Peppa Pig hogs the China limelight

Garry White looks at the events that have shaped UK equity markets this week (1 to 5 April, 2019).

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  1. Garry White

Hopes that the trade war was nearing some sort of resolution and some positive economic data form China and Germany helped the positive tone this week. The oil price continued its charge ahead and is up almost 30% this year and Peppa Pig is benefitting from the Chinese Year of the Pig. Her porcine adventures proved a hit in the Asian nation, sending Entertainment One shares to an all-time high. Oh, Brexit is still not sorted.

The FTSE 100 rose 1.7% over the week by mid-session on Friday. The FTSE 250 was 1.9% ahead.

Brexit

Following an extension to the Brexit deadline set by Article 50, the UK is scheduled to leave the European Union on April 12. Prime Minister Theresa May thinks a further postponement to the Brexit date is needed if the UK is to avoid leaving the EU without a deal and has requested June 30. European Council President Donald Tusk is proposing to offer the UK a 12-month flexible extension to its Brexit date, according to press reports. Mr Tusk calls it a “flextension” which could see the UK signing up to a delay with the option to cut it short as soon as Parliament ratified the Brexit deal. However, if the talks fail, the government faces a backbench bill that is attempting to prevent a no-deal exit, which would force Mrs May to seek a new delay. Passed by MPs by one vote on Wednesday, ministers have argued it could increase "the risk of an accidental no-deal" in the event the EU agreed to an extension but argued for a different date than one specified by MPs. The situation remains highly fluid.

Economics

The services sector, which accounts for 80% of the UK economy, unexpectedly shrank for the first time in almost three years last month. The purchasing managers' index from IHS Markit/CIPS fell to 48.9 in March from 51.3 in February, below forecasts. Any figure below 50 indicates a contraction.

There was more gloomy data from Germany. Factory orders in Europe’s largest economy posted their biggest annual plunge in a decade in February, as its industrial sector struggles to cope with heightened trade war and Brexit uncertainty. Factory orders slumped 8.4% year-on-year and suffered a shock 4.2% month-on-month drop, well below economists' expectations of a modest rebound.

However, there was some positive data released in Germany on Friday. Industrial production in the country halted its run of declines, calming fears of a slowdown in Europe's largest economy. Output rose 0.7% month-on-month, much better than the consensus for a 0.5% rebound and a fall of 0.8% last month.

Also positively, Eurozone retail sales came in better than expected in February. The volume of retail trade rose by 0.4% on a seasonally-adjusted basis, according to Eurostat.  That was down on January’s growth of 0.9%, but marginally above a consensus for a 0.3% improvement.

Chinese equities hit a one-year high following a surprise recovery in China’s factory data. The manufacturing purchasing managers’ index rose to 50.5 from 49.2 last month, the biggest increase since 2012.

Geopolitics

The trade war is hurting. The World Trade Organization slashed its global trade growth projection for 2019 to the lowest level in three years, citing the impact of rising commercial tensions and tariffs. World merchandise trade growth will slow to 2.6% this year and 3% next year, after rising 3% in 2018, the WTO said.

China and the US claimed progress in talks to end their trade war, with Chinese President Xi Jinping pushing for a rapid conclusion and President US Donald Trump talking up prospects for a “monumental” agreement, although it may still be some weeks away.

Turkish President Recep Tayyip Erdogan's AK Party is contesting the slim opposition victory in the country's biggest city, Istanbul. Last Sunday's municipal elections also delivered opposition CHP wins in the capital, Ankara, and in Izmir. The AKP alleges irregularities, and is challenging the results in every Istanbul district. Officially the CHP is ahead by 25,000 votes in the city. I argue that The Turkish economy is in serious trouble here.

Cryptocurrency

Bitcoin’s price surged 20% to a five-month intraday high earlier in the week, with many market observers blaming an “April Fool’s Day joke” for the rise. The prank claimed the US Securities and Exchange Commission had approved “not one, but two applications for Bitcoin-based exchange traded funds” in a “shockingly sudden” decision by the SEC following an “emergency meeting”.

Technology

There was another security breach at Facebook. Detailed information about more than 540 million Facebook users was left publicly viewable for months, a security firm found. UpGuard found the massive cache of data on unsecured Amazon servers used by a Mexican social media company and it included account names, ID numbers, comments and reactions. Facebook said the data had now been removed from the servers.

South Korea’s Samsung Electronics said it was heading for its lowest quarterly profit in more than two years as a glut in memory chips, slowing panel sales and rising competition in smartphones hit its margins.

The Academy of Motion Picture Arts and Sciences received a letter from the US Department of Justice suggesting the organisation could be violating antitrust law if it attempts to exclude Netflix from the Oscars. The letter warned Academy chief executive Dawn Hudson that changes to Oscar eligibility rules could “suppress competition”. Netflix's production "Roma" won three Oscars at this year's Academy Awards, but inclusion of the film was heavily criticised by director Stephen Spielberg.

Energy

Oil prices gained on optimism that a trade deal between China and the US was close and output from Venezuela slumped. Over the week, Brent crude futures rose 1% to trade at about $69 a barrel. The price is up 28% in the year to date.

