Market buzz: FTSE falls amid trade tensions, Inmarsat rockets
1642: The FTSE 100 finishes down 2.24% to 7509.8, levels last seen at the end of April.
Meanwhile, US treasury secretary Steven Mnuchin has clarified that the media reports that the White House is planning to block China's investment in US high-tech companies over the potential threat to economic and national security are "fake news", with Mnuchin stressing that a statement will be "not specific to China, but to all countries that are trying to steal our technology".
Looking at the falls in global stocks today, with European benchmarks similarly floundering, Neil Wilson, analyst at Markets.com, observes that markets have in recent weeks been pretty relaxed about the trade war escalation and so the events of recent days "necessitate a repricing of risk that is arguably overdue".
Looking away from equities, there is further evidence of yield curve inversion as investors seek shelter in US Treasuries, while the dollar is selling off. The spread between 2s and 10s at 34bps is the lowest since the summer of 2007. "Risks of stagflation and recession are rising," he says.
Wilson also notes that Trump's call for restrictions on investment in US companies, could make a full blown trade conflict more likely but taken on their own the restrictions on investments would have a bigger impact on corporate earnings than "fairly small beer tariffs" if there is no escalation.
"US equities are still just about flat for the year, which given the massive ramp up through Jan is not a terrible performance. From a technical viewpoint, as long as we see the Dow hold its 200-day SMA - which at time of writing it is managing to do - we're still in an upwards trending channel from the April lows," Wilson says.
"The US should confirm tariffs on Chinese imports and the investment curbs by the end of this week - it could be a pivotal few days but there is still some hope - albeit fading - that the White House will step back from the brink. Harley Davidson's decision to pull US jobs is a timely reminder to the administration that trade is not a zero sum game that either won or lost."
1619: Mining giant BHP Billiton is facing a class action from up to 400 workers who allege they were left $40m worse off because they were hired as “casual” workers by labour hire firms and not as permanent staff, despite their rosters being published months in advance
Broker SP Angel noted that the landmark action, which is to be launched this week by law firm Adero Law, could grow to include between 800 and 1500 people and cover an estimated $40-50m, according to the lawyer leading the claim, Rory Markham.
Two BHP companies, Mt Arthur Coal Pty Ltd and Hunter Valley Energy Coal Pty Ltd (HVEC) will be sued in the proceedings, as well as the labour hire firms Chandler Macleod and TESA.
1612: Although shares in cruise operator Carnival are sinking 9%, analyst Greg Johnson at Shore Capital remains on an even keel, with the downgraded guidance for the second half balanced with a better first half "implying the outlook for the remainder of the year remains broadly unchanged".
As such, Johnson says the crux of the Carnival investment case for him is revenue yield development as industry capacity growth accelerates from next year, with Carnival alone adding over 5% in 2019 and 2020.
He retains a 'hold' recommendation at the recent price but seeing fair value at £49, predicated on 2% annual yield growth over the medium term versus a market that seems to be pricing in 1.5%, wants greater clarity on the 2019 booking outlook or a fall to £40 per share, implying circa 1% medium term yield growth, in order to take a more positive stance.
1522: Satellite operator Inmarsat pops 4% higher as France's Eutelsat says it is currently evaluating a possible offer for the company.
"There can be no certainty any offer will be made, nor as to the terms of any offer," Eutelsat says, adding that a further announcement will be made in due course.
1506: JP Morgan on equities: "Trade fears have taken centre stage again. Of course, equities will not ignore a potential further escalation, but it is very difficult to handicap this risk. Our view is that the prospect of significant market falls and a dent to corporate confidence in the run-up to November mid-term elections will ultimately prevent the US administration from actually implementing these policies."
On miners: "We worry that Miners and Energy equities have seen the gaps closing with underlying commodity prices, which are rolling over anyway, partly driven by stronger USD.
"Overweight Cyclicals versus Defensives may be at risk if bond yields fall," the investment bank says.
BUT analysts add: "we note PMIs are moving higher again and Eurozone CESI is clearly bottoming out. We think our OW Tech call is well shielded here."
1409: UBS on Hunting: "We recently spoke to the CFO of Hunting and he sees a continuation of the strong US trading highlighted at 1Q trading update with no signs of the bottlenecks impacting Titan's momentum. With the shares -11% since 22 May (recent oil & share price high), the upcoming 1H preclose update on 28 June could be supportive."
1305: In a research note covering the European tech space, Credit Suisse cites Sophos (Outperform: target: 750p), Computacenter (Outperform; target: 1650p) among their 'top picks'.
1303: Analysts at Citi appear to think they spy a positioning opportunity in miners after "modest" 5% drop for the group over the past month.
