Regulators close in on Big Tech

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

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  1. Garry White

The S&P 500 and Nasdaq both reached new all-time highs as hopes of an interest rate cut by the Federal Reserve later this month grew and news that trade war discussions between the US and China will resume. The FTSE 100 rose 2% over the week by mid-session on Friday and the FTSE 250 was up 1.5%.

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Economics

Are trade wars easy to win? The US trade deficit widened by more than forecast to a five-month high, as imports surged the most since 2015. The gap increased 8.4% in May to $55.5bn and April’s level was bigger than previously reported, Commerce Department data showed. Imports jumped 3.3% and exports rose 2%, the most in a year, while the goods-trade gap with China widened to $30.1bn.

The UK’s dominant service sector narrowly avoided stagnation in June. The services PMI dropped to 50.2, only just above the 50 level indicating no change from the previous month. Economists had expected it to come in at 51.

Britain’s construction industry slumped to its worst monthly performance in more than 10 years in June. The IHS Markit/Cips construction purchasing managers’ index (PMI) plunged to 43.1, the lowest reading since April 2009 when the country was gripped by the global financial crisis. A PMI figure below 50 shows the sector contracted.

UK manufacturers have recorded the sharpest drop in factory output for more than six years. This is partly caused by the unwinding of stockpiling that was seen ahead of the initial Brexit leaving date of 31 March.

The Reserve Bank of Australia opted to cut its key policy rate again at its July meeting to 1%, a record low.

The Indian government forecast its economy will grow 7% in the current financial year, up from 6.8% in the prior year.

Turkey’s consumer inflation fell to its lowest level in a year in June thanks to a high “base effect” as inflation was high in June last year and a drop in food prices. This potentially paves the way for the country’s first interest rate cut since last year’s currency crisis. The consumer price index fell to 15.72% year-on-year.

Geopolitics

After last weekend’s G20 summit in Japan, President Trump confirmed that the US will not place tariffs on the remaining $300bn of Chinese exports to America, and will resume talks to try to get a deal. He clarified the position over the ban on business with Huawei. However, reports later in the week suggested China continued to stress that the US must remove all the tariffs placed on Chinese goods as a condition for reaching a deal. What happened at the G20 summit? John Redwood, Charles Stanley’s chief global economist, takes a look here.

The US threatened to impose tariffs on European Union (EU) imports worth up to $4bn. The US Trade Representative said it was "in response to harm caused by EU aircraft subsidies". The moves are part of a 15-year dispute at the World Trade Organization between the US and EU over subsidies given to plane-makers Airbus, from Europe, and the US's Boeing. A full list of the potential tariffs can be found here.

Germany’s Defense Minister Ursula von der Leyen was nominated by the leaders of the EU member states to become the next President of the European Commission, while Christine Lagarde of France, currently IMF head, was nominated to become the next chief of the European Central Bank. Both Ursula von der Leyen and Christine Lagarde will become the first women to lead the respective EU institutions – if their nominations are confirmed by the European Parliament.

The European Union and Switzerland have imposed new restrictions that affect each other's financial companies. Investment firms in the EU are no longer allowed to trade on the Swiss stock exchange. An “equivalence" agreement, which previously allowed trading, lapsed at the end of June and the European Commission has decided not to renew it as part of an ongoing dispute with the country over simplifying existing arrangements. In response to the EU's move, Switzerland banned trading of Swiss shares on EU markets.

Chinese premier Li Keqiang said the country would open up its financial sector ahead of schedule. Speaking at the World Economic Forum in Dalian, Mr Li said full foreign ownership of securities firms, futures businesses and life insurance companies will be allowed by 2020.

Hong Kong students refused a meeting with the Chief Executive Carrie Lam, dealing her China-backed government another setback to its efforts to avert further mass protests after violence last weekend. Student leaders at the Hong Kong University of Science and Technology said they refused an invitation for a closed-door meeting with Ms Lam, saying they weren’t interested in private talks and wouldn’t sit down until she met their demands. The students, like several groups involved in recent protests, are seeking the complete withdrawal of legislation allowing extraditions to China and reforms allowing direct elections for the city’s top office.

IPOs

New York claimed the IPO crown in the first half of the year in value terms ($31.8bn), with new listing in Hong Kong falling by a quarter in value to $8.9bn as Chinese technology companies chose to list in the Big Apple.

US brewing giant Anheuser-Busch InBev is hoping to raise as much as $9.8bn when it lists its Asia business in Hong Kong in what could be the biggest IPO of the year.

Technology

Shares in cybersecurity companies jumped after US chip group Broadcom revealed it was in advanced talks to buy Symantec Corp. The news benefitted UK-listed sector players such as Sophos and Avast.

Regulators are closing in on big tech. The UK Competition & Markets Authority (CMA) announced the launch of a market study into online platforms such as Alphabet’s Google and Facebook. The CMA study will look into the way digital advertising-funded platforms are collecting and using personal data. The regulator will also look into "the sources of any market power" amongst these platforms. A key goal of the CMA's study will be to determine "whether competition in digital advertising is producing good outcomes for consumers".

A group representing US retailers including Walmart, Target and Best Buy sent a letter to the Federal Trade Commission (FTC) outlining its concerns over the dominance of major tech companies, such as Amazon. The letter comes as the FTC and Department of Justice (DoJ) have reportedly divided oversight of a handful of the country’s largest tech firms: Facebook, Google parent-company Alphabet, Amazon and Apple.

