Mexico fix green light for risk, oil rebounds, Thomas Cook carve-up

Indices
Morning Note

It’s a sea of green as stocks rebound on Trump’s Mexican fix. Investors are relieved at Mexico and the US coming to an agreement to avoid the latter slapping the former with tariffs, and this sent equity futures north. SPX closed Friday +1% for the day to cap a remarkable turnaround after a very rocky period. Futures show further gains Monday – looking now for a retest of 2900 –remarkable considering we were sub 2800 just a few sessions ago. Wall Street had its best week since Nov as weaker data cemented the market’s belief the Fed will cut rates – 4 cuts now more likely than 1 in 2019, according to the market. This looks overly optimistic. Futures indicate European shares are positive thanks to the Mexican deal with the FTSE 100 eyeing a return to 7400 and the DAX looking to return to 12,200. 

Tariff reprieve for Mexico

Late Friday the US ‘indefinitely suspended’ tariffs on Mexico after striking a deal. Whilst this is positive for risk assets, one should be cautious that this may only embolden Mr Trump to use tariffs as policy tool for the pursuit of non-economic interests. As previously suggested, the EU could be next – maybe to get the 2% defence spending target.  

Meanwhile as we raised on Friday, the US Treasury Sec Steve Mnuchin criticised China for purposefully letting its currency slide. The thesis is basically ‘no intervention is now intervention’. This has been talked about extensively before. Offshore USD/CNH was last around 6.950 – a little below Friday’s highs – expect the 7 handle to face stiff resistance but the jawboning is pushing it in that direction and suggests the PBOC won’t defend 7 at all costs like we might have assumed in the past. The onshore version sank to its weakest in six months today. 

Data overnight positive – Japan GDP Q1 revised higher, from 2.1% to 2.2%; while Chinese exports climbed in May, an unexpectedly strong performance. 

Dollar steady, oil rebounds

The US dollar was solid on Monday but could come under pressure. EURUSD holding at 1.13 and GBPUSD holding 1.27 but thus far failing to show any further momentum higher.  

Oil was firmer as the recovery in risk sentiment boosted crude. Saudi comments about extending OPEC cuts seem to be helping but largely this is baked in already – it’s the demand side that matters the most right now. Brent was last trading around $63.50. We await to see whether this is just another bear flag or the start of a meaningful recovery. Speculative net long positions fell again to 400k from 439k, indicating traders are continuing to unwind their bullish bets oncrude. E

Ferguson 

Good numbers from Ferguson but cloudy outlook means shares fell about 5%. Ongoing revenue growth of 6.2%, including 8.4% in the USA. Gross margins lightly ahead of last year, rising 20bps to 29.5%. Ongoing trading profit of $359m was $8m ahead of last year. FY guidance unchanged.  

Ferguson remains a play on the US economy, particularly new housing starts. Shares in the company are still subdued following the selloff last autumn and are yet to recover the kind of level we saw in September.  

Fears about the economic outlook in the US are a factor, but the expectations the Fed will cut rates should act as a support. US mortgage rates have come down as yields have retreated to 2-year lows. US new housing starts have picked up in the last two months and confidence has returned to the sector, some of which should be reflected in the Q3 numbers. New home sales dipped in April, but this was from an 11-year high as the market recovered from the disaster in the final quarter of 2018. 

Thomas Cook

 Thomas Cook confirmed that it is in discussions with Fosun following receipt of a preliminary approach. It follows reports over the weekend that 18% shareholder Fosun is ready to pounce for the tour operator business excluding the airline, which it cannot own due to EU aviation rules. As noted on May 16th, when we suggested an approach was in the offing, as once the airline is sold a major obstacle to the Chinese group making a bid will have been removed.

Management says it has received multiple bids, including for the whole, and parts, of the airline business. Triton may make life more difficult for Fosun but whatever the outcome, it seems the writing is on the wall after some bad losses and a ratcheting up in debt levels. First half losses jumped to almost £1.5bn – its biggest ever – as it took a £1.1bn write-down on My Travel. Underlying EBIT losses increased by £65 million to £245 million, which was down mainly to margin pressure in package holidays. Net debt has risen to £1.25bn

Sadly, it rather looks like Thomas Cook will be carved up in some fashion or other. This may not be a bad thing – clearly managing this large, complex holiday business proved daunting. But selling off the various bits of the business is likely to be even more complex.”

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