US-China trade deal incoming, Quiz has more questions than answers

Morning Note

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 inflation. 

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 fight. 

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. 

Over 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 at 11%. 

For Q4, the forecast EPS is $5.50 based on 22 estimates, according to the Markets.com platform.  

UK equities 

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.