US and Eurozone spending and confidence, Best Buy earnings

Week Ahead

Welcome to your guide to the week ahead in the markets.

Has COVID-19 peaked?

Markets will of course remain susceptible to news surrounding the COVID-19 outbreak over the coming week. The number of new cases recorded daily had slowed towards the end of last week, but an outbreak in South Korea reignited fears of a global spread. Over 75,000 cases and more than 2,100 fatalities had been reported by the end of the week. An acceleration of cases outside of China could prompt further flights to safety, but otherwise the market seems relatively confident that the outbreak is contained and that stimulus from Beijing and the PBoC will soften the economic hit.

US GDP, durable goods, personal spending

Members of the Federal Reserve were feeling confident about the state of the US economy during their last policy meeting, according to last week’s minutes. The FOMC thinks the outlook has gotten “stronger”, and the coming week offers plenty of data to either challenge or support that view. CB confidence is expected to have ticked higher in January, durable goods orders to have fallen –2%, and core PCE to remain stable on the month. While personal income growth is predicted to have risen, spending is likely to have weakened. A second estimate of Q4 GDP is likely to hold steady at 2.1%.

Eurozone, Germany confidence, flash inflation

The euro could be facing more headwinds this week after sliding to multi-week lows against the pound and multi-year lows against the dollar last week. Sentiment data from Germany and the bloc is expected to soften, mirroring market concerns over the health of the bloc’s economy following some poor industrial data. Flash inflation figures for the Eurozone and Germany are unlikely to make inspiring reading; even if price growth in Germany has strengthened towards the ECB target again, the wider Eurozone reading remains far behind.

Earnings: Best Buy, Bayer

Best Buy reports earnings before the open on February 27th. The stock has put in a strong performance over the last six months, rallying around 40% compared to 15% gains for the retail-wholesale sector and 18% for the S&P 500 index during the same period. Best Buy has delivered 11 earnings beats in the past 12 quarters and beat expectations by over 9% in each of the past two quarters.

Bayer also reports earnings on the 27th. The stock is up 45% from the June 2019 low of 51.90, and was last trading around 75.00.

FTSE in focus on deluge of FY results

Earnings reports will be a key driver of UK stocks over the coming days. A deluge of full-year results for 2019 from blue-chips including Standard Chartered, British American Tobacco, Rio Tinto, Persimmon, Taylor Wimpey, RSA Insurance and Meggitt provide clear risks for the FTSE 100 index over the coming sessions. A slew of reports from FTSE 250 constituents throughout the week could also affect the general sentiment around UK plc.

Heads-Up on Earnings

The following companies are set to publish their quarterly earnings reports this week:

24th Feb – 09.00 GMTGerman IFO Business Climate Index
24th Feb Associated British Foods Pre-Close Trading Statement
25th Feb – 12.00 GMTManchester UnitedQ2 2020
25th Feb – Pre-MarketHome DepotQ4 2019
26th Feb – 06.00 GMTRio TintoQ4 2019
26th Feb – 08.00 GMTDanoneQ4 2019
26th FebTaylor WimpeyFY 2019
26th Feb – Pre-MarketLowe’s CompaniesQ4 2019
26th Feb – 15.30 GMTUS EIA Crude Oil Inventories
27th Feb – 00.30 GMTAustralia Private Capital Expenditure
27th Feb – 04.15 GMTStandard CharteredQ4 2019
27th Feb – 06.30 GMTBayerQ4 2019
27th FebPersimmonQ4 2019
27th FebRSA InsuranceFY 2019
27th Feb – 10.00 GMTEurozone Sentiment Survey Results (Consmer, Business, etc)
27th Feb – After-MarketAutodeskQ4 2020
27th Feb – 13.30 GMTUS Q4 GDP 2nd Estimate, Durable Goods Orders
27th Feb – 15.30 GMTUS EIA Natural Gas Storage
27th Feb – Pre-MarketBest Buy Q4 2020
28th Feb – 10.00 GMTEurozone Preliminary Inflation
28th Feb – 12.30 GMTUS PCE Index, Personal Spending, Personal Income
28th Feb – 13.00 GMTGermany Preliminary Inflation

European equities rise as China eases

Forex

Police in Hong Kong are investigating an alleged toilet paper heist, amid a shortage due to the coronavirus outbreak. Things are bad when loo roll becomes currency.

