the 2020 presidential election. From mid-September, anyone buying ad space of this nature will have to provide a whole host of verification details, including a phone number, a business email and website, and proof they are registered with the government.

Energy

Oil had its biggest weekly gain since mid-July after a sizable drop in American crude inventories and an apparent pause in trade hostilities instigated by China eased demand fears. Brent crude prices rose 2.5% over the week to trade at about $6.80 a barrel.

The Trump administration proposed rolling back Obama-era limits on emissions of methane at oil and gas operations, relaxing standards on one of the main pollutants that has been linked to climate change.

BP will no longer have any operations in Alaska after it agreed to sell its entire remaining business there to a private oil and gas company. Hilcorp will pay $5.6bn to buy all of the oil behemoth’s interests in the US state. BP has faced pressure from environmental groups to stop drilling in the area, but BP said its decision was not connected to this.

An exciting oil find was made near Hull. Reabold Resources, Union Jack Oil and Rathlin Energy said a recent testing had revealed their jointly owned field in West Newton is now thought the be made up of mostly oil, which is more valuable than gas and easier to extract and transport. If proved correct, it would be the largest onshore hydrocarbon discovery in the UK since the 1970s.

Oil services group Petrofac said it expected revenues to fall next year as it struggled to win new orders because of a Serious Fraud Office investigation. Interim profits fell by 9% and order intake was lower due to a probe into its contract dealings in Saudi Arabia and Iraq.

The 2.9-magnitude quake, recorded near Cuadrilla’s site near Blackpool on Monday, is believed to be the biggest fracking-related tremor seen in Britain.

Mining & commodities

Iron ore had its worst month ever in August, with futures traded in Singapore down almost 30%. A restart of supply from Brazil’s Vale and concerns about a slowing global economy all hit the price. Major producers Rio Tinto and BHP Billiton have fallen sharply as a result.

The diamond market is failing to sparkle. Leading diamond producer De Beers, majority owned by Anglo American, reported a 44% fall in stone sales its latest sales round, or “sight”. Sales of diamonds fell to $280m in the company’s seventh sight of the year, down from $503m the year before, and marginally higher than the $250m for the previous sight this year.

Healthcare

The US opioid crisis is finally catching up with healthcare groups. Purdue Pharma and members of the multi-billionaire Sackler family, who own the company that makes the prescription painkiller OxyContin, have offered to settle more than 2,000 lawsuits from US states and cities for between $10bn and $12bn. The company has been blamed for fuelling the opioids crisis, which has cost the lives of more than 400,000 people across the US in the last 20 years.

Johnson & Johnson could also face tens of billions in liabilities for its part fuelling the opioid epidemic sweeping the US after a court in Oklahoma ordered the drugs giant to pay $572m for deceptively marketing the addictive painkillers.

AstraZeneca’s lupus drug showed some promise after a set-back last year. The company said that anifrolumab met the main goal in a late-stage study, an encouraging sign after it failed to meet its main target in the final stage of another trial last year.

Retail

WH Smith’s revealed that hospital stores are now the second-largest division in its travel business – after airports – and are helping to keep profits in line with expectations. In its high street division, the retailer also revealed that sales of high-margin stationery had been strong.

Ted Baker has signed a deal to sell its goods to Japanese department stores from October, telling investors it should offer an instant, if marginal, bump to its bottom line. The contract sees the retailer appoint Sojitz Infinity as its Japanese retail licence partner for the next five years to grow the brand in the country.

Consumer

Tobacco giants Philip Morris International and Altria are in talks to merge, more than a decade after the two firms separated. With Philip Morris worth some $120bn and Altria $88bn, a deal would create a $200bn-plus industry powerhouse. The news hit the share prices of cigarette competitors, such as British American Tobacco.

Goal Soccer Centres invited bids for its business and assets just weeks after it disclosed accounting issues stretching back to almost a decade. The company detected misstatement in past accounts about a month ago, which forced it to delay publishing 2018 financials and suspend trading of shares. It had also confirmed investigations into two former executives.

