Last Week in the City: Crunch time for Theresa May

Garry White, Chief Investment Commentator, looks at the events that have shaped UK equity markets this week (November 19 to 23, 2018).

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  1. Garry White

The FTSE 100 fell 2% over the week by mid-session on Friday, as the pound was volatile on continuing Brexit uncertainty. The FTSE 250 fell 0.2%. Theresa May faces a crunch weekend trying to get May’s legal divorce treaty and a political declaration on future ties signed off by the EU, but there are concerns that the deal will not get through parliament in its current form. Concerns about global growth remain and oil prices hit a one-year low.

Economics

UK government finances were worse than expected in October. The deficit rose to £8.8bn from £7.2bn last year, marking the biggest October figure for three years. The data point was well above the £6.1bn expected by economists. However, the amount borrowed so far this financial year is the lowest for 13 years.

There was good news for UK manufacturing, however, as output growth in the sector picked up in the quarter to November. Companies also saw overall order books rebound from a fall in October, according to the latest monthly CBI Industrial Trends Survey.

The minutes of the last European Central Bank meeting showed policymakers still planned to halt the expansion of its €2.6bn bond-buying quantitative easing programme at the end of the year, despite the current slowdown and weak data.

Orders for American-made durable goods sank in October, but this was mostly due to a fall in demand for aeroplanes. Significantly, business investment was weak for the third month in a row. Durable goods orders fell 4.4% year-on-year, the biggest decline in 15 months. This was worse than market expectations.

Worries over rising interest rates hit US consumer sentiment, which fell to a three-month low in November. The University of Michigan’s sentiment index fell to 97.5, compared with expectations of a fall to 98.3.

Eurozone consumer confidence hit its lowest level since March 2017. The EC’s headline consumer sentiment index fell to -3.9 in November, worse than the expected -3.

Brexit

A summit on Sunday 25 November has been called to rubber stamp Theresa May’s legal divorce treaty and a political declaration on future ties (the basis of any trade agreement), but eleventh-hour objections from Spain over Gibraltar has complicated the issue. If this is all agreed, Mrs May will start the process of getting MPs to back the deal. However, it appears that there may not be the parliamentary maths vote through the agreements, as even opponents of Brexit have criticised the terms. Scottish Conservative MPs are also worried that the declaration will not protect the interests of the UK fishing industry. This may increase the chances of a no-deal Brexit. Germany has reiterated that Angela Merkel would not attend Sunday's meeting if the text has not been agreed in advance. If MPs back the deal it then has to be ratified by the European Parliament.

A plot to remove the prime minister by the European Research Group, a group of Tory MPs who support a hard Brexit, failed spectacularly as they failed to get enough MPs to back a vote of no confidence. However, ERG member Jacob Rees-Mogg called for “patience”.  

Bank of England governor Mark Carney supported Mrs May’s deal, saying it would “support investment”.

Hope followed by uncertainty over the withdrawal caused volatility in the pound over the week. However, Goldman Sachs said this week that it expected that sterling would rally next year. The bank’s strategists predict the pound will rally almost 5% against the euro to €1.176 and 10% against the dollar to $1.41. However, Goldman accepted that “the political situation in the UK remains fluid”.

Jon Cunliffe, Charles Stanley's Chief Investment Officer, looks at the market implications for each of the five potential Brexit outcomes here.

Geopolitics

The finance ministers of the Eurozone countries, informally known as the Eurogroup, will meet in December to discuss the situation with the controversial Italian budget. The EU’s Economic and Financial Affairs, Taxation and Customs Commissioner, Pierre Moscovici, said that Italy did not comply with the EU fiscal rules but no official disciplinary measures have been launched. Italian Deputy Prime Minister Matteo Salvini said he had lost his patience with Mr Moscovici and accused him of insulting Italy. This followed Mr Moscovici’s statement that he wouldn’t negotiate with Rome like they are in some “carpet bazaar”.

US President Donald Trump thanks Saudi Arabia for its role in preventing oil-price rises. This followed comments that he was standing by the Saudis, despite the CIA reportedly concluding Saudi Crown Prince Mohammed bin Salman ordered the killing of journalist Jamal Khashoggi. Germany, Denmark and Finland suspended any arms sales to the country, which is fighting a proxy war in Yemen. This story is significant for Britain and the US as the two countries sell the Saudis the majority of their arms. Over the past five years the US accounted for 61% of major arms sales to the Saudis, with the UK second, with a 23% share. France, in third place, sold a mere 4% of the total, according to data from the Stockholm International Peace Research Institute.

The US midterms raises the prospect of bi-partisan co-operation over America’s crumbling infrastructure, which could be positive for UK companies such as Ashtead, Ferguson, National Grid, CRH and Hill & Smith. However, Garry White argued that funding issues make a deal tricky here.

Cryptocurrency

Digital coins such as bitcoin and ethereum slumped in value once again, hitting new 2018 lows.  The rout in the sector continued as a US-based cryptocurrency mining company, Giga Watt, filed for bankruptcy protection amid declining prices. Giga Watt had been offering remote cryptocurrency mining hosting plans at the company's data centres in Washington, with the promise of low fees to customers. There are also concerns about increasing regulation in the sector driving the price falls. As of Friday morning, the bitcoin price has plunged 78% from its peak in December last year.

Charles Stanley has always recommended avoiding cryptocurrency because of the risks. Our chief executive Paul Abberley explains why here.

Technology

The sell-off in technology shares eased this week, with Nasdaq bouncing from Tuesday. Gains, however, were very slight and the Nasdaq Composite index was still down 3.8% over the week by mid-session on Friday.

