Market buzz: Politics, trade tensions in focus

1700:Close A bounce in oil majors' shares after Friday's bout of selling helped pull the Footsie off its intra-day lows, with the top-flight index outperforming its peers across the Channel at the start of the week.

Supporting that move was a rally in Brent crude oil futures on the back of reports suggesting that OPEC+ countries were not set to deliver as large an output hike as some might have hoped for when they next met on 20-21 June, in Vienna.

Weakness in Sterling amid talk of disarray in Westminster may also have lent a helping hand ahead of a vote in the Lords on Tory rebels' demand that Parliament should have a vote in case of a no-deal Brexit.

Lawmakers in Westminster weren't alone, with those in Berlin also reportedly struggling to beat back the populists in their ranks.

All throughout, traders were watching for any fresh news on the global trade front, which might all too easily sway prices in one direction or the other.

Market participants were likely to do so as well on Tuesday, although they would also be keeping an eye out for any remarks from some of the world's top central bankers who had gathered for the European Central Bank's forum in Sintra, Portugal.

FTSE 100 down 2.58 points to 7,631.33.

1605: The Dow Jones dropped more than 200-points in early trade to around 24,800 but is erasing the worst of those losses now.

"The index is struggling under the weight of the escalating US-China trade war," says Connor Campbell at SpreadEx, "with Trump’s decision to push forward with tariffs on Beijing last Friday causing another nasty flare-up of international posturing."

He observes that the Eurozone indices, softened up by the trade war stuff, have also been susceptible to the political problems in Germany, with the clash between Angela Merkel and coalition partners bloodying the region’s trading rooms.

The DAX dropped 1.8%, wiping out the post-ECB growth seen last week, and leaving it struggling to hold above 12800; the CAC was in-step with its German sibling, falling 1.6%, with the IBEX down 1.1% and the FTSE MIB slipping 0.6%.

"Though still at its worst intraday price since the end of May, shedding half a percent to return to 7600, the FTSE managed to avoid the pain seen elsewhere. That’s likely because Brent Crude rebounded by 1.3%, lifting BP and Shell alongside it, while the pound fell 0.3% against both the dollar and the euro as it speculates about Thursday’s Bank of England meeting."

1536: The ECB will start raising interest rates in September 2019, Capital Economics reckons, not long before we judge that the US Fed will start to cut. "Such divergence between the two central banks would be almost unprecedented and have important implications for financial markets."

The ECB has only hiked once when the Fed was cutting, a mis-move back in 2008, and before the ECB existed, the German Bundesbank only raised interest rates during a Fed easing cycle during Germany's reunification-fuelled boom of the early 1990s.

Economist Jennifer McKeown justified the firm's controversial view noting that the spare capacity in the eurozone economy and solid domestic fundamentals, will mean the eurozone "will catch a less severe cold than it might ordinarily when the US "sneezes'", plus the delay between the first Fed rate hike and the first ECB hike will be about four years, with Capital Economics' forecasts implying only a partial reversal of what has been a huge divergence between the two central banks. Thirdly, even after our envisaged rate hikes, the level would still be much lower than in the US and the ECB’s policy stance would be accommodative, with real rates remaining negative.

"If we are right, our policy forecasts could have significant financial market implications," McKeown said, with the euro seen rising from about $1.15 at the end of this year to $1.20 in 2019 and $1.25 in 2020; US Treasury yields rising a little further by the end of this year but dropping back from 2019 in anticipation of policy loosening as the 10-year Bund yield "should rise somewhat" to end 2020 at 1.25% – 100bp below the US equivalent.

1312: Front month Brent crude oil futures are up by 1.26% on the back of a Bloomberg report that OPEC+ members may be negotiating an output increase of between 300,000 and 600,000 barrels a day.

Ahead of OPEC's next meeting, on 20-21 June, analysts at Kepler Cheuvreux are saying: "There is arguably a need for more OPEC oil. Any decision beyond 500kb/d will likely be subject to Iran and Venezuela's future trajectory. We would not bet on any mistake by Saudi Arabia to raise output beyond what is needed by the markets."

Also helping to lift crude futures, on Friday Baker Hughes reported that the US oil rig count declined by three over the latest week.

1129: After the weekend saw Theresa May announce that, as part of a 10-year plan, funding for the NHS would be increased by £20bn a year by 2022, analysts at Berenberg believe that the medium-term potential acceleration in NHS volume growth for Spire Healthcare outweighs longer-term potential lower self-pay growth.

The changes should increase the annual funding uplift by around 1% a year from the level over the last two years, and by 2% from increases over 2010-2015.

"NHS finances are in a parlous state, and have resulted in increasing waiting lists, so this should serve to ameliorate these pressures. However, in the longer run, this level of increase may still be insufficient to deal with the demographic drivers of healthcare demand in the country, and one commentator described the funding as just a 'giant sticking plaster'.