It’s a dull old session out there today: European shares were a little indecisive at the start of play following a mixed bag overnight in Asia, but are leaning higher with stimulus from China helping to lift the mood. Basic resources stocks were among the biggest gains on the FTSE as the blue chip index moved to try to reclaim the 7500 level, last some way short at 7445.

Shares in Hong Kong and Shanghai advanced as China cut a key medium-term interest rate, while Tokyo shares slipped on growth concerns. Markets are betting this will be only a part of a wider stimulus programme to offset the economic damage wrought by the Covid-19 coronavirus – the PBOC has already been injecting liquidity and there will no doubt be more to come. China reported another 2k cases by Sunday night, taking the total to more than 70k.

US stocks finished higher for the second straight week. Markets in the US will be closed today for Washington’s birthday but have rolled into the holiday in fine fettle. Industrial productions were weak, down 0.3% in January, largely down to Boeing. Ex-aircraft production, factory output rose 0.3%. Retail sales showed the US consumer started the year in decent shape, with headline sales +0.3% month on month.

There are growing fears about the economic impact. Japan’s economy shrank at the quickest pace in six years in the last quarter of 2019 – down 6.3% as the consumption tax hike hobbled the economy far worse than thought.

Most think to hit to tourism and exports resulting from the outbreak will mean the economy contracts again in the March quarter, pushing Japan into recession. Meanwhile Singapore has slashed its growth outlook for 2020.

Oil is higher above $52, having closed last week well. Look like a base has been formed at $50, looking to cement gains north of last week’s highs at $52.2.

In FX, there are tentative signs of stabilisation and basing for EURUSD. Speculators have not been this net short since Jun 2019, with net shorts at nearly 86k, contracts so the short-euro trade is very crowded. As ever this CFTC data is a week old so I wouldn’t be surprised if the next set of data showed deeper net shorts towards 100k corresponding to the dove under 1.0880. The inverted hammer on Friday suggests near term reversal but until 1.09 is reclaimed the bears remain in control.

Sterling is giving a gallic shrug to some French fighting talk vis-à-vis Brexit trade talks. GBPUSD is steady at 1.3040, with support at 1.30 and near-term resistance seen at the 50-day moving average at 1.3070.

Apple Q1 earnings preview: Spotlight on China, 5G, Wearables, Services

Apple (AAPL), which reports fiscal 2020 first quarter earnings today after the close, has declined somewhat from its all-time highs in the last couple of sessions, but the stock is still up by around 100% since its profits warning a year ago. Over that time we have seen a massive rerating in the stock despite fears iPhone sales are not going to be what they once were. This is largely down to one thing – Services. But there is also a sense that iPhone sales are going to be materially higher than feared a year ago, and with the 5G refresh cycle promising to be a super-cycle, there is plenty of fundamental support for shares to be trading where they are.

Fiscal Q1 earnings per share are expected at $4.55, from $4.18 a year before, on revenues of $88.4bn, from $88.3bn a year ago. 

At the time of its Q4 19 release, Apple guided revenue to be between $85.5 billion and $89.5 billion, with gross margin between 37.5% and 38.5%. 

Momentum coming into this quarter is positive – Apple posted record Q4 revenues despite slower iPhone sales and guided for a very strong holiday quarter. Earnings per share beat handsomely at $3.03 vs $2.84 expected and up 4% year on year. Revenues jumped 2% to $64bn.   

On a trailling 12-month (TTM) basis Apple’s PE has soared to 25 from around 11 last year. The Services-led re-rating may have already happened, although there could yet be a little more upside. 

Q1 Key themes 

Coronavirus/China – investors will pay close attention to what management have to say about the impact of the virus on demand in China, as well as on operations/production. Apple may have to revise its Q2 forecasts for Greater China lower – this could be an important steer for the broader market in terms of the outbreak’s impact.  Most of Apple’s products are made in China, while the country accounts for about 16% of global revenues. Chinese exposure has the potential to dent the stock whatever the Q1 earnings turn out to be if the guidance is soft.

