US-China trade deal incoming, Quiz has more questions than answers
Just when you thought it was safe to go back in the
water…it turns out that tariffs won’t be lifted as part of the phase one
trade deal between the US and China.
Weighing on risk appetite, reports yesterday said the US
will likely keep tariffs on Chinese goods until after the November
presidential election, at which point they will review compliance with the
phase one deal. It’s a deal Jim, but not as we know it: tariffs are here to
stay. I don’t think Big Ben would be bonging for this one, if the Americans
have an equivalent.
It suggests there will be limited progress in 2020 – perhaps
this is as good as it gets? Indeed, it’s possible that instead we see Trump
threaten China more, dangling the prospect of abandoning the deal and taking an
even tougher stance going into the election. What is not clear the extent to
which this will hurt growth rates and may contribute to upwards pressure on
Treasury Sec Steve Mnuchin confirmed that tariffs are here
to stay, for now at least. “These tariffs
will stay in place until there is a Phase 2. If the president gets a Phase 2 in
place quickly, he’ll consider releasing tariffs as part of Phase 2,” he
said. Mnuchin also said there will be a firm dispute resolution mechanism.
Whilst not specifying the election, it is
unlikely we will get a quick phase two deal. The election seems an opportune
moment to re-evaluate. Moreover Trump has an election and impeachment to
We have certain risks now more clearly delineated (with no
doubt more twists and details to come today).
- the key risk is that phase one is just not as good as the market hoped for – either in content or the processes, timings and mechanisms therein
- China needs to buy $200bn of goods and services over 2 years to comply. Failure to comply risks more tariffs being slapped on, or abandoning the deal. Before the trade war started, in 2017 China bought nearly $187bn in US goods and services.
- Trump could well use this deal only as further leverage, threatening more aggressive tariffs, leaving this deal in tatter
- with phase one baked in, we’d hoped for immediate progress on phase two, but this seems very tricky (though not impossible) with phase one still effectively incomplete – i.e with tariffs still imposed.
However Treasury Sec Mnuchin said tariffs will be in place
until phase two is agreed, indicating there will be efforts to progress talks
speedily – but good intentions don’t butter many parsnips.
US indices retreated from record intra-day highs on
the news. The Dow finished up 0.1% at 28,940 having earlier risen above 29,000,
boosted by a record year for JPMorgan. The S&P and Nasdaq were both a shade
lower at the close having hit fresh intra-day highs in the session.
Treasury yields were a touch lower after US inflation rose
less than expected in Dec, indicating the Fed’s decision to cut was – in their
narrow view of inflation – the correct decision.
Europe – markets are flat and directionless again as
investors wait for the signing of the trade deal today.
Elsewhere, in FX it’s a ghost town. Although we are seeing
just a whisper of the dollar weakening this morning, sideways markets dominate
– EURUSD stalling around the 1.113/4 region, but uptrend remains intact.
GBPUSD has regained 1.30 but with little momentum. USDJPY is still
flirting a few pips either side of 1.10. Gold steady at $1550.
Oil bears remain in control with WTI now struggling
to bind to the $58 handle.
On tap today:
BoE’s Michael Saunders to speak. (Dove, voted for cut
at last 2 meetings) who is likely to reiterate the dovish rhetoric we’ve seen
from fellow MPC members lately.
German GDP 9am. More weakness.
U.K. inflation 09:30 – likely not to be chief driver
now as markets think the BoE is close to cutting come what may.
the pond, earnings seasons continues with Goldman
Sachs numbers due later. After the earnings and revenue beat
for JPM, particularly on investment banking and fixed income, the GS
Q4 figures may be better than expected. GS has markedly lagged JPM over
the last two years but there may be signs that it can claw back some
ground. GS stock has not got near all-time highs again but is starting to
build upwards momentum.
Q3 EPS came in at $4.79 versus the $4.86 expected, and down
sharply from the $6.28 registered in Q3 2018 and from $5.81 in Q2 2019. The
lack of IPO activity saw revenues in its Investment Banking division down 15%.
Return on tangible equity slipped to 9.5% in Q3, leaving the nine months YTD figure
For Q4, the forecast EPS
is $5.50 based on 22 estimates, according to the Markets.com platform.
Persimmon reported lower revenues as it tries to
improve build quality. They’re learning, slowly. FY numbers seem in line with
expectations. Shares were flat to slightly negative.
Ashmore shares rose after it reported +7.1% in assets
under management to $91.9bn, with net inflows of $3.3bn.
Quiz has more questions than answers right now.
Christmas trading was worse than expected, but cost-cutting and a disciplined
approach to promotional activity means profits should just hold up as guided.
Group revenue fell 9.3%, hit by a 7% decline in its U.K.
physical stores, both standalone and concessions. There does seem to have been
a problem with certain third party websites, which led to a 14.8% decline in
online revenues as Quiz terminated relationships with these partners. Sales via
Quiz’s own brand websites rose 5.9%.
It’s been a tough start to life on the stock market for
this little fledgling. It’s been more of a turkey than Aston Martin, with
shares worth less than a tenth of what they were when it floated in 2017.
For the six months to the end of September Quiz made a loss
of £6.8m with group revenues down 5%. Online sales were steady, with
international sales marginally higher. No surprise the UK high street was the
trouble spot with sales down 11% – the fact this has moderated to -7% is the
about the only thing management can cling to.
Store closures are certain. Up to half could go from the
current estate of 75 stores, 171 concessions. Quiz
has battled a very tough retail market, and the disasters at House of Fraser
and Debenhams have hit the brand hard via its concessions. It also seems to
have made some wayward decisions with third party websites. Shares sank 13% on
the open to 16p.