Last Week in the City: Trade war whiplash

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (5 to 9 August, 2019).

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  1. Garry White

Markets were hit by an apparent escalation of the trade war between Washington and Beijing this week, with both sides accelerating the rhetoric. The UK economy shrank in the second quarter for the first time since 2012 and the oil price fell sharply as fears of a slowdown in global growth as a result of the trade angst accelerated.

The FTSE 100 fell 1.9% over the week by mid-session on Friday and the FTSE 250 was 0.3% lower.

Economics

The UK economy contracted in the second quarter for the first time in seven years. GDP fell 0.2% compared with expectations of a flat outcome.  

A number of central banks around the world cut interest rates this week, as concerns about growth increased. New Zealand's central bank surprisingly cut interest rates by half a per cent — a move which no economist forecast. The Indian central bank made its fourth rate cut of 2019 and the Thai central bank unexpectedly cut its interest rates.

Donald Trump renewed his attacks on the Federal Reserve. He tweeted: "Our problem is a Federal Reserve that is too...  proud to admit their mistake of acting too fast and tightening too much (and that I was right!)."

There was some mixed economic news for Germany. Factory orders showed unexpected strength in June, thanks to demand from outside the Eurozone. Orders rose 2.5% month-on-month, up from a fall of 2% in May. Economists had expected a modest 0.4% increase. However, industrial production dropped significantly for the second time in three months. Also, exports registered their steepest
annual decline in three years in June.

As a result of the stuttering economy, a spending package could be ahead. Germany is now considering a fiscal policy U-turn, ditching its long-cherished balanced budget goal by issuing new debt to finance a climate protection package, reports suggested. Berlin would link and limit any new debt strictly to the climate protection package which Chancellor Angela Merkel's cabinet is expected to seal next month, the reports noted.

Chinese exports rose unexpectedly in July, beating expectations for a fall, despite trade tensions with the US. Official figures showed exports rose 3.3% last month, compared to forecasts for a 2% drop. Imports fell 5.6% in July, less than the expected 8.3% decline.

China’s July food prices jumped 9.1% year-on-year, data from the National Bureau of Statistics showed, as the country battles soaring pork prices amid the spread of African swine fever. In particular, pork prices rose 27% from a year ago in July while fresh fruit prices rose 39.1%, the data showed.

Trade war

The Chinese government has asked its state-owned enterprises to suspend imports of US agricultural products after President Donald Trump ratcheted up trade tensions. Following trade talks in Shanghai at the end of July, President Trump proposed adding 10% tariffs on another $300bn of Chinese imports from 1 September. This abrupt escalation took markets by surprise. In response, Beijing let the yuan slide below 7 to the US dollar. This threshold has not been breached in a decade. China's central bank sets a "band" every day within which the yuan's value is only allowed to move 2% up or down. The move prompted US Treasury Secretary Steve Mnuchin to brand China a “currency manipulator”.

Goldman Sachs no longer believes the world’s two largest economies will be able to resolve their long-running trade dispute before the US presidential election next year.

President Trump eased concerns that he would imminently put tariffs on European automobiles, although he kept the threat on the table unless “progress” was made. The comments were made after the president signed a deal to sell more US beef to Europe.  “Auto tariffs are never off the table,” the president said. “If I don’t get what we want, I’ll put auto tariffs... If I don’t get what I want, I’ll have no choice but maybe to do that. But so far they’ve been very good.”

The trade dispute between Japan and South Korea appears to be escalating. The trade spat has been fuelled by South Korean court rulings ordering Japanese firms to pay compensation to Koreans over forced wartime labour. Japan says the issue was closed in the 1960s. The South Korean government unveiled plans to invest around $6.5bn to try to develop products and materials which it currently buys from Japan. There is also a boycott of Japanese cars, with Toyota sales plunging 32% in July year-on-year and Honda's sales down 34%.

Chinese officials said there could be “reverse sanctions” on Indian companies engaged in business in China should India block Huawei because of pressure from Washington, reports suggested.

Brexit

The way forward on Brexit remains unclear. Boris Johnson said he hoped the EU will “show common sense” and agree a new Brexit deal. The Prime Minister said he may hold a general election just a few days after the UK leaves the EU on 31 October.