Services/Apple TV+ 

We’ve had decent indications from the Services side of the business indicating that its pivot to being more of a Services business is in full swing. App store customers spent a record $1.42bn between Christmas and New Year, 16% up on last year, the company has said. Management also revealed that Apple News is drawing over 100m monthly active users across the US, UK, Canada and Australia. Services is accounting for an increasingly large chunk of earnings, supportive of the recent multiple expansion. However we may see margins hit by content creation investment with Apple TV+ – investors will be keen to hear how this service has performed on launch. Services growth has pulled back a touch in recent quarters and could further slow.

iPhone sales matter a lot less 

The fiscal first quarter is always Apple’s strongest as it chalks up the holiday season and new iPhone models. But sales are less important than in the past. We’ll be looking for any guidance from management on the year ahead and, crucially, the potential super-cycle 5G refresh when it happens. Apple’s first 5G phones are due this year, although there is talk of delays to get the fastest devices to market, so any guidance on this will be key.

The improvement on both top and bottom line in the fiscal fourth quarter came despite a 9% drop in iPhone sales. Whilst that’s not as bad as the 15% type level seen recently, it shows how much of the lifting is now being done by other parts of the business. It suggests Apple is reaching an inflection point where it’s no longer dependent on the iPhone for EPS growth. This is across the board a positive. Indeed for 2019 as a whole, iPhone sales fell 14% but the stock was up 89%.  

Wearables  

Apple has been increasingly talking up its Wearables business as this has been a particularly strong performer. Wearables, Home and Accessories knocked it out the park in Q4, with sales up 54% to $6.52bn. This was by far the fastest growing segment and will account for an increasing percentage of sales, currently c10%.  

American consumers

Q4 confirmed that the US consumer remains strong. Indeed, almost all the growth came from the Americas, which is dominated by US sales. American consumers still look in good shape. Sales in Europe, Japan and Greater China fell.  We will look to the holiday quarter to see whether international demand is improving again.

Holiday quarter could be record breaking  

Guidance for the fiscal first quarter was bullish, and Apple could mark a record for quarterly revenues. Apple is guiding revenue of between $85.5 billion and $89.5 billion. Early indicators suggest the iPhone11 is performing well with consumers. Favourable comparisons in China from last year are assured, given the previous year’s downswing in iPhone sales in the region.   

Stock overbought 

The stock has run up quite a head of steam to top $320 before pulling back a touch. We noted on Jan 8th a potential topping pattern on the chart as it fails to make new highs and the 14-day RSI indicating overbought conditions, while noting that MACD could also be turning.  Indeed since then we have seen the daily MACD turn lower below the signal line and the RSI divergence played out with a pullback last week and into this week. On a weekly chart, the RSI and MACD show the stock is hyper-extended and trading well north of its long-term moving averages. Further pullbacks could occur if the earnings are not least in line with expectations.  

Netflix beats, Tesla climbs

Netflix posted an earnings beat and better-than-expected net subscriber additions, but softer guidance on net adds was a slight drag. Shares rallied 2% after market. US net adds were mildly disappointing but growth in international markets was well ahead of forecast.

The company needs subscriber growth to be maintained at least at these levels, but the softness in the US – where net adds missed slightly – are a worry. Higher prices and competition are affecting consumers in the US. The good news is that international growth is exceeding expectations, which should more than compensate for plateauing in the far more mature US market. 

We’ve yet to see how competition from the likes of Apple and Disney will really affect subscriber growth. The guidance from Netflix suggests competition is going to be more of a worry going forward, as we would anticipate, but the proof will be in the 2020 numbers. As noted in our preview, consumers are meeting a sudden explosion of choice in streaming services that did not exist a year ago. This is relatively new and uncharted waters for Netflix. Instead of winner takes all, Netflix will need to be content to be primus inter pares, the first among equals. 

Tesla hit the $100bn market cap – a level which if maintained will trigger Elon Musk’s options package – in extended trading. The stock jumped 7% in the normal trading session, before adding a further 1.3% after hours to hit $555 and become the first car maker to achieve a $100bn valuation. Earlier New Street Research raises its price target on Tesla to $800. Tesla reports Q4 numbers on Jan 29th – see our preview for more.

Sainsbury’s boss Mike Coupe at last read the writing on the wall, bit the bullet and fell on his sword after the Asda merger debacle. As I noted last May: will Mike Coupe fall on his sword after the Asda deal failed? Or will he embark on a major turnaround of the business? I would feel the former is more likely. Questions persisted over his leadership after the CMA blocked the deal – to be fair it looks with the appointment of Retail and Operations director Simon Roberts as his successor, the passing of the baton by Coupe has been long in the planning. Coupe pulled off the Argos deal with aplomb, but he will be remembered for the Asda disaster – a hubristic and entirely obvious failure from the get-go. It also left management with their eyes off the ball just as margins really were pressured and as Tesco, Morrisons and the German discounters got their act together. But on the plus, there have been some, minor tentative signs of improvement in the core grocery division of late that his successor will want to accelerate sharply. Competition is fierce, but it’s not just discounters like Aldi and Lidl parking their tanks on Sainsbury’s lawn. Sainsbury’s did well when Tesco was facing problems and Morrisons was a long way short of where it is now. Both of those have undergone impressive turnarounds, Having put all its eggs in one basket with the Asda merger, a new boss is the right course of action.