"Mark to market momentum still positive — We calculate potential mark to market consensus upgrades of 13%/24% to 2018/19 EBITDA and 21%/36% to 2018/19 EPS. Window of opportunity — Half yearly reporting season should benefit from commodity and currency tailwinds despite oil driven cost pressure. This combined with positive momentum represents a positioning opportunity for mining stocks even though 5% correction is modest. July has typically been a strong month for the sector. Biggest stock level catch-up opportunities — Glencore, South32, Vedanta, China Moly, KAZ, and GMexico," they tell clients.
Another possibility, as opposed to a catch-up trade, is that earnings momentum is about to turn negative.
1301: RWS may offer a "rare opportunity" to buy into a high-growth, high-margin business with rising exposure to the international expansion of FANG companies, Berenberg says.
1208: Software and information technology business Micro Focus is under pressure after US peer Red Hat cut its full-year revenue forecast last week.
Otherwise, the London midday market report finds miners leading the falls as investors are increasingly jittery following more trade threats from US President Trump.
The FTSE 100 is down 1.3% to 7,586.55, while the pound was off 0.2% against the euro and the dollar at 1.1366 and 1.3236, respectively.
1147: Economists at Bank of America-Merrill Lynch are standing by their forecasts for a first hike from the ECB's in September next year, but say they now see an increased risk of no interest rate hikes at all next year.
1020: European car manufacturers are taking a hit in early trade, as investors look back to Trump's threat to impose a 20% tariff on EU cars on Friday. EU auto imports into the US were $58bn last year.
"By this point, many of us thought any differences would have been ironed out," says market analyst Josh Mahony at IG. "However, if anything it seems as if relations between the US and their allies are deteriorating further. It is clear that this disruption is not going away any time soon, with the PBoC cutting the capital reserve requirements to the lowest level since 2010, as they hope to free up funding in the face of a trade war induced economic slowdown."
Friday’s Opec production output agreement has provided sharp gains for WTI, yet a more mixed picture for Brent, says Mahony. "The abundance of US oil has long driven a wider spread between WTI and Brent, yet with OPEC agreeing to raise output across all member states, we have seen the Brent premium over WTI fall from $10 to $6."
1011: Not a lot of notable broker action so far, though Kepler Cheuvreux has upgraded Rolls-Royce to 'hold' from 'reduce' with a new target price of 975p.
Off the back of the Countrywide profit warnings, Jamie Constable at N+1Singer sees some read-across to Foxtons, "but the interesting one for me is Rightmove", which is trading at an all-time high at almost 30 times forecast December EPS. "Rightmove is of course more listings driven than transactions driven but if their customers are in trouble then surely there must be some read across. If the number of estate agent branches is falling then that could start to impact Rightmove."
Berenberg has upped its target price for Marlowe on the back of a strong set of full year results this morning, achieving an 11% beat against its EPS estimate. "Looking ahead, we believe Marlowe will continue to consolidate its highly fragmented end markets, aim to enter additional verticals and continue to benefit from its increased scale, driving further organic growth and margin expansion. We increase our EPS estimates by 1-4%, reiterate our 'buy' rating and raise our price target to 550p."
Canaccord upped its target price for Urban Logistics REIT, which is focused on smaller single-let logistics properties across the UK, often ‘last mile’ distribution warehouses. The TP has been set at 145p, from 137p.
0954: Germany's Ifo survey has shown companies forward-looking outlook stabilising, though firms still seem a bit gloomy about their current situation.
The business climate index moderated to 101.8 from 102.2, dragged down by another negative assessment by firms of their current business situation from 106.1 to a 13-month low of 105.1.
"That suggests that growth has not bounced back at the end of Q2. However, the more forward looking ifo expectations recorded a stable outlook. But at 98.6 that still marks a 2-years low," says Oxford Economics.
After months of strongly disappointing readings, the release of the June ifo index may send early signs of stabilisation despite recording another fall, Oxford suggested.
"It is tempting to put a positive spin on this. First, a rise in the PMIs in June and now ifo expectations stabilising after six successive falls. However, with US president Trump’s renewed threat to impose tariffs on US car imports we fear that expectations are in for another fall in July.
"We see no reason to change our view that the Eurozone economy is past its growth peak and that our view of GDP growth rates in the vicinity of 0.4% per quarter are still facing downside risks as uncertainty becomes a drag on firms’ investment intentions."
0923: There's much ire flying about on social media on the back of a great bit of investigative journalism from Bloomberg about how hedge funds hired YouGov and at least five other polling companies to sell "critical, advance information, including data that would have been illegal for them to give the public" that helped the hedgies make bumper profits short-selling the pound.
"Some hedge funds gained confidence, through private exit polls, that most Britons had voted to leave the EU, or that the vote was far closer than the public believed—knowledge pollsters provided while voting was still underway and hours ahead of official tallies," Bloomberg reports.