Former US treasury secretary Larry Summers said he did not believe that a “desperate” UK would manage to secure a post-Brexit trade deal with Washington. However, Stephen Vaughn, who served as acting trade representative before becoming general counsel on trade, stressed the UK had "enormous leverage" in a potential trade deal with the US.

Geopolitics

There’s more political turmoil in Italy. Matteo Salvini, leader of Italy's League party, has called for a snap election, saying differences with coalition partners cannot be mended. A failed attempt by the Five Star Movement to derail plans for a high-speed rail link showed the coalition could no longer govern, he said. Five Star leader Luigi Di Maio said his party did not fear another election. As a result, investors moved out of Italian debt.  

Demonstrators gathered at Hong Kong's airport on Friday to mark the start of three days of unauthorised rallies in the Chinese territory. Protests in Hong Kong have been happening for a number of weeks, sparked with anger at an extradition bill.

US earnings

Uber shares plunged after the ride-hailing group revealed its biggest-ever quarterly loss of $5.24bn.  The company’s shares have only closed above their initial public offering price of $45 twice since its share sale.

The Walt Disney Co disappointed investors, despite its box office success this year. Second-quarter results missed analysts’ expectations, despite producing blockbuster movie hits such as Avengers: Endgame and Toy Story 4. Its new Star Wars theme park proved a disappointment and impacted the numbers.

Match Group, which owns the online dating app Tinder, saw its shares soar after it posted sales and profit that beat expectations.

Weight Watchers shares jumped after it beat quarterly earnings expectations, boosted by its recent advertising campaign starring Oprah Winfrey.

Other companies beating expectations include pharmacy CVS Group, fashion group Capri Holdings (formerly known as Michael Kors), news group Fox, car-hire group Hertz, retailer Office Depot fast-food chain Wendy’s and media group Viacom.

Companies missing Wall Street expectations included: pizza company Papa John’s, battery-maker Energizer, financial-technology group GreenSky and travel website Tripadvisor.

Share of the week

Shares in Burford Capital slumped and management blamed a “bear raid” on the group. Shares in the group, which specialises in providing funding for lawsuits, plummeted 65% in 24 hours after the US hedge fund Muddy Waters took a short position on its stock and launched an attack on the company’s financial status. Burford issued a detailed rebuttal of the claims, calling them “false and misleading”.  NMC Health ended up as collateral damage from Muddy Waters’ attack on Burford. The Abu Dhabi-based hospital operator’s shares fell around 11% on rumours it was the planned target of the Muddy Waters’ report. The company issued a trading update in response saying things were in line with management expectations and refuted claims from the short seller, resulting in a bounce in its share price. Directors also purchased shares in the group. The fall in Burford was another blow for beleaguered fund manager Neil Woodford, as Burford was the second-largest holding in his suspended flagship fund.

Technology

Amazon founder and chief executive Jeff Bezos, the richest person in the world, sold $990m worth of Amazon shares last Thursday and Friday, Securities and Exchange Commission filings showed. He unloaded $1.8bn of stock earlier in the week, which means he sold about $2.8bn of Amazon shares in the past fortnight.

FedEx will end its ground-delivery contract with Amazon and won’t renew it at the end of the month. “This change is consistent with our strategy to focus on the broader e-commerce market, which the recent announcements related to our FedEx Ground network have us positioned extraordinarily well to do,” a FedEx spokesperson said.

Donald Trump has said he is watching Alphabet’s Google "very closely" after an engineer that was fired by the company said the company had a “liberal bias”.  Writing on Twitter, the president said that Google's CEO Sundar Pichai had visited the White House where he was "working very hard to explain how much he liked me".

Twitter said that it may have used data for personalised ads without a user’s permission due to issues with the microblogging website’s settings. The company said it recently discovered those issues and fixed them, although it hasn’t yet determined who may have been impacted.

Social media group Snap plans to raise $1bn in short-term debt to invest in more media content, augmented-reality features and possible M&A.

Broadcom will acquire the enterprise software business of Symantec for $10.7 billion. The semiconductor company said it expects the acquisition to result in more than $1bn in cost synergies in the 12 months following the deal’s close.