Burberry – Good numbers here with an upgrade to the 2020 forecast, Revenues now seen rising by a low single digit percentage point, versus pervious guidance to remain flat. China sales picked up with Mainland China sales up in the mid-teens, but the strife in Hong Kong bit as sales halved.

EasyJet up 5% on upgrade

After Ryanair delivered a major profit upgrade, EasyJet also seems to have been a beneficiary of more solid demand and a more favourable capacity environment. To wit, the collapse of Thomas Cook has been a boon for low-cost airlines that operate in regions vacated by the defunct tour operator. 

EasyJet upgraded its outlook to a key revenue metric with the benefits of the Thomas Cook failure, cost discipline and better ancillary revenues partially offset by French strikes. To be fair, if any airline worried particularly about strikes in France they are in the wrong game; it goes with the turf. For H1 management expect revenue per seat to increase in the mid to high single digits, compared to previous guidance of low to mid-single digits. Headline loss for H1 is seen better than the -£275m in 2019. FX moves are seem having a £70m positive impact on headline profit before tax.  

EasyJet is probably the biggest gainer from Thomas Cook’s collapse, particularly as it bagged lucrative airport slots. EasyJet snapped up 12 summer and 8 winter slots at Gatwick, and 6 summer and 1 winter at Bristol for £36m. Strikes at BA and Ryanair have also been to the benefit of EasyJet. 

Considering the profit upgrade announced in October, it’s been quite the turnaround since last May when EasyJet was warning about higher fuel costs, overcapacity in the market, the pinch of rising labour costs and FX headwinds all hitting margins. 

Key stats for quarter to end of Dec 2019 

  • Total group revenue for the quarter ending 31 December 2019 increased by 9.9% to £1.425bn. Passenger revenue increased by 9.7% to £1.124bn and ancillary revenue increased by 10.8% to £301 million. 
  • Passenger numbers in the quarter increased by 2.8% to 22.2 million, driven by an increase in capacity of 1.0% to 24.3 million seats. Load factor increased by 1.6 percentage points to 91.3%. 
  • Total airline revenue per seat increased by 8.8% at constant currency, outperforming expectations.  

Ryanair upgrades, Superdry and Joules miss

Ryanair has defied fears about the airline market suffering from weaker demand and too much supply. Management today has reported a stronger than expected Christmas and New Year. Forward bookings Jan to Apr are running 1% ahead of this time last year, and Ryanair believes this will result in slightly better than expected ave. fares in Q4, while full year Group traffic will grow to 154m (previously guided at 153m). On the negative side, Laudamotion is underperforming, with average fares lower than expected despite the solid traffic growth and load factors. Price competition with Lufthansa is to blame. Forecast net loss widen from under €80m to approx. €90m.

As a result management has raised Full Year profit guidance from €800m – €900m, to a new range of €950m – €1,050m.

This is a big improvement from the Nov update, when we noted: “First half revenue grew 11% to €5.39bn, with profits flat at €1.15bn. But fares were down 5%, due to the weak consumer demand in the UK and overcapacity in Germany and Austria. Ryanair is facing headwinds from lower fares, higher fuel bills and rising staff costs. The fuel bill rose 22% (+€289m) to €1.59bn, on +11% traffic growth.  Ex-fuel unit costs rose 2%, largely because of higher staff costs, increased pilot pay and higher than expected crew ratios. Faced with these headwinds Ryanair will need to cut costs.”

Ryanair remains very well placed to take advantage of consolidation in short haul European air travel. But its low cost model is facing headwinds.

JD Sports continues to perform. In a short trading update that offered little in the way of detail, management stuck to full year group headline profit before tax being in the ‘upper quartile’ of current market expectations, which range from £403 million to £433 million. From the tone of the statement it seems it was tough in the UK in the Christmas period but they think overseas sales are better and will follow through into January numbers. So I think we need to wait and see how this pans out.