That confidence put some funds in the perfect position to capitalise, while others learned the likely outcome of public, potentially market-moving polls before they were published, offering "surefire trades".
One private exit poll conducted by Survation, the company of Nigel Farage’s favorite pollster and friend, Damian Lyons-Lowe, was sold to multiple clients and correctly predicted Leave. Farage told Bloomberg he learned of Survation’s results before making at least one of two public concessions that night, "meaning there was a good chance he was feeding specious sentiment into markets".
0916: The Turkish lira is buoyant after Turkey's general election has been won, surprise surprise, by sitting President Recep Tayyip Erdogan, giving the high-voiced premier a new five-year mandate with some new sweeping executive powers. Erdogan won an absolute 52.5% of votes in the first round.
But the voting was controversial and there are numerous reports of irregularities and rigging attempts in several districts.
Undaunted as ever by such issues, Erdogan gave a combative victory speech from the balcony of the AK party’s headquarters in Ankara, including to fight terroristic organisations and “to continue the fight to make the Syrian grounds freer".
"We have received the message that has been given to us in the ballot boxes. We will fight even more with the strength you provided us with this election."
TD Securities said the initial market reaction has been positive for the lira and rates, as expected, with the lira outperforming rates so far. "As for political, economic and financial performance we expect more of the same for another five years, we remain bearish both on FX and rates, with USDTRY forecast above 5.00 and 1yr Xccy swaps above 20% in the forecasting horizon."
0859: Estate agent Countrywide has plummeted 22% this morning after a profit warning saw first-half EBITDA expectations cut £20m, with the “subdued” market outlook blamed.
This is a second quarter in a row that Countrywide has warned on lower earnings, hot on the heels of highly disappointing 2017 results. "With the figure now upped to £20m, are we going to hear a new revised £30m number in September? £40m by year’s end? How low can Countrywide go?" wondered analyst Artjom Hatsaturjants at Accendo Markets.
"The real estate agent’s never-ending troubles come after multiple profits warnings from housebuilders (Crest Nicholson, Berkeley Group) supporting the notion that the UK housing market is in deep trouble. After many years of strong expansion, have the chickens finally come home to roost for Countrywide, with its promises to halve M&A swollen debt and progress in reducing HQ headcount by a third not fooling investors?
"While Countrywide reported that it property pipeline (properties available for sale) has returned to 2017 levels, that’s not exactly anything to be proud of, given the miserable 2017 results. As the Americans say: ‘lipstick on a bull’?"
0838: London stocks have indeed fallen, and the FTSE 100 is down 0.7% at 7,630.24.
Commodities stocks and banks are leading the falls, with Anglo American, Antofagasta, Glencore, Rio Tinto and BP, mingling with Barclays, Lloyds and RBS in the bottom-10.
0754: London stocks are expected to open with a 38-point fall on Monday, with Asia currently bathed in red.
0735: The US-China trade war is back on the agenda as the US Treasury department is reported by the WSJ to be planning to subject Chinese investments in sensitive US industries to greater scrutiny under a law that would declare these investments to be a threat to economic and national security. The ruling would threaten China’s 'Made in China 2025' drive and could therefore lead to an all-out trade war.
Marshall Gittler at ACLS Global notes that the news sent Aussie dollar lower, reducing the large gains that it made on Friday, despite China’s measures to shore up growth.
China cut its reserve requirement ratio (RRR), freeing up local bank lending. Gittler observes that 500bn of the 700bn yuan freed is going mostly to debt-to-equity swaps, in which banks swap their loans in companies for equity, allowing troubled companies to reduce their leverage, with he other 200bn is aimed at loans to small businesses, which are entering into a difficult time as the US-China trade war heats up.
"Overall, the move is one of a series of recent policy actions taken to support growth as economic indicators suggest the economy is slowing just as the trade war heats up. The measures will take effect on 5 July, one day before the first round of US tariffs on Chinese goods goes into effect.
"Personally, I wonder how effective the move will be. It’s not clear to me whether the RRR is a leading indicator of bank lending, i.e. whether a cut in the ratio leads to more lending, or a lagging indicator, i.e. the authorities cut the ratio when bank lending slows. Nonetheless, it certainly won’t hurt."
0734: TD Securities observes that Asian equities slipped and US futures slumped into the red after President Trump announcing the US is looking into restricting Chinese investment in the US. US Treasuries benefited and 10-years are now down 2 basis points to 2.875%. "Crude oil held onto Friday's gains.
"G10 FX swiftly adopted risk-off positioning with JPY +0.44% while everyone else flat to down. AUD the laggard at -0.3% being most exposed to China. Month end and quarter-end also looms large."