Ugly markets, deals to nowhere, EU-US trade war

Morning Note

Investor confidence has crumbled off the back off a couple of weak US data prints, whilst impeachment talk and geopolitical troubles from Hong Kong to North Korea are not helping. European investors also battling the real prospect of a no-deal Brexit and worries about a new tariff war with the US after the WTO back Washington over the Airbus case.

On the latter, the White House has approved a range of punitive tariffs of between 10% and 25% on everything from malt whisky to aircraft. The UK, France and Germany have been targeted (mutters something about the special relationship). But wait, if EU companies see their US market hit, does that make the UK export even more important…?

The EU may now retaliate, risking a tit-for-tat tariff war that we all know will serve no one. US airlines are unhappy as it will raise the cost of new aircraft they’re already committed to. Delta and JetBlue both decried the tariffs. Airbus shares are higher – the 10% tariff on aircraft is well short of what Boeing had demanded.

Markets have decided that manufacturing is in recession – further escalation of tariffs won’t help.

And with global manufacturing in crisis, today’s services PMIs are utterly crucial to shore up sentiment. The big one will be the ISM print for the US at 3pm. UK numbers are due at 09:30. European final services PMIs are released between 8 and 9.

The reaction to the manufacturing numbers earlier this week has been deeper and more sustained than expected. Yesterday’s weak private jobs print compounded the situation and raises fears that tomorrow’s NFPs will reveal even further slowdown in hiring. 

However, as we’ve been saying for some time, these were markets set up for disappointment. I just didn’t think that manufacturing print would be sufficient to spook the steeds. We may yet see stabilisation once the Fed comes into play. 

European shares are mixed – the FTSE is down a touch in early trade, while the CAC has risen a shade. Investors are looking for direction after the horror show yesterday. DAX shut for a holiday. Signs of stabilisation if not recovery.

The FTSE 100 suffered its worst single day plunge since January 2016. The blue chips dropped 3.23% to 7,122.54 as just about everything was sold.

The S&P 500 skidded 1.8% lower to 2,887 on strong breadth. The Dow shipped 500 points.

Asian markets were weaker as they joined in the rout. Tokyo slid c2%. China is closed for a holiday – they’ll have an almighty hangover when they reopen.

US Treasury yields have been wanging around all over the place the last few weeks and now we’re back to 1.585% on 10s. That’s helped gold, which buoyed by a degree of haven flow and weaker yields, has completed its round trip back to the $1500 level, having been sold off sharply. 

On Brexit, Boris has offered his ‘deal’ to the EU for inspection. But this is a deal to nowhere, and won’t be enough. The bridge to gap is too far. Boris is Brian Horrocks trying to make the Hail Mary pass and save Johnny Frost and his boys. Unfortunately, it’s just a bridge too far.

GBPUSD has driven up beyond 1.23 as the offer was not flatly rejected out of hand by the EU and some MPs came on board. If it’s really full and final then we move on to the next phase and preparations for no-deal. The Benn bill comes to fore again – how does Boris the chess pieces, how does Parliament react? Lots of risk for sterling, a retest of 1.19 before the week is out is not unfeasible. At present it’s retraced to the comfort of 1.2270, resting on its 50day moving average.

Equities

Ted Baker is going through the wringer here. We noted in June at the time of the last profits warning that these warnings seldom come alone and that, following the March warning, a third was not unlikely. And so today the company is reporting a pre-tax loss of £23m, down from a profit of £24.5m last year. Group revenues slipped 2.5% on a constant currency basis. Ongoing consumer uncertainty in a number of key markets and elevated levels of promotional activity have been blamed, creating extremely difficult trading conditions during the financial year to date.  As we noted, profits warnings never come alone, and often in threes.

Imperial Brands – CEO Alison Cooper is to step down. It’s been a tough journey for her in the last year or so and the latest warning was probably the final nail in the coffin. Competitors have stolen a march. Only last week Imperial lowered its full-year revenue guidance to +2% from a previous guidance of 4%. Its vaping business is not growing as quickly as expected – regulatory trouble in the US is the main problem. Back in May the company was already flagging that next generation products were not doing as well in the US as hoped. Cooper is the latest in a string of CEO departures from the FTSE. Not sure it signals anything, but there is something of a changing of the guard happening right now.

H&M – shares in H&M are up over 3% after posting a 25% increase in profits. Solid summer performance with collections well received and a move away from discounting. Sales +8%.