JD Sports has a lot of work to do in cracking the US with its Finish Line fascias but there is hope that management is well experienced enough to achieve it. The problem is the shares are priced for perfection and with the big brands shifting more and more to direct sales, the US will be difficult. But betting against Cowgill and co has not paid off yet. Shares could dip.

Betting against Superdry on the other hand….has worked out pretty well. In an update today management say the peak trading performance has been lower than expected as the business continues the ‘strategic transition to a full price stance’. As we noted with Marks and Spencer, discounting is murder if you don’t have the brand power to avoid it. Superdry saw lower than anticipated retail sales of £23m since Black Friday, predominantly online.

The numbers are woeful – group revenue -15.8%, in-store revenues -18.5% and wholesale revenue -16.9%. E-commerce revenues dropped by more than 9%. Profits are now see between £0 and £10m. Shares could be down around 20% on this. Julian Dunkerton has an awful lot of work to go – does the full price strategy actually have legs? Sales are being hammered – margin gains may be for nought.

Joules’ run of luck has come to an end. Posh wellies may be a niche market after all. Full year profit before tax will be significantly below market expectations. Retail sales over the seven-week period to Jan 5th were significantly behind expectations and decreased by 4.5% against the prior year. A weak online sales performance was to blame, which management explains was “due to an internally generated stock availability issue through the important end of season sale event, the cause of which has now been addressed”. In other words they mess up on stock just like Marks & Spencer did. Too many posh wellies? Not enough polo shirts? Who can say, but shares seen at least -10%.

Anglo ‘rescues’ Sirius, Sainsbo’s makes grocery progress, Greggs performance baked in to shares

Anglo American is to play white knight to Sirius Minerals. Anglo is in advanced talks to but Sirius for 5.5p a share, valuing the business at £386m. The offer is a roughly 40% premium to yesterday’s close price although we can hardly call that undisturbed. AAL has until Feb 5th to make a firm offer. AAL shares were down 2.25% on the news – the project still requires major investment.

Shares in SXX jumped 35% after Anglo confirmed its bid – there was bid for the stock yesterday clearly as news of the offer leaked. Whilst this is great news for the holdouts and many retail investors still clinging to the stock, the valuation is still barely a tenth of what it once was.

If anyone can, Anglo can. As one of the largest miners in the world, it has the financial clout and expertise to make this project happen. We also wonder whether the government may have offered certain assurances. The fact this offer is public could make raising cash for other sources very tricky now, if not impossible, forcing SXX into something of a corner – even if the price is not the best they will have to accept it. The market knows they need cash ASAP but with this offer on the table, it’s now the only show in town – they have to recommend it or it’s curtains. Anglo is picking up a distressed asset on the cheap.

Sainsbury’s numbers don’t look fabulous but grocery remains broadly positive with a second straight quarter of growth amid a very challenging market. The problem lies with Argos.

Total grocery sales rose 0.4% but general merchandise (Argos) was down 3.9%. This was more disappointing than expected and seems to be down to a poor performance in toys and gaming. Clothing was very strong at +4.4% and delivered a particularly robust online performance.

That left total like-for-like sales -0.7%, which was broadly in line. Whilst, as we noted in November, tentative signs of recovery in the core grocery division, it cannot be ignored that under Mike Coupe the business has delivered five straight quarters of LFL sales declines (ex-fuel). Whilst Q2 showed some arresting in the decline, Q3 has not continued in the same vein. Shares were up and down around the flat line in early trade – it’s hard to really make a case for these results changing the narrative meaningfully – I think most of us would have hoped for a little better but grocery is good.

Greggs delivered again with another upgrade to add to November’s. Company-managed shop like-for-like sales were 9.2% with total sales up 13.5%. Fourth quarter like-for-like sales grew by 8.7%. Full year profits seen slightly higher than previously expected. Despite exceptionally tough prior year comparisons trading remains remarkably strong and with plans for more outlets there is still some growth in there, albeit you have to assume the kind of double digit growth won’t last. Shares dipped 3% on profit taking for sure. But with the company now valued at £2.4bn, is all the future growth fully baked in?

Equity roundup: Aston Martin and Morrison

Morrison’s lean Christmas 

It was a lean Christmas at the Morrison household but the grocer managed to stick to profit forecasts and is upbeat about the year ahead. Group like-for-like sales excluding fuel were down 1.7% in the 22 weeks to Jan 5th, with retail responsible for all of this decline whilst wholesale was flat. Total sales fell 1.8% over the period – although it’s interesting that it’s chosen not provide more specifics on the performance over the key Christmas period. 