As part of filings for a bond sale, new financial details about Saudi Arabia’s state-own oil group Aramco were revealed. Saudi Aramco is the world’s most profitable company. Aramco’s $111.1bn profit in 2018 easily dwarfed all other businesses on the planet and the company also paid the Saudi government $102bn in taxes last year. The $58.2 billion in dividends paid to the Saudi government last year indicate the company is worth closer to $1.2 trillion if it’s judged by the same metrics as other oil majors, rather than the $2 trillion the Saudi government was targeting in its aborted flotation plans. The group plans to raise $10bn or more to help fund its purchase of a 70% stake in Saudi Basic Industries Corp (Sabic).

There was political unrest in Opec member Algeria. There were street demonstrations after its constitutional council met to confirm the resignation of the president, Abdelaziz Bouteflika, as protesters expressed concerns over the caretaker government. They argued the entire ruling regime should be replaced. The resignation of the 82-year-old Bouteflika came after weeks of peaceful, unprecedented mass protests against his plans to run for another term as president after two decades in power. The upheaval has stopped a number of pending deals involving its national energy company, Sonatrach, which suspended plans to set up a trading joint venture. The company had been at the final stage of choosing a partner among firms including Vitol Group, Gunvor Group, Total and Eni.

Mining and Commodities

India’s Tata Steel proposed selling one of its plants in Wales to get its £13bn merger with Germany’s ThyssenKrupp approved by the European Commission. The Trostre plant in Llanelli could be sold by Tata to satisfy regulatory concerns about the merger, with fears it could result in reduced competition.

Iron ore’s supply-driven rally picked up pace, with futures topping $90 a ton, amid increasing concern the crisis at Brazil’s Vale will be drawn out as regulators ordered dozens of dams to be shut. BHP Group and Rio Tinto are expected to be the main beneficiaries.

Retail

Online electrical goods retailer AO World reduced its full-year earnings guidance. Earnings will now be at the lower end of market expectations, reflecting margin pressure in its German business.

A boardroom coup at Superdry was completed. Eight executives, including the chairman and chief executive, resigned after founder Julian Dunkerton won his bid to be reinstated to the board. In a narrow victory, Mr Dunkerton won the support of 51.15% of shareholders who voted. Mr Dunkerton, who left the chain a year ago, has been appointed interim chief executive. He has blamed management for flagging sales and profits and has promised to revive the firm's performance.

Consumer

Shares in production company Entertainment One hit a new record after revealing that revenue in China jumped 50% so far this year. The timely release of “Peppa Pig Celebrates Chinese New Year” in January helped, with 117 new episodes in the pipeline as well as the opening of four new indoor attractions in the US and China.

Aircraft and travel

The crew of the Ethiopian Airlines jet that crashed last month, killing all 157 people aboard, performed all the procedures recommended by the manufacturer Boeing but could not control the jet, according to the preliminary report of the aircraft's data. Boeing declined to comment pending its review of the preliminary report.

Shares in over 50s cruise operator Saga slumped after the company cut its dividend and warned profits would be hit by Brexit and lower margins in its insurance arm. Lance Batchelor, chief executive, said travel bookings to Europe this year were down 8% from a year earlier. “Brexit is putting a clear dampener on customers’ willingness to commit to holidays in 2019,” he said.

The hedge fund founded by billionaire Ken Griffin has taken out a £60m short position in Ryanair shares, the first time a short position of this size has been reported for the budget airline. Citadel Europe took a 0.56% short position in the Irish airline on 2 April, according to short-selling data reported to the Central Bank of Ireland.

US carrier Delta Airlines saw its share jump after management upped its forecast for first-quarter earnings and announced an 11-year extension of its credit card deal with American Express.

Automobiles

New car registrations in the UK dropped 3.4% in March, as political and economic uncertainty continues to weigh. Sales hit their lowest March level since 2013, according to figures from the Society of Motor Manufacturers and Traders.

The situation was similar in the US, with major US carmakers announcing a drop in first-quarter US new vehicle sales. GM said new vehicles sales in the US fell 7%, Toyota‘s first quarter sales fell 5%, Ford’s was down 1.6% and Fiat Chrysler sales dropped 3%.

Ride-haling group Lyft listed at the end of March but its shares are now trading below its IPO price. A surge in demand for short positions also made it the most expensive bearish bet in the U.S. equity market. Tuesday was the first day investors were able to borrow shares to settle short sales, and the cost of funding a new short stake rose 100%, according to IHS Markit. That makes Lyft the “most expensive to borrow” US stock. Bigger rival Uber plans to float later this month.

Tesla shares tumbled after the electric car maker said it delivered about 63,000 vehicles in the first quarter, significantly fewer than the 76,000 analysts had expected. Elon Musk’s company revealed that deliveries ended up being 31% lower than in the previous quarter, when Tesla also missed analysts’ expectations.

Former Nissan boss Carlos Ghosn was arrested again by Japanese prosecutors who accused him of trying to enrich himself at the carmaker’s expense. The arrest, described as “highly unusual” for someone who has been released on bail in Japan, is reportedly linked to payments made to an Omani dealer.

Toyota will offer royalty-free access to its hybrid vehicle technology patents until 2030. It is part of a move to promote hybrid cars as a bridge to fully electric vehicles. It will grant licences for nearly 24,000 patented technologies relating to motors, converters and batteries.

Financials

This could be a big weekend for the potential merger of Commerzbank and Deutsche Bank. The two banks are leaning toward intensifying talks, reports suggest, and are close to a consensus on the rough outlines of a potential deal.

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