Last Week in the City: Trump’s Mexican standoff

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets this week (28 to 31 May, 2019).

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  1. Garry White

Markets were hit this week by a surprise acceleration of the trade war, after US President Donald Trump unveiled tariffs on all Mexican goods in an attempt to stop illegal immigration across the border. The campaign to be the next Tory party leader, and therefore UK Prime Minister, saw a wide range of candidates throw their hats into the ring. Recently-listed Uber posted a $1bn quarterly loss, as the Watches of Switzerland IPO in London proved a success.

The FTSE 100 fell 1.8% over the week by mid-session on Friday and the FTSE 250 was down 1%.

Economics

US economic growth last quarter was revised down by less than expected, amid stronger consumption and exports than initially reported. Inflation-adjusted first-quarter GDP increased at a 3.1% annualised rate, compared with an initially reported 3.2% and analyst estimates for a revision to 3%.

Chinese industrial profits slumped at their fastest pace in nearly three and a half years in April, the last month before the sudden escalation of the trade war. Industrial profits stood at 515.39bn yuan last month, down 3.7% year-on-year, the largest percentage decline since December 2015

Germany's unemployment figures rose in May for the first time in more than five years. The Federal Labour Agency said 5% of people were out of work in Germany, up 0.1 of a percentage point.

Geopolitics

Numerous candidates launched their Conservative Party leadership bid, with the lead candidates according to bookmakers being Boris Johnson and Michael Gove.

Conservative leadership candidate Boris Johnson was ordered to appear in court over claims he lied by saying the UK gave the EU £350m a week. Mr Johnson stands accused of misconduct in public office after making the claim during the 2016 EU referendum campaign. It is a private prosecution launched by campaigner Marcus Ball, who crowdfunded £200,000 for the case.

New Zealand's main opposition party denied hacking into the government's computer systems to steal documents relating to the country's budget. The National Party, which leaked details of the budget two days ahead of schedule, said it got the information legitimately. On Wednesday the Treasury said its systems had been "deliberately and systematically hacked". It confirmed the matter had been referred to police.

Trade war

The trade war had a shock escalation this week after Donald Trump announced tariffs on all goods coming from Mexico, demanding the country curb illegal immigration into the US. In a tweet, Mr Trump said that from 10 June a 5% tariff would be imposed and would slowly rise "until the illegal immigration problem is remedied".

China has indicated it may restrict the export of rare earth minerals to the US as the trade conflict between the two countries escalates. It is by far the largest producer of these raw materials, vital for many American industries, including high-growth sectors such as electric car and wind turbine production. Last year, the US Geological Survey designated these minerals critical to the economy and national defence.

The Trump administration is considering payments of $2 per bushel for soybeans, 63 cents per bushel for wheat and 4 cents per bushel for corn as part of a package of up to $20bn to offset US farmers' losses from the trade war with China, reports suggested.

China, the world’s largest soybean buyer, has put purchases of American supplies on hold after the trade war between Washington and Beijing escalated, reports suggested. State-grain buyers haven’t received any further orders to continue with the so-called goodwill buying and don’t expect that to happen given the lack of agreement in trade negotiations.

Citigroup cut its forecast for Apple’s earnings, saying the trade war will further hurt iPhone sales in the second half of the year. “The US/China trade situation will result in a slowdown of Apple iPhone demand in China as China residents shift their purchasing preference to China national brands,” Citi said. This following increasing reports that Chinese consumers were boycotting US goods.

Washington's move to blacklist Huawei is set to hit about 1,200 US suppliers to the Chinese telecoms group, including companies that provide most of the backbone of its cyber security system. The US President’s attack on Chinese technology in general, and on Huawei in particular, may have long-term consequences for the development of the sector.

IPOs

Watches of Switzerland got off to a solid start in its first day of trading on the London Stock Exchange, as its shares surged after being priced at the top end of their range.

India’s Bharti Airtel plans to raise about $1bn from the sale of at least a 25% stake in its Africa subsidiary that will be listed on the London Stock Exchange. It plans to use the money raised to reduce debt and compete with Reliance Jio Infocomm in the Indian market.

Online rail ticketing company, Trainline, hopes to raise £75m in its listing on the London Stock Exchange. The company is expected to float in June and will issue new shares to generate the additional funds. Trainline is currently owned by US private equity house KKR, which bought the site in 2015 for £500m.

