Pressure builds on Big Tech

Garry White looks at the events that have shaped equity markets this week (22 to 26 July, 2019).

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  1. Garry White

Fines over bribery and privacy breaches hit major technology companies this week, with anti-trust investigations also launched. In the UK, Boris Johnson was appointed Prime Minister and vowed to get the UK out of the European Union on or before October 31.

The FTSE 100 rose 0.4% over the week by mid-session on Friday and the FTSE 350 was up 0.2%.

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Brexit

Boris Johnson was elected leader of the Conservative Party and Queen Elizabeth invited him to form a government. Prime Minister Johnson was quick to sack numerous ministers seen as not being pro-Brexit enough. Mr Johnson made clear the Irish border backstop must be scrapped altogether and urged the EU to rethink its refusal to make more concessions in talks. He also threatened to withhold the £39bn divorce bill unless the UK gets a better deal. The EU has not responded positively and the chance of a no-deal Brexit on 31 October is real.

Economics

US second-quarter GDP came in better than expected, slowing by less than forecast to 2.1% year-on-year. Economists had expected a slowdown to 1.8%. Consumer spending, the biggest part of the economy, increased 4.3%, while government spending climbed 5% and offered the biggest boost in a decade. This means a 50-basis-point cut by the Federal Reserve next week, as some in the market had hoped for, was now even less unlikely.

Bank of England Chief Economist Andy Haldane said he would be very wary about lowering interest rates unless there is a sharp economic downturn because the British economy is at full capacity and cannot depend on BoE stimulus for growth.

The European Central Bank held fire on new stimulus measures but opened the door to a further interest rate cut as well as additional stimulus measures. This is a reversal of a previous pledge that rates would remain unchanged.

The recession in Germany’s manufacturing sector worsened in July with the performance of goods producers dropping to the lowest level in seven years. Markit’s flash composite Purchasing Managers’ Index (PMI),which tracks the manufacturing and services sectors that together account for more than two thirds of the economy, fell to 51.4 from 52.6 in the previous month. The drop was driven by a decline of the manufacturing sub-index which fell to 43.1 from 45.0.

Geopolitics

US Treasury Secretary Steve Mnuchin and Trade Representative Robert Lighthizer will restart trade talks in China on Monday. However, a major breakthrough is not expected.

As the trade war rumbles on without a suitable political solution, US farmers continue to suffer and the US government has agreed to pay at least $15 an acre to farmers hit by the dispute.  Garry White takes a look at the issue here.

A decision on whether controversial Chinese firm Huawei should be excluded from the rollout of 5G mobile phone networks in the UK has been postponed. Culture secretary Jeremy Wright said the government is "not yet in a position" to decide what involvement Huawei should have in the 5G network. The Chinese company also announced more than 600 job cuts at its US research unit Futurewei after Washington put the Chinese company on a trade blacklist.

Britain, France, Germany, Russia and China will meet Iran in Vienna on July 28 to discuss how to save the 2015 nuclear deal, the EU's foreign policy service said in a statement. “The meeting has been convened at the request of France, Germany, the United Kingdom, and Iran, and will examine issues linked to the implementation of the JCPOA in all its aspects,” the statement said.

Clashes in Hong Kong escalated into violence last weekend, as police launched tear gas at pro-democracy protesters and a group of masked assailants attacked people making their way back from the rally in a subway station.

South Korea says its jets fired hundreds of warning shots at a Russian surveillance plane that entered its airspace on Tuesday. Officials said the plane twice violated the airspace over the Dokdo and Takeshima islands, which are occupied by Seoul but also claimed by Japan.

Emerging markets

Trading on China's new Nasdaq-style technology board began on Monday and got off to a solid start. Most of the 25 shares on the so-called Star market, operated by the Shanghai Stock Exchange, surged on debut. It marked a significant step in the country's bid to open its economy and markets.

US earnings

Embattled aircraft maker Boeing’s second-quarter results missed expectations by a significant margin. After it posted a record quarterly loss, management said that previous guidance did not reflect the impact of the 737 MAX groundings and new guidance will be issued at a future date.