Q3 was also soft with group LFL –1.2%, with wholesale contributing –0.1 percentage point to the decline and retail adding –1.1%. Management described trading conditions as exceptionally challenging. Aldi’s numbers support the case that consumers tightened their belts over the festive period a little more than expected. Nevertheless, decent cost control means 2019/20 profit before tax and one-off items is still expected to be within the current range of analysts’ forecasts. 

So, first out the gate among the big four listed grocers and Morrisons passes the test – trading was tough and for sure they are leaking market share to the discounters, whilst the election in December certainly had an impact.

But MRW hit forecasts and shares have bounced 3.5% as a result following a bit of selling on Monday in the wake of the Aldi numbers. The read across has been felt in the sector with TSCO up a touch, SBRY also doing well. Marks and Spencer shares have jumped 4% as Berenberg raised the stock to buy from sell.

Kantar data has also crossed the wires and confirm it was a tough old patch for supermarkets. Tesco sales -1.5%, SBRY -0.7%, Asda -2.2%, MRW -2.9%. Discounters continue to gain ground.

Nielsen numbers meanwhile indicate grocers endured the worst Christmas period since 2014. Again Sainsbury’s looks to have held up better with sales -0.4% over the 12 weeks to Dec 28th, while Tesco -0.9% and Morrisons -.2.5%.

So far it seems Christmas was a bit lean for supermarkets and there was not the hoped-for big post-election splurge, but perhaps it was not quite as bad as feared.

Aston Martin: Stroll on 

Profits warnings never come alone – they usually come along like buses in batches. True to form, following a warning last summer and sailing pretty close to one in November, Aston Martin is warning profits will be between £130m and £140m, about half the £247m last year. Shares dropped 13% to £4.53.

The numbers are pretty horrid, albeit retail sales rose 12% (heavy discounting when buyers can see multiple models on the forecourt is impossible to avoid). 

  • Core wholesales declined 7% year-on-year to 5,809 
  • Year-end cash balance was £107m, giving expected net debt and leverage ranges of £875m-£885m and 6.2-6.8x respectively.

That net debt figure is a major concern. The only good news is the DBX order book has risen to 1,800 which means Aston can unlock an additional $100m in 2022 notes. This is a drop in the ocean though and for sure Aston needs to raise cash in some way. The bond market looks unpalatable but even an equity raise could prove tricky. The rationale to go private is impossible to resist – the brand still has the cache to make it appealing. Stroll on.

Grocers have little to cheer from Aldi numbers

There is little to cheer in the Aldi numbers for the UK’s big grocers. Shares in Tesco (TSCO), Sainsbury’s (SBRY), Marks & Spencer (MKS) and Morrisons (MRW) were all notably softer after Aldi delivered a disappointing Christmas trading update. Whilst we should always take numbers from private companies with a pinch of salt, the performance does not suggest that the big 4 listed supermarkets experienced a tremendous festive bounce. 

In the four weeks to Dec 24th, sales at Aldi rose 7.9%, which was below the 11% rate we saw across the whole of 2018. It also fell short of the 10% in the same period of 2018. Like-for-like sales were said to be positive but no figure was provided – for sure almost all the growth is coming from new stores. We know that margins are being hit hard too as it a) expands and b) keeps prices down. 

Investors are braced for a lacklustre Christmas for the big 4 listed supermarkets, but this points to arguably a bigger slowdown than had been expected. If even the discounters are seeing growth rates decline, we should expect similar for the larger names – it is hard to imagine they are picking up market share back from the Germans. Moreover, if Aldi’s growth slipped despite 47 more stores operating at the end of 2019 versus the start of the year, we should expect a poor Christmas performance across the piece. 

The election may have had an impact, shortening the period in which UK consumers were prepared to splash the cash on groceries for Christmas. Undoubtedly the election will have reduced the overall spend in Dec – the question is just how much.

Dates for the diary 

Jan 7th – Morrisons Christmas trading statement – could be tough – particularly in retail which has been underperforming with the overall numbers held up by solid wholesale performance.

Jan 8th – Sainsbury’s Q3 trading update  – Signs that the worst may be over as management take their heads out of their Asda deal and refocus on core grocery division. LFLs have just about started to head in the right direction again.

