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Last Week in the City: Trump threatens trade war

 
Garry White
Garry White, chief investment commentator, looks at the market moving events that have shaped the UK equity markets this week (February 26 to March 2, 2018) (Source: Charles Stanley)

This week US President Donald Trump threatened a trade war, a number of famous high street names, including Toys R Us and Maplin, got into serious trading trouble and upbeat assessments of the US economy from central bankers helped the US dollar to rally, reversing its recent trend. The FTSE 100 fell 0.2 per cent over the week by mid-session on Friday.


Economics

The US economy expanded at a slightly slower pace than previously thought in the fourth quarter of 2017, its second reading showed. GDP grew by an annualised 2.5 per cent in the final three months of last year, down from the initial reading of 2.6 per cent.

New York Federal Reserve President Bill Dudley said that four rate rises by the central bank would constitute a “gradual” pace of tightening as US policymakers.

The dollar rallied after new Federal Reserve chair Jerome Powell gave a straight-talking testimony on Tuesday to the US House Financial Services Committee. He gave optimistic assessment of the US economy.

German shoppers stayed at home in January, defying expectations for a rebound in retail sales with a second straight month of declines.


The Japanese yen strengthened after the country’s central bank chief suggested a possible exit from its current easy-monetary policy in 2019 if targets were met. This was the first time a possible timing has been suggested.

Geopolitics

The Irish border remains a thorny issue in Brexit talks, with Donald Tusk warning the UK risked creating a sea border between Ireland and Britain if the government cannot come up with a better way to solve the Northern Irish border question. He said the UK had not “come up with anything wiser”.

Fears of an expanding trade war hit global markets after US President Donald Trump said he would impose heavy tariffs on imports of steel and aluminium “for a long period of time”. Next week the president will sign an order imposing global tariffs of 25 per cent on steel and 10 per cent on aluminium, a move likely to trigger retaliation from the EU and China. US steelmakers rallied but the news hit shares in FTSE 100 listed Evraz as well as iron ore miners such as Rio Tinto and BHP Billiton. The trade protections may divert flows of Asian steel away from the US, boosting competition elsewhere and denting prices

Russian president Vladimir Putin has claimed that Russia has developed an “unstoppable” range of new weapons that would render US missile defence systems meaningless.

Fixed income

Rising bond yields have been cited as the reason behind the sell-off in the equity markets but should investors be just as concerned about a spike in inflation? Jeremy Spain, Charles Stanley’s bond analyst, looks at the issue here.

FTSE reshuffle

March’s index reshuffle by FTSE Russell will see Royal Mail shares re-enter the blue chip index, replacing property group Hammerson.

In the FTSE 250 there were a number of changes.

Entering the index are: Baillie Gifford Japan Trust; Bakkavor Group; Charter Court Financial Services Group; Contour Global; Games Workshop; On The Beach Group; and Pantheon International.

Leaving the midcap index are: AA; Acacia Mining; N Brown; Dignity; Hansteen Holdings;Mitie Group; and Vectura.

Energy

Oil prices fell over the week as fears over excess supply from the booming US shale industry mingled with a broader selloff in risk assets after US President Donald Trump’s tariffs threatened to spark a global trade war. Brent crude futures slipped 5.5% over the week by mid-session on Friday to trade at around $63.60 a barrel.

Financials

Shares in Provident Financial soared after the troubled doorstep lender offered signs that the worst may be behind it. This followed a botched reorganisation, two profit warnings and an investigation from the Financial Conduct Authority. The lender announced a £300m rights issue and said it had agreed to pay a fine and compensation over issues relating to its Vanquis unit.

Retail

It was a generally gloomy week in UK retail, as the harsh backdrop and shifting shopping habits saw Toys R Us collapse into insolvency and Maplin Electronics failed to find a buyer.Prezzo, the Italian-themed diner, said it was restructuring its business with the loss of several hundred jobs and clothing group New Look was reported to be considering a restructuring that would involve closing scores of its 600 stores.

Shares in Carpetright were also floored, falling by almost a quarter after it said management was now expecting to report a loss for the year ending in April and that consumer confidence in the UK was “weak”.

UK shop prices fell in February in a further sign that inflationary pressures from a weaker pound had passed their peak, according to the British Retail Consortium (BRC). The BRC-Nielsen shop price index revealed prices fell 0.8% in February, a sharper fall than the 0.5% dip seen in January.

One bright spot, however, was sausage roll group Greggs, which pushed the accelerator on its expansion plans. The pasty purveyor will open a record number of new shops in 2018 and plans to extend its overall target beyond the 2,000 originally projected. The news came alongside a set of full-year numbers that was in line with City expectations.

Supermarkets

Tesco’s £4bn takeover of wholesaler Booker was agreed by both sets of shareholders at meeting this week. This was despite a number of institutional investors and shareholder advisory firms expressing their opposition to the deal.

Consumer

It wasn’t a great week for Sir Martin Sorrell, the best paid chief executive in the FTSE 100. Sir Martin has received about £210m in remuneration from advertising group WPP since 2012, but the company’s shares have been falling sharply for the last year. On Thursday, the company lost another 8% of its valuation after its full-year results showed multinationals reining in their advertising spend.

It’s been a bit of a rollercoaster ride for investors in shares in Alton Towers and Legoland ownerMerlin Entertainments. The share price soared after the group posted results that were “not terrible” and the company did not issue a new profit warning after a tumultuous year. This followed a year of bad weather across Europe and a spate of terror attacks in the UK, which hit trading.

Luxury goods company Burberry appointed Riccardo Tisci as chief creative officer to succeedChristopher Bailey. Mr Tisci worked with new chief executive Mario Gobetti at Givenchy.

Media

NBC-owner Comcast made a counteroffer for satellite TV group Sky, complicating a deal that was already proving complex. US media giants The Walt Disney Co and Comcast are now battling for Rupert Murdoch’s baby as he prepared to exit his TV and movie operations. For more click here.

Shares in Dancing on Ice producer ITV slipped after it was struck by a double-whammy hit of falling profits and sliding advertising revenues. New chief executive Carolyn McCall said a "strategic refresh" was under way.

Property

Profits at London-focused estate agent Foxtons dropped by nearly two-thirds in 2017, leading the company to more than halve its dividend as it struggled to deal with the capital’s slowing housing market.

Utilities

The Beast from the East brought Britain to a standstill this week, with heating demand so high that National Grid warned the country could run out of gas amidst the freezing temperatures. The cold snap is likely to be earnings-enhancing for businesses such as SSE and Centrica.

Global utilities have performed badly compared to world shares generally over the last year. John Redwood, Charles Stanley’s Chief Global Strategist, explains why here.

Technology

The UK is short of technology shares, with many of our national leaders bought by foreign rivals. This week chipmaker Laird agreed a £1bn sale to US private equity group Advent. Are we selling off the family silver? Garry White asks whether the lack of UK technology plays is a problem for UK investors here.

Engineering

GKN confirmed it was in talks about a “combination” of its automotive business with US-based Dana that would be “effected mainly in equity” as it tried to fight off a hostile offer from FTSE 250 listed Melrose Industries. GKN’s management have proposed demerging both the automotive division and its aerospace business as part of its standalone plans.

Shares in Cobham jumped almost a fifth after the defence and aerospace equipment supplier reported annual profits ahead of market expectations. The share price rise reversed the decline Cobham faced at the start of last month, when investors fretted over the cost of unwinding a series of acquisitions.

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