Energy

The oil price fell for its second consecutive week, hit by the deteriorating US-China trade dispute, despite steps from Saudi Arabia to stabilise the market. Riyadh responded to the rout with a plan to constrain exports and output in September. Brent crude futures fell 6.9% over the week by mid-session on Friday to trade at about $57.60 a barrel. This is the first time in six months the price has fallen below $60.

The International Energy Agency cut its global oil demand growth forecasts for 2019 by 100,000 barrels per day (bpd) to 1.1 bpd and for 2020 by 50,000 bpd, to 1.3m bpd. It cited the risk of a global slowdown and the US-China trade war.

Metals and mining

Nickel prices surged to a 16-year high on talks that major supplier Indonesia could soon ban exports of ore. The country’s director-general for minerals and coal said the industry should follow existing rules and not pay heed to speculation about bringing forward a previously-announced ban on exports of nickel ore by 2022. The restrictions risk deepening a looming shortage of the metal, used in stainless steel and batteries, as the country is the top source of the mined commodity.

Iron ore price fell by around 14% over the week making it the commodity’s worst week since 2016.

Glencore saw interim profits fall by almost a third as it announced plans to put one of its mines into temporary care and maintenance. The Mutanda mine in the Democratic Republic of Congo (DRC) is one of the world's largest cobalt mines.  The price of the metal has fallen by about 40% this year because of a surge in supply from the DRC.

Shares in Sirius Minerals, which has long been trying to develop a fertiliser mine near Whitby in Yorkshire, slumped after it was forced to pull a bond sale due to “market conditions”. Under the terms of its funding agreement signed with JP Morgan earlier this year, Sirius agreed to issue bonds worth $500m to unlock the full $2.5bn revolving credit facility.

Supermarkets

Tesco said about 4,500 staff in 153 of its Metro stores were set to lose their jobs in the latest round of redundancies. Management said the Metro format was originally designed for larger, weekly shops, but now nearly 70% of customers used them as convenience stores, buying food for that day.

Other retail

July's hot weather failed to boost consumer spending in the UK. Average retail sales over the year to July rose by 0.5% - a record low according to the British Retail Consortium (BRC) and KPMG. Helen Dickinson, the BRC's chief executive said a "combination of slow real wage growth and Brexit uncertainty has left consumer spending languishing". Barclaycard revealed that sales in department stores in July had fallen by 3.9% year-on-year.

One of Mike Ashley's key executives – who also happens to be his highly-remunerated future son-in-law – said that the business was not in crisis. Michael Murray said Sports Direct, would continue to buy struggling businesses after the retailer snapped up Jack Willis this week. "I can understand why people would think it, but it's definitely not a business in crisis," Mr Murray said.

Restructuring expert Stefaan Vansteenkiste said he has a “clear plan” to save Debenhams after the retailer confirmed his appointment as its new chief executive. Mr Vansteenkiste was a director at turnaround specialist Alvarez & Marsal before he joined the department store in April as chief restructuring officer.

Online fashion retailer Boohoo made a bid for the e-commerce arm of British brand Karen Millen, which was put up for sale in June. This raised questions over the fate of the group’s physical store chain.

Naked Wines is reportedly considering listing on New York’s Nasdaq stock exchange after the sale of its Majestic Wine store estate last week.

The retail trends that are hurting the UK high street are also present across the Atlantic. Upmarket US department store group Barneys, an icon of America's luxury clothing world for decades, filed for chapter 11 bankruptcy protection.

Consumer

InterContinental Hotels, owner of the Crowne Plaza and Holiday Inn chains, reported a slowdown in business travel in China, amid a trade war with the US and protests in Hong Kong. Revenue per available room, a key measure of hotel industry performance, fell 0.5% in greater China in the second quarter.  Overall, first-half revenue was in line with market expectations. Growth in the US was also weak due to strong comparable figures last year, when room occupancy was high due to hurricane-related demand. 

Cineworld is putting faith in summer blockbuster The Lion King and upcoming movies including the next Star Wars instalment to offset falling admissions and profits in a weak start to 2019. Box office admissions dropped 14% to 136 million in the first half of the year.