1038: Bonds have rallied, with yields generally down 1-2bps this morning, notes TD Securities ahead of the US open. West Texas International's losses have eased somewhat, with the crude measure sitting around $64.75 a barrel. The yen is up slightly, euro flat, sterling down, and .

After last week's CB disruptions, all eyes on the BoE & Norges Bank later this week, as well as a plethora of speakers at Sintra and Carney's Mansion House speech Thursday night.

1036: There are reports that the Swedish Democrats want an EU referendum, sending the krona sharply higher. The party was the country's third-largest at the last election.

0924: RBC Capital Markets upgrade AB Foods to 'outperform' as analysts see potential for Primark's LFL sales to improve, added to margin upside driven by better buying and inventory control. Concerns over performance in the US "have been overdone".

Global apparel peers have re-rated recently and RBC has raised its earnings forecasts slightly and the price target to £31 from £28.

Goldman Sachs has put out a note on Tesco with a new 275p price target that offers 8% upside and keeps the recommendation at 'buy'. The note follows first-quarter results that surprised positively, helped by Booker’s to contribute to Tesco’s highest UK LFL ex fuel growth in almost 10 years of 3.5% and comes on the back of full year results that showed a significant UK margin beat and was in tandem with a significant slowdown in discounter market share gains.

"While these key elements of the investment case are playing out, we also note that Asda has started to gain share and Kantar pricing data suggests Tesco has invested less than peers recently, historically a lead indicator of share losses."

However, at circa 12 times next-12-months EBIT, with a compound annual growth rate of circa 12% pro-forma over the next three years, we see valuation support. With .

0920: The pound is down 0.3% to 1.3234, not too far from November-equalling lows seen earlier in the month.

0911: After Virgin Media accepted the takeover offer from CYBG, the share price moves pretty muted, notes Artjom Hatsaturjants at Accendo Markets, observing that while there is still some space to the implied 371p per share offer, investors are not rushing to fill the gap.

"A muted reaction to the merger also reflected disappointment that it wasn’t sweetened by any cash (remember, cash is king in M&A), as well as the limited improvement on the original offer (+3.3% from implied 359p/share on 4 May). Still, given the gruelling competitive environment for challenger banks, investors were relieved that the merger was going through at all."

He says much work remains ahead, especially to integrate the two banks’ IT systems, with the lesson of TSB's IT meltdown not lost on anyone. "With CYBG CFO projecting 30% savings from operational efficiencies, the fear is that the cuts may go too far and affect one part of the business that the banks absolutely have to get right."

0847: Oil prices are down 4% from Friday's US rig count data, notes FXPro, with OPEC and non- OPEC members due to meet in Vienna on Thursday for the start of a three-day summit where production cuts are on the agenda.

US Rig counts on Friday showed an increase of 1 to 863 as more US production comes online. "The market expects production cuts to be eased adding more supply to the market and putting downward pressure on prices. The meeting is set to be contentious as Saudi Arabia and Russia are said to back the proposal to increase production by 1.5m barrels per day, in order to maintain their market share, while Iran, Iraq and Venezuela are set to block the proposal fearing lower prices and market instability. USDCAD traded higher to the 1.32000 level as oil fell."

0845: China has retaliated and hit US with $34bn tariffs on over 600 products including whiskey, electrical cars and soy, while state media attacked the US president Donald Trump’s actions.

After the White House announced on Friday that it would impose 25% tariffs on Chinese products worth $34bn, with another $16bn targeted at a later date, Beijing answered with sanctions that state media called "responsive, passive and reciprocal".

0803: A draft third iteration of South Africa's new mining charter recognises past 26% empowerment, but all companies must now meet a new 30% target in the next few years.

The draft version of the controversial charter "contained positives and negatives, but overall, we were disappointed" says analyst Yuen Low at Shore Capital.

"Most significantly, there was a major concession to regarding the all-important principle of ‘once empowered, always empowered’. Consequently, where the 26% BEE (black economic empowerment) ownership target level as been achieved in the past but BEE partners subsequently exited, companies will not be required to ‘top up’ to 26% again.

"Disappointingly, however, all companies will now be required to meet a 30% target within the next five years."

0755: Rabobank thinks that equity markets are being too sanguine about the the trade tit-for-tat between China and the US.

To summarise, on Friday, the White House proceeded with $34bn of 25% tariffs on Chinese exports with another $16bn waiting in the wings. China has made clear again that it will retaliate immediately and will aim to hit the US agricultural sector that is President Trump’s base, which will prove hugely disruptive to global agri markets. But the US announcement also made clear that if China retaliates then the US will once again up the ante.

"So what do markets make of this so far? Well, not a lot to be honest," Rabobank says. "Especially equities, which jumped in the US on Friday. One thing is therefore evident. Either markets are not pricing this all correctly, or everything we are repeatedly told about the damage that trade wars do is wrong. Which one is it? It looks like we might soon find out."