Sales of Harley-Davidson’s signature motorcycles continued to slide during the second quarter as profit, though better than expected, fell 19% for the struggling manufacturer.

Google’s parent company Alphabet reported higher than expected revenue and earnings. Profits soared to $9.18bn in the second quarter.

Amazon reported lower-than- expected quarterly profits.

Starbucks raised its full-year guidance, after the US and China performed extremely well in the second quarter.

Oil services group Halliburton beat analyst estimates in the second quarter, thanks to growth in international markets that offset lagging activity in North America, the company’s largest market.

Caterpillar reported a fall in quarterly earnings due to cooling demand for construction machines in Asia and the slowdown in the US shale boom.

Profit warnings

Aston Martin Lagonda shares hit the skids after management slashed its full-year guidance. Its valuation fell by about a fifth to an all-time low. In an unscheduled announcement, the carmaker revealed a 22% drop in sales to UK car dealers in the second quarter and a 28% slump across the rest of Europe, the Middle East and Africa.

Struggling British baby products retailer Mothercare warned that full-year profits would not grow, as it grapples with an uncertain and volatile home market. The company hasn’t made a profit in the UK in a decade.

Payment system PayPal reduced its full-year guidance due to delays in product integrations and pricing changes as well as currency pressures.

French carmaker Renault warned that revenues may decline this year, after first-half profit was hit by weakening car demand and an earnings collapse at alliance partner Nissan.

German automotive supplier Continental warned that its earnings fell in the fourth quarter, and it forecast profitability would decline in the current year. However, the shares rose following the announcement as much gloom was already priced into the shares and many in the market welcomed a new dose of realism from German auto-sector companies.

Technology

Big tech is now under the US anti-trust microscope. The US Department of Justice (DoJ) announced an investigation into leading online platforms, examining whether they are unfairly restricting competition. The DoJ did not name any companies, but Facebook, Alphabet’s Google, Amazon and Apple are likely to be scrutinised in the wide-ranging probe. It was sparked by "widespread concerns" about "search, social media, and some retail services online," the DoJ said.

Australia said it will tighten regulation of Facebook and Alphabet’s Google to address the harm digital platforms are doing to businesses, consumer and the media.

Alphabet’s Google's work with the Chinese government does not raise any concerns, US Treasury Secretary Steve Mnuchin said. However, he said there was “no question” that Amazon limited competition and had destroyed much of the US retail sector. Amazon’s founder, Jeff Bezos, also owns The Washington Post, which has been highly critical of the Trump administration. 

The fines keep building up in the technology sector. Facebook will pay a $5bn fine to settle privacy concerns, the US Federal Trade Commission (FTC) announced. The social network must also establish an independent privacy committee that Facebook's chief executive Mark Zuckerberg will not have control over. The FTC had been probing allegations political consultancy Cambridge Analytica improperly obtained the data of up to 87 million users. However, chief executive Mark Zuckerberg escaped any real censure.

Microsoft will pay more than $25m to settle federal corruption charges involving a bribery scheme in Hungary and other foreign offices. While the case related to Hungary, the Securities and Exchange Commission said it also found improprieties at Microsoft offices in Saudi Arabia, Thailand and Turkey.

Apple has announced it is buying Intel's smartphone chip division for $1bn. The transaction could help the iPhone maker’s efforts to build its own line of 5G chips, and reduce its dependence on chip maker Qualcomm.

Vodafone’s shares jumped on Friday after management said it would move its mobile mast operations in 10 European markets into a new company that it potentially could float. The company argued this would unlock value for shareholders.

Energy

After falling sharply in the previous week, oil prices bounced as tension with Iran escalated. Brent crude futures rose 2.4% over the week by mid-session on Friday to trade at about $63.50 a barrel. Iranian commandos hijacked a British oil tanker in the Strait of Hormuz. The Stena Impero, which has 23 crew members on board, is British flagged.  

Tullow Oil’s shares fell after management cut full-year guidance amid new well delays in Ghana.