Technology

Twitter is conducting in-house research to better understand how white nationalists and supremacists use the social-media platform. The company is trying to decide, in part, whether white supremacists should be banned from the site or should be allowed to stay on the platform so their views can be debated by others, a Twitter said.  

An attempt to make Facebook founder Mark Zuckerberg step down as the company's chairman has failed. At the company's AGM, shareholders tried to separate his roles – Mr Zuckerberg is both Facebook's chief executive and the chairman of its board of directors. However, the founder controls about 60% of the voting shares and would only have lost if he voted against himself.

Energy

Fear of an accelerating trade war caused the oil price to fall sharply this week. Brent crude futures fell 7.3% over the week by mid-session on Friday to trade at around $64.90 a barrel.

Saudi King Salman Bin Abdulaziz accused Iran of threatening global oil supplies and shipping at a meeting of Arab leaders that called on the international community to confront Tehran following attacks on shipping and rising tensions in the oil rich region.

Russia’s Gazprom reported a 44% jump in first-quarter net income, boosted by higher gas sales and prices, despite a drop in export volumes.

Mining & commodities

Arcelor Mittal is to cut back on steelmaking at plants at Dunkirk in France and Eisenhuettenstadt and Bremen in Germany. The company said it has been hit by "weak market demand and high import levels in Europe".

Retail

The UK's big four supermarkets all lost market share in the 12 weeks to 19 May, market research company Kantar said, as discounters gained ground. Tesco's share fell to 27.3% from 27.7% a year ago, while J Sainsbury's and Walmart’s Asda had equal shares of 15.2%, after sales fell by 1.7% and 0.2% respectively. Sales at Wm Morrison fell 0.4%, giving it a share of 10.4%. German discounters Aldi and Lidl continued to record strong growth, with sales up 11.1% and 8.5% respectively, giving them a record combined market share of 13.8%.

WH Smith was ranked the UK's worst High Street retailer for the second year in a row, according to a Which? survey of 7,700 shoppers.

More than 200 Boots stores across the UK could be closed by its American owners Walgreens Boots Alliance in a bid to cut costs. The chain has 2,485 stores across the UK, employing about 56,000 staff.

Food

Vegan burger maker Beyond Meat said it would begin making its plant-based meats in Europe next year, in an effort to expand production outside the US. KFC also said it was meeting with major plant-based "meat" makers to discuss what a vegan version of fried chicken could look like. The news resulted in another bump in the share price of the most successful IPO this year.  

Autos

Uber posted a $1bn quarterly loss, in its first figures since a disappointing flotation earlier this month. The loss was despite a 20% rise in revenues to $3.1bn and increase in monthly active users to 93 million. However, the shares rose as the results were in line with analysts' forecasts.

Fiat Chrysler made a "transformative" merger proposal to French carmaker Renault, the Italian firm said on Monday. The combined business would be 50% owned by Fiat shareholders and 50% by Renault. The carmaker said the merger would create a global automotive leader, with 8.7 million vehicle sales. Shares in both companies rose strongly following the announcement.

Travel & airlines

The boss of the International Air Transport Association (IATA), which represents airlines around the world, says it could take up to three months for the Boeing 737 Max to return to the skies. Alexandre de Juniac, director general of IATA, said the timing was up to regulators but that airlines were preparing for a period of between 10 and 12 weeks before the plane resumes commercial service.

At next week’s FTSE reshuffle, easyJet shares are expected to be demoted from the FTSE 100.

Wizz Air bucked the downbeat tone in airlines after posting a good rise in annual profits and indicating that profit would rise in the coming year. Wizz’s focus on eastern and central Europe means it is sheltered from the intense competition on popular Mediterranean routes.

FirstGroup said it is considering breaking itself up by seeking a buyer for its iconic Greyhound bus operation in the US, as the business struggles because of competition from low-cost airlines. The company is also looking at spinning off its UK buses arm, First Bus.

Healthcare

Johnson & Johnson, one of the world's largest drug manufacturers, has gone on trial in a multi-billion dollar lawsuit by the US state of Oklahoma. Prosecutors accuse the firm of deceptively marketing painkillers and downplaying addiction risks, fuelling a so-called "opioid epidemic". Johnson & Johnson denies wrongdoing and says it marketed products responsibly.

NMC Healthcare's shares rose after the Abu Dhabi-based company raised its full-year guidance on the back of a partnership with Saudi Arabia’s state-run pension fund. The private hospital and care provider now expects sales of between $2.5bn and $2.54bn, higher than its previous upper guidance of $2.46bn announced in October.

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