Morning Note: Trade war escalates, Uber IPO caution, IAG profits sag
Tariffs on $200bn worth of Chinese exports were raised to
25% last night. Trump was true to his word, and there is no can kicking. This
marks a sharp escalation in the trade spat, but it’s not gone nuclear yet.
Talks between the Chinese
and the Americans are continuing today, although we don’t hold out much hope of
anything meaningful being achieved this week.
It all tends to suggest Mr
Trump is playing one of his aces in order to force the Chinese into
concessions. His bet is that the US economy can weather any hit from tariffs
better than China. He is probably right but this will not help ease uncertainty
about the global economy. Beijing is weighing whether to retaliate.
Yesterday the S&P 500 bounced off its lows, closing down just
0.3% at 2870.72, having plumbed lows around 2835. The Dow was offside by 139
points on the close,
but was over 400 points lower at one
point. Algos seemed to bidding it up after the ‘beautiful letter’ nonsense.
Oil has rallied, indicating markets have had enough of the selloff.
Brent was last pushing up at 70.75, above the key 70.60 resistance point. The
flag pattern does look like it could be a bullish continuation pattern that is
just about complete – watch for a leg higher. But failure to cement the
tentative gains we see this morning would be bearish – look for the area around
69.50 for support.
Asian stocks bounced overnight and European futures point higher today. Chinese stocks were last about 3% higher – just remember how much these stocks had sold off earlier in the week. There is still hope that a deal will be done.
Uber prices at low end
Uber priced at the bottom end of the range at $45. It’s a
rough time to be coming to the market after the selloff this week but this IPO
exists to a degree in its own bubble. Are you betting on the long payoff? If
not, you may well be disappointed – profits are not coming any time soon.
But shares could yet pop higher today, partly because of
this conservative approach that Uber clearly learned from Lyft’s bumpy ride
post-IPO. I said yesterday (Uber set for big pop despite Lyft worries,
09/05/19) that I would not be surprised if the people selling
Lyft stock are simply doing so in preparation for the Uber listing, so be
careful reading too much into the Lyft troubles. FOMO is a strong emotion.
Nevertheless, my main concern is the slowing revenue
growth. Whatever the cash burn, you’d want to see accelerating top line growth
in a disruptor coming to market.
IAG profits sag
Profits at IAG were hit by
rising fuel costs and a big FX headwind, whilst we see a broader thread across
airlines with margins being competed away. Excess capacity remains a problem,
as we heard from Lufthansa. In fact, we can pretty much regurgitate what we
noted about Lufthansa – lots of competition means no one has the pricing power,
whilst labour costs are a factor, but the biggest headwind right now is fuel
costs, which were up 15.8%. Non-fuel costs were 0.8% higher.
Although passenger revenue growth was at a healthy
clip, up in excess of 5%, first quarter operating profit slumped to
€135 million before exceptional items, which was down 60% from a year before on
pro forma basis. Profits after exceptional items – which were zero in Q1 – were
down 86%. FX headwinds knocked €61m from the bottom line. 2019
operating profit is seen in line with 2018 – which means no growth in the year