Chinese Apple supplier Foxconn Technology Group, plans to cut costs by £2.3bn next year amid concerns that iPhone sales growth is slowing. Foxconn faces “a very difficult and competitive year”, according to an internal memo.

Elon Musk’s Tesla revealed it was slashing prices in China for the second time this year, taking a bigger hit from the trade war in a bid to protect sales. The electric carmaker will slash prices of its Model S and Model X by between 12% and 26%, even though higher Chinese tariffs on US autos have made it more expensive to import cars. However, there was some positive news for Mr Musk, after Swiss investment bank UBS conducted an analysis of battery production costs for various manufacturers and concluded that Tesla had a 20% cost advantage over its closest competitor, LG Chem.

Facebook was once again the centre of controversy, after it admitted that a senior executive had hired a public relations firm to attack George Soros and undermine the social media company’s critics by publicising their association with the billionaire Jewish philanthropist. Both Mark Zuckerberg and Sheryl Sandberg said they had no knowledge of the strategy that some described as having “anti-Semitic overtones”.

Hong Kong listed Chinese food-delivery app Meituan, which is backed by internet giant Tencent, slumped after its first earnings report since its IPO saw losses triple. The shares have fallen by about a quarter since their flotation in September.

Amazon workers across the UK and Europe stage demonstrations at its warehouses on Black Friday to protest against working conditions.

Energy

The oil price hit a one-year low on mounting concerns about a global oversupply. US crude inventories rose by 4.9m barrels to the highest levels since last December. Saudi Arabia is now producing in excess of 10.7 million barrels a day, according to its Energy Minister Khalid Al-Falih, which would be a record level of output. However, there is speculation that Opec may implement a production cut at its December 6 meeting, so this may provide a short-term floor for the price. Brent crude futures fell 8.8% over the week to trade about $60.71 a barrel.  

Centrica shares slumped after the energy supplier reported losing customers, lower nuclear power generation and a fall in output at its oil and gas division.

Mining

Shares in precious metals miner Frenillo fell sharply after Morgan Stanley downgraded its rating on the shares amid uncertainty over its operations in Mexico following the passage of recent legislation, which could restrict mining in the country.

Shares in Irish construction materials group CRH said full-year earnings would come in at the bottom range of analysts' expectations, sending its shares lower.

The London precious metals market is not as big as some thought. An average of $36.9bn of gold and $5.2bn of silver changed hands each day in the city’s over-the-counter market, including metal for delivery in Zurich, according to figures released for the first time by the London Bullion Market Association. Previous World Gold Council estimates, based on 2016 data, were between three and six times higher.

Media

Sir Martin Sorrell increased tensions with his former company WPP by poaching a senior executive to join his new advertising venture S4 Capital. Michel de Rijk will be the chief executive of operations in Asia-Pacific.

The Walt Disney Co received unconditional approval for its purchase of large parts of Rupert Murdoch’s 21st Century Fox from China. This is regarded as positive because there were some fears that Donald Trump’s trade war would cause authorities in the Asian nation to drag their feet.

Retail & consumer

Retailers are braced for a subdued Christmas trading period, with many offering Black Friday discounts to attract shoppers. 

Baby products retailer Mothercare saw UK sales slump 11% in the first half of 2018, as the high street remains challenging. Management also cited "negative press coverage" caused by its restructuring in May. 

Under-pressure DIY retailer Kingfisher said it plans to dispose of its operations in Russia, Spain and Portugal to concentrate on its larger markets of the UK, France and Poland. The move impacts about 51 of the group's 1,300 stores.

The British hedge fund run by George Soros has taken a £10m position betting on a fall in the share price of WH Smith, according to US regulatory filings. SFM UK Management is now short 0.5% of the company’s equity.

Shares in online electrical retailer AO World slid sharply after management said that there was a “challenging backdrop” in its core markets. Nevertheless, interim results saw a 10% jump in sales and a narrowing of losses.

Majestic Wines announced plans to stockpile more than 1m extra bottles of wine from France, Spain and Italy as part of its emergency planning in case there is no Brexit deal by March. The company swung to a loss in the first half of the year and warned the retail market was tough.

The Financial Reporting Council launched an investigation into the audits of Patisserie Valerie statements following the discovery of accounting irregularities at the company. Its auditor was Grant Thornton.

This year’s World Cup in Russia helped pub group Marston’s post record sales in its latest financial year, but profits were down sharply as they were hit by a property estate revaluation.

Catering company Compass reported solid full-year results that were largely in line with City expectations. Organic sales increased by 5.5%, reflecting a strong fourth quarter and driven by excellent growth in North America.

Industrials

The board of Japanese carmaker Nissan voted to sack its chairman, Carlos Ghosn, days after his arrest for alleged financial misconduct after French partner Renault backed away from a last-minute demand to postpone the decision on their alliance leader’s fate. This may defuse a crisis that threatened to end the alliance between the two carmakers and spark a diplomatic rift between Japan and France. Mr Ghosn is also chief executive of Renault and chairman of Mitsubishi. The events could prompt a series of other “confessionals” from Japanese executives, some observers claim.

Shares in Babcock International fell to a seven-year low after the Ministry of Defence contractor reported a 64% fall in half-year profits and warned on future earnings.

Catalyst maker Johnson Matthey’s shares rallied sharply after it posted slightly better-than-expected half-year results and upgraded full-year guidance.

Safety-equipment maker Halma reported good half-year results that were well ahead of City expectations. Organic sales increased by 14%, reflecting double-digit growth across all divisions and helped by the phasing of some major orders.

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