Last Week in the City: Apple crumbles after sales warning

Garry White, Chief Investment Commentator, looks at the events that have shaped equity markets this week (31 December, 2018 to 4 January, 2019).

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  1. Garry White

Global markets perked up on Friday after two days of declines, but the FTSE 100 was helped by a sharp rally in the oil price. The FTSE 100 was up 0.4% over the week by mid-session on Friday and the FTSE 250 rose 1%.

The biggest story of the week was Apple, which issued a shock sales warning at the start of the New Year. Shares in the iPhone maker are now down by almost 40% since their all-time high on 1 October last year. There was, however, some rare good news from the retail sector, with Christmas trading at Next and John Lewis better than the market had feared.

Investment tips for high earners! Louis Coke looks at strategies for the 364,000 UK individuals paying higher rate tax here.

Economics

The UK construction sector expanded at the slowest rate in three months at the end of 2018, though it remained in growth territory for the ninth consecutive month, the IHS Markit/CIPS Purchasing Managers' Index showed on Thursday. The PMI reading came in at 52.8 in December, down from 53.4 in November and slightly below consensus forecasts of 52.9. The score remained above the neutral mark of 50, which separates expansion from contraction.

However, the dominant British services sector accelerated slightly in December, bucking expectations of a slowdown. The IHS Markit purchasing managers index rose to 51.2, up from 50.4 in November. Economists had expected a reading of 50.7.

U.K. consumer confidence fell to its lowest level since 2013 in December. An index published by YouGov and the Centre for Economics and Business Research fell to 104.4 last month. All but one of the gauge’s eight components fell, with expectations for business activity over the next year dropping to the lowest level since 2012.

UK house prices posted their slowest annual growth in five years in 2018, according to Nationwide Building Society. Growth slowed to just 0.5% last year, down from 2.6% in 2017.

China’s factory activity weakened further in December. The purchasing managers’ index of the National Bureau of Statistics and an industry group, the China Federation of Logistics & Purchasing, fell to 49.4 from November’s 50.0. Any reading below 50 shows activity is contracting.

To help boost the economy, China’s central bank cut the amount of cash lenders must hold as reserves by 1 percentage point. The required reserve ratio for banks will drop by 0.5 of a percentage point on January 15 and a further 0.5 percentage point on January 25, the People’s Bank of China said. Additionally, Chinese premier Li Keqiang, an economist, visited the country’s three largest commercial banks this week to try and encourage lending to small businesses. Mr Li met with the "inclusive finance" departments of Industrial and Commercial Bank of China, China Construction Bank, and Bank of China, reports noted.

Geopolitics

The Democratic Unionist Party, which is propping up Theresa May’s government, said it still had “principled objections” to her Brexit deal. A vote on the deal was postponed in December, as it was unlikely to pass. The vote is now expected in the week commencing 14 January.

Hopes increased that a solution could be found to Donald Trump’s trade war, with talks set to resume next week. Deputy US Trade Representative Jeffrey Gerrish will lead a delegation to meet Chinese counterparts on Monday. Markets are concerned about the impact on the global economy following this week’s shock sale downgrade from Apple, which was based on weakness in China. News that Chinese companies were once again seeking to buy US soybeans helped sentiment on this front.  For a backgrounder on why soybeans are important to the dispute click here.

The Democrats took over the US House of Representatives on Thursday, which will allow them to disrupt President Trump’s economic agenda and potentially release his tax returns. The first thing Democrats did was approve legislation, backed by new Speaker Nancy Pelosi, that would end a 13-day partial government shutdown, ignoring President Donald Trump’s demand for $5bn for a border wall. However, it is unlikely the bill would pass the Republican-majority Senate.

Chinese President Xi Jinping has urged the people of Taiwan to accept it "must and will be" reunited with China. In a speech marking 40 years since the start of improving ties, he reiterated Beijing's call for peaceful unification on a one-country-two-systems basis. In response, Taiwan’s President Tsai Ing-wen said on Wednesday the island will never accept a “one country, two systems” political arrangement with China.

Canada said on Thursday that 13 of its citizens have been detained in China since Huawei Technologies chief financial officer Meng Wanzhou was arrested last month in Vancouver at the request of the US. This has accelerated fears of a break up of the internet – to find out more on this issue click here.

Technology

Shares in Apple slumped after the company said it would miss its sales target for the final quarter of 2018 by at least $5bn due to a slowdown in China. Shares in the iPhone maker are now down by more than a third since 1 October last year.  The news hit apple suppliers worldwide. The news prompted fears a wider slowdown in China, exacerbated by Donald Trump’s trade war and high levels of indebtedness. The news therefore hit other China-related companies, with steep falls in miners such as BHP Group and Rio Tinto, as well as in luxury goods companies such as Burberry and LVMH.

The plunge in Apple’s share price meant it was relegated to the third-largest listed company in the world. Based on Thursday’s closing prices, the three largest public companies in the world are now:

Microsoft – market cap $747.8bn
Alphabet – market cap $710.2bn
Apple – market cap $674.8bn

Tesla shares also fell sharply after the electric vehicle maker missed market expectations for vehicle deliveries in the last three months of 2018. The company also said it would reduce the price of its vehicles in the US by $2,000 to partly offset the expiration of a $7,500 federal tax credit for electric vehicle purchases that will be phased out this year.

Energy

Brent crude saw its biggest weekly gain since July 2017, as Opec’s production cuts outweighed concerns over the health of the global economy. Brent crude futures rose 8.6% over the week by mid-session on Friday to trade at around $56.80 a barrel.

Ophir Energy shares jumped by more than a third after revealing it was in takeover talks with a subsidiary of Indonesian oil giant Medco Energi.

Mining

Gold prices hit a six month high, briefly breaching the $1,300 level, as uncertainty mounted and the market sell off continued.

Retail

Updates from retailers defied gloomy expectations, as a late rush by Christmas shoppers boosted results. The John Lewis Partnership said sales were up 4.5% in the week to 29 December, compared with the same period last year. Sales also rose 4.2% in the preceding week.

Next shares jumped after the high street stalwart reported a sharp rise in online sales over the Christmas period, although trading at its physical stores declined. Helped by a last spurt, online sales rose 15.2% between 28 October and 29 December from a year earlier, while store sales fell 9.2%. In total, full-price sales at the retailer were up 1.5% over the period.  The retailer expects an annual profit of £723m, slightly lower than its previous forecast of £727m. It blamed the lower forecast on strong sales of less profitable items such as beauty products and personalised gifts.

Healthcare

In the US, Bristol-Myers Squibb is buying cancer drugmaker Celgene in a cash and stock deal valued at $74 billion. Under the agreement, Celgene shareholders will receive one Bristol-Myers Squibb share and $50 in cash for each share held, or $102.43 per share, a premium of 53.7 percent to Celgene’s close on Wednesday this week.

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