Mining

Iron ore miners such as Rio Tinto and BHP Group were weak after Brazilian miner Vale announced plans to partially resume processing operations at Vargem Grande complex. Production had fallen – forcing prices higher – after the collapse of the Brumadinho dam in January, which killed at least 248 people. There was also a sector downgrade from broker Liberum. Garry White argued recently that a correction in the sector may be coming. Click here to discover why.

Indian billionaire Anil Agarwal is to sell his 20% stake in Anglo American, ending a two-year spell as the miner’s biggest shareholder.

Petra Diamonds spooked investors by admitting it is struggling with a weak market, adding to concerns that an industry crisis is building. Full-year revenue fell 6% to £372m in the year to June, missing analysts' expectations.

Supermarkets

UK grocery sales declined for the first time since June 2016, according to the latest data from market research group Kantar Worldpanel. Sales fell 0.5% year-on-year in the 12 weeks to 14 July, as they face tough comparators with sales boosted in 2018 by the men’s football World Cup and a prolonged period of good weather. All the major grocers recorded a sales fall, with Wm Morrison recording the largest drop of the big four. Ocado was the best performer, with sales up 11.9% as customers bought from the online grocer more frequently.

J Sainsbury and Deliveroo have launched a two-month trial delivering freshly-baked pizzas straight from the supermarket counter to customers’ homes. The initiative launched today in five stores: Cambridge, Selly Oak, West Hove, Hornsey, and Pimlico.

Retail

Sports Direct postponed its result release a couple of weeks ago and promised to release them on Friday. However, the numbers were not forthcoming through the Regulatory News Service at 7.00am and management later admitted it was still finalising the figures and expected them to come out later in the day. When they were eventually released, the numbers revealed a €674m tax demand from Belgium. Mr Ashley admitted things looked “terminal” for House of Fraser, which Sports Direct brought out of administration last year. The state of House of Fraser makes it impossible to forecast profitability, Mr Ashley said.

Shares in Ted Baker soared following press reports that the fashion retailer’s founder, Ray Kelvin, was considering teaming up with investors to buy the company. Mr Kelvin quit as chief executive in March in the wake of allegations of inappropriate behaviour towards staff, including “forced hugs”. Mr Kelvin already owns 35% of the equity.

Consumer

French luxury-goods group Hermes posted better-than-expected sales growth for the second quarter, in an encouraging signal for some of its major luxury goods rivals.

Louis Vuitton owner LVMH reported a pick-up in sales growth in the second quarter, boosted by new design launches and strong demand in China.

Paris-listed Kering’s second-quarter numbers disappointed, as sales growth slowed at its star Gucci brand in the US.

Asahi Group, Japan’s biggest brewer is buying the Australian assets of Anheuser-Busch InBev as it seeks growth outside the stagnant home market. However, the deal involves doubling Asahi’s debt and the issue of about 10% more in new shares. Investors balked at the high cost and wiped $2bn from the brewer’s market value on Monday.

Diageo, the drinks group behind Guinness and Johnnie Walker whisky, posted second-quarter results that were slightly ahead of analysts’ expectations. Management said it was keeping one eye on the North American cannabis industry, but there was no evidence yet it was crimping alcohol sales. For a background on why alcohol companies are worried about the decriminalisation of marihuana click here.  

UK sales growth at Fever-Tree Drinks, the premium mixer maker, has said growth slowed during the first half of the year. Management said this was partly due to poor weather. UK growth slowed to 5% but the company said it had "made significant distribution gains and operational progress" in the US, where revenues jumped by nearly a third. Total revenues rose 13%.

Soft drinks maker Britvic reported a dip in third-quarter revenue, but said it was still confident of delivering on full-year market expectations.

Shares in US-listed plant-based burger company Beyond Meat continued to rise after management said it planned to add faux bacon to its product range. After listing at $25 a share less than three months ago, they are now priced in excess of $220. The group now has a market value of $13.4bn on quarterly revenues of $95m.  

Defence

A £4bn recommended offer for British aerospace and defence company Cobham from US private equity group Advent is likely to face scrutiny over national security concerns.  Management claims investors were likely to support the bid but Cobham's biggest shareholder disagreed. Silchester International, which has a 12% stake, said it should “seek others who might offer better value to stakeholders of Cobham” and that the price was “not compelling”.