French group Vivendi is in talks to sell a 10% stake in its lucrative Universal Music Group to Chinese tech company Tencent, as it seeks to expand its presence in Asia. Universal already has its content streamed by Tencent in China as the result of a deal struck in 2017. Universal is home to artists such as Elton John, Lady Gaga, Taylor Swift and Drake.

Financials

HSBC shares fell after the bank announced chief executive John Flint had been sacked after just 18 months in the role. HSBC said a change was needed because of an "increasingly complex and challenging global environment." The exit was a result of differences of opinion with chairman Mark Tucker over Mr Flint’s more tentative approach to cutting expenses and setting revenue targets for senior managers to boost profit growth, reports suggested. The news came alongside HSBC’s interim numbers, which showed a 16% rise in profit and announced a share buyback of up to $1bn.

Aviva reported a rise in operating profits despite its core Life Business unit struggling as sales volumes slipped. Management also said it was "evaluating a range of options" to enhance its Asian businesses.

Shares in asset manager Standard Life Aberdeen fell after the group posted a fall in interim profits and noted there had been an exit of clients from higher-margin products such as Global Absolute Return Strategies.

JP Morgan confirmed it had won an auction to hold a majority equity stake in its Chinese asset management joint venture, becoming the first foreign firm to move closer to taking control of an onshore funds business under new rules.

Warren Buffett's industrial and insurance conglomerate Berkshire Hathaway ended the second quarter with a record $122bn in cash, according to its latest SEC filing.

Autos

Sales of new cars in the UK fell for the fifth month in a row in July, as confusion over the government's policy on fuel types and political uncertainty hit car dealers, according to the Society of Motor Manufacturers and Traders. A total of 157,198 cars were registered last month, down 4.1% year-on-year.

Defence

Losses at Rolls-Royce narrowed in the first half of the year. Management said it expected a significant improvement in cash generation in its second half, driven by better trading in power systems and civil aerospace. The turbine maker said it had made good progress on fixing problems with its Trent 1000 engines, although customer disruption remained.

Lady Nadine Cobham, whose late husband Sir Michael ran defence group Cobham and was the son of its founder Sir Alan, has written to the Government urging it to intervene in its takeover by a US private equity group. Advent International has launched a recommended £4bn offer for the group, but Lady Cobham said the deal will hollow out the UK’s defence industry and could put national security at risk.

Airlines and travel

IAG-owned British Airways suffered an IT glitch which caused more than 100 flights to be cancelled and more than 200 others to be delayed.

UK-based Ryanair pilots have voted to strike in a row over pay and conditions. The British Airline Pilots Association (Balpa) has announced two walkouts, one from 22-23 August, while the second strike will be from 2-4 September.

State-run SriLankan Airlines will report a loss of up to $160m this year, as tourism in the island nation suffered following the Easter bombings, chief executive Vipula Gunatilleka said.

Package holiday company On the Beach issued a profit warning, with management blaming the slide in sterling. “On the Beach operates a flexible model incorporating dynamic, rather than currency-hedged, pricing for the packages that it provides its customers,” management said.

Engineering

Spirax-Sarco shares fell after management said it expected organic sales growth in its Steam Specialties business to more than half in the second half of 2019.

Senior became the latest aerospace supplier to highlight the impact of grounding the Boeing 737 Max jet, as first-half profits fell. The FTSE 250 group said although it had mitigated some of the damage through stronger sales in other parts of its business, “the sector has been impacted” by the grounding.

Property

The UK housing market is at the weakest point since the global financial crisis a decade ago as Brexit uncertainty puts off buyers, according to property company Savills.

Media

Shares in advertising giant WPP rose by the highest amount in more than a decade on Friday, after reporting better-than-expected sales in the first half.

Healthcare

Hikma Pharmaceuticals raised its full-year revenue forecasts for its generic drug business and said sales in its injectables unit would be near the high end of its previous outlook range.

Denmark’s Novo Nordisk, the world’s largest maker of insulin, raised its sales forecast for the year, buoyed by key drugs for diabetes and obesity.

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