Meat-free investing

Shares in US-listed plant-based meat group Beyond Meat jumped after Yum Brands’ KFC revealed it was going to trial meatless "chicken" nuggets made by the company from plants as it tries to further take advantage of the growing popularity of meat substitutes. It will be a limited trial run.

Cargill, one of the world’s biggest agricultural companies, said it was investing in the rapidly-growing meat-alternatives market. The US group is investing an additional $75m in Puris, the largest North American producer of pea protein, a chief ingredient in vegan burgers and other meat substitutes. A factory owned by Puris in Minnesota will double its output as a result.

Following the success of Greggs sausage roll, the high street baker said it was now working on vegan versions of all its best-selling pastries including steak bakes, pasties and doughnuts.

Formula One racing driver Lewis Hamilton has been revealed as an early investor in meat-free burger chain. Neat Burger, which will open its first outlet just off London’s Regent Street on Monday, is currently raising up to £15m to fund expansion. It has lined up restaurants in Covent Garden and Kings Cross, is planning a US launch next year and aiming to open 14 outlets around Europe over the next two years, the Guardian reported.

However, the backlash to the sector is building. A report in the medical journal BMJ indicated that meat-free diet lacked a vital nutrient for healthy brain. Choline is critical for brain health, particularly during foetal development, and also influences liver function.

Garry White looks at whether it’s worth investing in the new vegan gold rush here.

Travel & transport

Thomas Cook agreed a rescue deal with Chinese investor Fosun Tourism, its banks and a majority of its bondholders. The UK package holiday group said in July it was working to secure new investment from Fosun, a major shareholder. The new deal would see the Chinese group take control of the business at the expense of other shareholders. Fosun will put in £450m in return for at least 75% of the tour business and 25% of the group's airline.

Shares in Scandinavian airline SAS slid after the company reported a drop in earnings, which it blamed on a pilot strike, high fuel prices and cut-price competition. The airline, which is partly owned by Sweden and Denmark, is seeking to cut more costs and admitted it will struggle to make a profit this year.

Autos

Britain’s car exports took another hit in July, with output slowing for its 14th consecutive month. Manufacturing output fell 10.6% last month, with just 108,239 vehicles rolling off the production lines, according to figures released this morning by the Society of Motor Manufacturers and Traders. Production for export fell 14.6% in July year-on-year, despite eight in every 10 cars produced in the UK being shipped abroad.

Toyota has announced a tie-up worth more than £700m with smaller Japanese rival Suzuki as the two car makers gear up to invest more in driverless car technology. It is the latest partnership between rival automakers, which have struggled to achieve the scale they need to invest in next-generation vehicles.

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.

More from author

  1. Garry White

    Oil spikes and WeWork scraps IPO

    Companies and Markets - 30th Aug 2019 12:18pm

    Garry White looks at the events that have shaped equity markets this week (16 to 20 S...

  2. Garry White

    The other trade war is another tech nightmare

    Companies and Markets - 30th Aug 2019 12:18pm

    A political dispute between Japan and South Korea is spilling over into trade. Unless...

  3. Garry White

    Beijing offers olive branch to Trump

    Companies and Markets - 30th Aug 2019 12:18pm

    Garry White looks at the events that have shaped equity markets this week (9 to 13 Se...

Most read articles

  1. China eases trade tensions

    Oil spikes and WeWork scraps IPO

    Companies and Markets - 30th Aug 2019 12:18pm

    Garry White looks at the events that have shaped equity markets this week (16 to 20 S...

  2. China eases trade tensions

    Beijing offers olive branch to Trump

    Companies and Markets - 30th Aug 2019 12:18pm

    Garry White looks at the events that have shaped equity markets this week (9 to 13 Se...

  3. China eases trade tensions

    Trade talk hopes boost markets

    Companies and Markets - 30th Aug 2019 12:18pm

    Garry White looks at the events that have shaped equity markets this week (2 to 6 Sep...

Investment involves risk. You may get back less than invested.