Financials

Metro Bank’s customers have withdrawn £2bn of deposits since the start of the year, following a misreporting scandal that forced the company to raise fresh capital.

Beazley’s pre-tax earnings more than doubled. The insurer, which operates seven syndicates at Lloyd’s of London, said the result was driven by a surge in investment income.

Swiss bank UBS beat profit expectations in the second quarter, as gains in its advisory business softened an investment banking fall and boosted its Swiss retail and corporate banking business.

German lender Deutsche Bank reported a weaker-than-expected net loss of €3.15bn for the second quarter.

Healthcare

GlaxoSmithKline forecast a smaller than previously estimated fall in full-year profit after the drug maker beat profit consensus for the second quarter due to demand for its fast-growing Shingles vaccine.

AstraZeneca raised its product sales forecast for 2019 on Thursday after second-quarter results beat analysts’ expectations, thanks to strong sales from cancer medicines and emerging markets, especially China.

Swiss group Roche raised its full-year guidance for the second time this year.

US moves to reduce the price of prescription goods could be a threat to pharma companies across the world. I take a look at the issue here.

Property

The rise of online retail continues to be a boon for Segro, as demand for warehousing continues to rise. Including the revaluation of its property portfolio, profits rose 19%.

Rightmove said its revenue has increased by almost 10% during the first half of this year. However, it noted the sluggish housing market had put a number of the agents using its website out of business, which manifested itself in a 3% fall in total estate agents using its services.

Sales at estate agents Foxtons fell in the first half of the year due to a downturn in the London market. Group revenue slipped 3.5% and losses deepened from £2.5m in the first half of 2018 to £3.2m this year.

Media

Shares in ITV received a much-needed boost after it posted a lower than expected decline in advertising revenue following the success of shows such as Love Island. Total advertising revenue in the first half fell 5%, better than the company’s forecast of a 6% fall in a May update.

Pearson, the world’s largest education publisher, said it had traded well in the first half of 2019 and maintained revenue guidance and slightly increased its adjusted earnings guidance. Management said its strategy to shift away from textbooks toward digital learning was starting to pay off.

Shares in academic analytics group Relx fell after it missed expectations for half-year revenue growth.

Ofcom fined TV channel RT (formerly Russia Today) £200,000 for "serious and repeated failures" to preserve due impartiality in its coverage of the Salisbury poisonings and the Syrian conflict.

Autos

Nissan unveiled 12,500 jobs cuts globally over the next three years, but did not say where the cuts will take place. Trade union sources were quoted in the press saying they were hopeful no more jobs would go at its Sunderland plant on top of 500 voluntary redundancies already taking place.

Jaguar Land Rover posted a £395m pre-tax loss in the first quarter of its new financial year after sales fell nearly 12%.

French carmaker PSA Group delivered a sharp increase in first-half profit, defying a global industry downturn as new models and cost savings from the integration of Opel-Vauxhall more than made up for weaker emerging market sales.

There was also good news from Volkswagen. The German group delivered revenue and profit growth in the first half of the year, with strong results for Porsche, its new SUV models and Bentley’s return to profit all boosting its performance.

Volvo recalled 507,353 cars worldwide (69,616 in the UK) after investigations identified a problem with plastic intake manifolds. In "very rare cases" the plastic engine intake manifold was known to melt and deform, sometimes causing a fire in the engine bay.

China’s Beijing Automotive Group (BAIC) bought a 5% stake in Daimler, cementing their long-standing alliance after China’s Geely emerged as a potential rival by also taking a stake in the German automaker.

Travel & transport

Pilots at IAG-owned British Airways voted in favour of strike action in a dispute over pay, threatening a walkout over the key summer holiday period. The British Airline Pilots' Association said 93% of its members had voted in favour of industrial action.

Shares in Wizz Air rose after the central and eastern European-focussed carrier said it was confident in reiterating its full-year outlook, in contrast to profit warnings from the likes of Lufthansa.

American Airlines took a further $500m hit from the removal of Boeing 737 Max jets from its current fleet and Southwest Airlines said it would cease operations from Newark in New Jersey because of a shortage of planes following the grounding.

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