German authorities fined Facebook €2m for under-reporting complaints about illegal content on its social media platform, in breach of the country’s law on internet transparency.

South Korea’s Samsung Electronics said that profits for the three months to June more than halved year-on-year following continued weakness in the price and demand for memory chips. The world’s largest smartphone maker and supplier of memory chips said operating profit was 6.5 trillion Korean won, which was slightly better than an industry estimate of 6 trillion won, but was down about 56% from a year earlier.

Energy

Brent crude futures fell 4.8% over the week by mid-session on Friday to trade at around $63.30 a barrel as global demand concerns outweighed an OPEC+ pact to extend supply curbs.

Energy cartel Opec reached an agreement to extend production cuts until March 2020. The energy alliance between OPEC and non-OPEC partners, referred to as OPEC+, has been reducing oil output since 2017. The policy is designed to prevent prices from sliding amid soaring production from the US, which has become the world’s top producer ahead of Russia and Saudi Arabia.

British special forces seized a supertanker off Gibraltar carrying Iranian oil to Syria in violation of European and US sanctions. Iran responded by declaring the action illegal and summoning the British ambassador to the Foreign Ministry in Tehran to explain the ship’s arrest.

Shares in mid-cap Energean Oil & Gas jumped after it revealed plans to buy oil and gas assets from Edison of Italy for $750m.

Chubb said it will become the first US insurer to turn its back on the global coal industry by beginning to phase out its coal investments and insurance policies within the next three years. It will begin cutting ties with major coal-using utilities, such as the German energy giant RWE, from the same year.

Financials

Funding Circle, a platform that allows people to lend money to small businesses, halved forecasts for revenue growth. The peer-to-peer lender said the uncertain economic environment had damaged demand. Management now expects revenues to grow by 20% this year, down from a previous forecast of 40%.

Supermarkets

A statement from J Sainsbury proved disappointing. The supermarket giant says it has cut prices on more than 1,000 everyday food and grocery products since February. However, in its latest quarterly trading statement, it reported a fall of 1.2% in its total sales, excluding fuel. Like-for-like sales fell 1.6%. Chief executive Mike Coupe complained of a “tough trading environment”, but said Sainsbury's was making progress. The firm said: “Retail markets remain highly competitive and promotional.”

Other retail

Primark, owned by Associated British Foods, blamed the weather for sliding sales. The fast fashion-chain said cooler, wetter conditions in May meant fewer people bought summer clothes. Although the retailer did not give a figure in its trading update, analysts said that like-for-like sales were down about 2%.

Shares in retailer JD Sports Fashion jumped after the clothing chain delivered news of strong trading and plans for more growth in its store estate.

Two of Mike Ashley’s senior aides quit Sports Direct. After 28 years, Karen Byers – known as the person who ran Sports Direct – announced her departure. She would be welcome back if she ever wants to return, Mr Ashley said. Company secretary Cameron Olsen stepped down.

Monsoon Accessorize’s CVA has been passed by its creditors, paving the way for hefty rent reductions at around half of its stores. The retailer did not disclose by what margin its CVA passed but said it was “with a majority significantly above the required threshold”.

Leisure

A raft of redundancies is now expected in the gambling sector. William Hill said it planned to close about 700 betting shops, which could lead to 4,500 job losses. Management said the move followed the government's decision in April to reduce the maximum stake on fixed-odds betting terminals to £2. Since then, the company added, it had seen "a significant fall" in gaming machine revenues. GVC, the owner of Ladbrokes and Coral, plans to close up to 900 shops in a move that would affect up to 5,000 jobs. It gave the revised figures on Thursday, which are slightly lower than its previous forecast of 1,000 closures and 6,000 redundancies.

Autos

Jaguar Land Rover is investing hundreds of millions of pounds to build a range of electric vehicles at its Castle Bromwich plant in Birmingham. Initially the plant will produce an electric version of the Jaguar XJ.

Tesla shares jumped after the electric vehicle maker set new production and delivery records during the second quarter. The company delivered 95,200 vehicles, producing 87,048 cars.

Travel and transport

Low-cost carrier Ryanair said that group traffic grew by 13% in June compared with the same month a year ago. Ryanair operated almost 78,000 scheduled flights in June, and carried a total of 14.2 million passengers, up from 12.6 million.

For the first time since the Boeing 737 Max aircraft was grounded worldwide, American Airlines suspended a route as a direct cause of the grounded planes. The airline will suspend flights between Oakland and Dallas/Fort Worth from 6 July to 4 September.

Boeing unveiled a multi-year payout of $100m to local governments and non-profit organisations helping families of the two fatal 737 Max crashes, which killed 346 people.

British Airways owner IAG said it has no plans to revive a bid for discount rival Norwegian Air Shuttle following a Spanish report that an offer was likely to be made in the next 15 days.

Aviation services operator John Menzies issued a profit warning, saying its performance in the first half of the year fell short of the mark. Management noted the headwinds impacting the wider aviation market, including weak cargo volumes and flight schedule reductions.

Property

Shares in housebuilder Persimmon slipped after its trading update showed revenue was down as it attempted to improve its customer service.

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