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Last Week in the City: Markets Trumped by trade fears

 
Garry White
The week was dominated by trade war fears as Donald Trump said he would slap further tariffs on Chinese goods should there be any retaliatory measures.

The week was dominated by trade war fears as Donald Trump said he would slap further tariffs on Chinese goods should there be any retaliatory measures. Despite this, Nasdaq hit a record high, although the Dow Jones Industrial Average erased all its gains in 2018 so far. The FTSE 100 fell 0.5% over the week by mid-session on Friday. The index is 3.6% below its all-time high, hit on 22 May 2018.


Economics

Sterling rallied and interest rate futures indicate a 70% probability of a UK interest rate rise in August after the publication of minutes from the Bank of England’s last rate-setting committee. The Bank of England’s chief economist, Andy Haldane, joined dissenters voting for a quarter-point rise in rates. The last meeting voted 6:3 to keep rates on hold. In another hawkish signal, the Bank agreed to start unwinding its £435bn quantitative easing programme earlier than expected.

The British Chambers of Commerce cut its UK 2018 growth forecast, warning the economy faces its weakest year since the financial crisis. It now forecasts GDP growth of 1.3% this year, down from a previous forecast of 1.4%, and cut its forecast for 2019 to 1.4% from 1.5%.

John Redwood, Charles Stanley’s Chief Global Economist, looks at the money supply and how central banks are currently impacting markets here.

Geopolitics

President Trump suggested that tariffs on a further $200bn of Chinese goods would be implemented should the country launch any retaliatory action against the US’s initial tranche of measures. The administration had previously unveiled tariffs on Chinese imports worth $50bn, but these have been reduced to $34bn following a consultation with US businesses. They will come into force on 6 July.


Carmakers were hit hard by the trade war rhetoric. Daimler cut its 2018 profit forecast because of the issue and BMW said it was looking at “strategic options” because of the threatened trade war. Shares in Fiat Chrysler and Volkswagen also fell.

John Redwood, Charles Stanley’s Chief Global Economist, looks at the implications of Donald Trump’s trade rhetoric here.

The government's Brexit bill passed through Parliament after Prime Minister Theresa May saw off a revolt by Tory MPs. Peers accepted the amendment to the EU (Withdrawal) Bill sent to them from the House of Commons, meaning the bill now goes for Royal Assent, becoming law.

Aerospace giant Airbus warned it could pull out of Britain with the loss of tens of thousands of jobs in the event of a 'no-deal' Brexit. The UK chief executive of Siemens also warned that the German company may limit its investment in the UK as a result of uncertainty over the country’s departure from the EU, especially in the event of a ‘no deal’ departure.

President of the European Commission Jean-Claude Junker said that Ireland will come first in the Brexit negotiations, and that its border with Europe is a priority.

Canada’s senate voted to legalise marijuana for personal use from October 17 this year. A few weeks ago Garry White looked at the investment opportunities presented by the historic cannabis vote – for more click here.

Emerging markets

Index compiler MSCI said it will add Saudi Arabia and Argentina to its emerging market index from the middle of 2019. This represents a re-entry into the index for Argentina, after it was downgraded to frontier market status in 2009 after former populist President Cristina Fernandez imposed capital controls.

Cryptocurrencies

South Korean cryptocurrency exchange Bithumb said $31.5m worth of virtual coins were stolen by hackers, the second local exchange targeted in just over a week.

The Bank for International Settlements said that cryptocurrencies were afflicted with inherent contradictions that make their widespread use as money impossible. It argued that the amount of energy needed to produce coins would create and environmental disaster, as well as “bringing the internet to a halt”. There are also issues with scalability, it said.

Charles Stanley does not consider cryptocurrencies as an investment. Paul Abberley, our chief executive, explains why here.

Energy

Opec was meeting in Vienna on Friday in a final effort to overcome Iranian opposition to a preliminary agreement to boost production by a theoretical 1 million barrels a day. Ahead of the press conference announcing the decision, Brent crude futures were up 0.6% over the week by mid-session on Friday to trade at around $73.90.

Technology

The Competition and Markets Authority (CMA) has launched an investigation into Ion Investment Group's proposed £1.5bn takeover of trading technology group Fidessa. The regulator is considering whether the deal “may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services".

Despite the technology wobble earlier this year, shares in Facebook and Netflix both closed at record highs this week.

Google, owned by Alphabet, said it will invest $550m in China's second-largest e-commerce player, JD.com. The two tech companies said they would work together to develop retail infrastructure that will improve the internet shopping experience and reduce friction in a number of markets, including Southeast Asia.

Electric car maker Tesla has filed a lawsuit against an employee its chief executive Elon Muskhas accused of committing “sabotage” against the company. The lawsuit alleges the former employee “unlawfully hacked the company’s confidential and trade secret information and transferred that information to third parties." Garry White argues that the buzz around electric vehicles such as those produced by Tesla remains excessive here.

Retail

It was another gloomy week in the retail sector. Debenhams issued its third profit warning in a year, sending its shares sharply lower. The department store operator blamed “increased competitor discounting and weakness in key markets”.

Shares in Hornby also slumped after the toymaker said its annual losses had widened to £10.1m. Revenues fell by a quarter.

Dixons Carphone posted a 34% fall in annual profits as the retailer admitted that it had "plenty of work to do" in revamping its business.

Online fashion group ASOS saw its shares slip after the US Supreme Court overturned a ruling that barred US states from forcing businesses that had no physical presence in a state – such as internet retailers – to collect sales tax from customers. Local governments can now start collecting sales taxes from such companies.

Property

London-focused house builder Berkeley reiterated its warning that profits would typically be around 30% lower in future years as the benefit of a glut of sites acquired cheaply in the wake of the financial crisis was wearing off, sending its shares down. Richard Stearn, chief financial officer, said London’s housing market had suffered from changes to the stamp duty regime, tighter mortgage lending rules and uncertainty around Brexit. Shares in other house builders such as Barratt Developments, Persimmon and Taylor Wimpey were also hit by the news.

Financials

CYBG, the owner of Clydesdale Bank and Yorkshire Bank, agreed to buy Virgin Money for £1.7bn. Under the deal, all the group's retail customers will be moved to Virgin Money over the next three years. It will be the UK's sixth-largest bank, with about six million customers.

Engineering

BAE Systems won a $200m contract to build US marine "ocean-capable" amphibious tanks.

Shares in defence contractor Chemring jumped after a jump in interim profits. It also talked up the prospects for its countermeasures unit. “After a number of years of weakness in the countermeasures markets that followed the end of the Iraq and Afghanistan conflicts, the outlook for the segment is increasingly positive,” the group said.

Equipment rental company Ashtead Group posted a 16% increase in full year underlying pre-tax profit as hurricanes in the US bolstered demand.

Media

The battle for Rupert Murdoch’s 21st Century Fox media assets intensified. The Walt Disney Co raised its offer to $71.3bn to counter a rival $65bn bid from NBC and Universal ownerComcast.

Trinity Mirror's acquisition of the privately owned Daily Express and Daily Star ownerNorthern & Shell Media Group was been cleared by UK culture secretary Matt Hancock.

Travel

Lufthansa’s chief executive confirmed the giant German airline is in talks with the budget carrier, Norwegian over a potential takeover. IAG – British Airways’ parent company – revealed it has taken a 4.6 per cent share in Norwegian last month, leading to speculation it too may make a bid.

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