Jan 9th – Tesco Q3 and Christmas trading update, Marks & Spencer Q3 trading update. The former is likely to do OK but serious question marks over whether Marks can deliver on the food front. More worrying for Marks is Clothing and Home which the Nov update showed were in a real mess. Could be grim.

No deadline for China trade deal

Equity markets in Europe and US futures were hit as Donald Trump upped the ante again on trade, warning that there is no deadline for doing a deal with China and that it’s probably be better to wait until 2020 and even after the November presidential election to agree terms. The chances of a deal by Dec 15th just took another turn lower.

Markets simply aren’t priced for this; for a trade deal to be that far in the future – if one can even be struck at all. After weeks of making generally positive noises on a deal being very close, there is a real sense now that a deal is not so very near at all and markets need to reprice. Combined with the barrage of tariff threats on the EU, the comments can be taken as a sign that the White House has no qualms about levying further tariffs and is happy about using trade as a economic, political and diplomatic weapon.

Of course, Donald Trump’s shoot-from-the-hip comments in these kind of interviews need to be taken with a dose of salt – we could just as easily see him row back on this later, as has happened countless times already. We’re only ever a tweet away from saying that a deal is very close to see a rebound. However, it’s clear that hopes for even a skinny deal being done this year have diminished in the last two days and markets are reflecting this.

Meanwhile, France has promised a strong response to the plans to hit $2.4bn of French goods with 100% tariffs. It’s worth noting that while the chance of a meaningful escalation in EU-US trade spats – tit-for-tat tariff hikes – is relatively low, it’s clearly a risk.

Dow futures fell 100 points to test horizontal support at 27,660 and bouncing off that level to pare some losses, with the cash market eyeing an open down c90pts around 27690 as of send time. Meanwhile European markets were also hit, although the DAX remains in positive territory. The FTSE 100 is having a hard time, down more than 1%.

Tariffs are very much the talking point:

  • The US government may levy a punitive tariff of up to 100% on $2.4 billion in imports from France, including cheese and Champagne (Christmas is cancelled). This is in retaliation for France’s digital services tax that targets the big US tech giants.  
  • The White House also threatened the EU with a fresh round of tariffs in relation to the Airbus case. Whilst the US has already slapped tariffs on $7.5bn of EU goods, the US trade representative threatened to go beyond that. 
  • Tariffs on imports of steel and aluminium from Brazil and Argentina will be re-imposed in retaliation for ‘massive devaluation’ of their currencies. Nonsense of course – quite clearly they couldn’t manipulate clay. 
  • Meanwhile no real signs of progress on that all-important phase one deal with China by Dec 15th, although the US may still kick that can down the road. 

Probably three salient points in this to bear in mind. 

  • What we are seeing is the weaponization of trade and using it for diplomatic purposes. It is no coincidence that these announcements come as Trump lands in London for the Nato summit and a chance to demand European allies spend more on defence.  
  • It will also draw attention away from the Chinese talks, which clearly are not yielding the necessary outcome as far as the White House is concerned. US support for Hong Kong protesters has not helped build bridges and we have seen China retaliate in its own way. Beijing seems sensitive to conflating anything about Hong Kong with trade talks though. 
  • And, three, it’s a clear signal to Beijing that Trump is not shying away from tariffs – as he said yesterday – if there is no phase one deal the tariffs will go up. 

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Products

  • CFD
  • Strategy Builder

  • Clients’ funds kept in segregated bank accounts
  • Electronic Verification
  • Negative Balance Protection

Markets.com, operated by TradeTech Markets (BVI) Limited (“TTMBVI”) Regulated by the BVI Financial Services Commission (‘FSC’) under licence no. SIBA/L/14/1067.

FCA (UK)

Products

  • CFD
  • Spread Bets
  • Strategy Builder

  • Client’s funds are kept in segregated bank accounts
  • FSCS Investor Compensation up to GBP85,000
    *depending on criteria and eligibility
  • Negative Balance Protection

Markets.com operated by TradeTech Alpha Limited (“TTA”) Regulated by the Financial Conduct Authority (“FCA”) under licence number 607305.

ASIC (AU)

Products

  • CFD

  • Clients’ funds kept in segregated bank accounts
  • Electronic Verification
  • Negative Balance Protection

Markets.com, operated by Tradetech Markets (Australia) Pty Limited (‘TTMAU”) Holds Australian Financial Services Licence no. 424008 and is regulated in the provision of financial services by the Australian Securities and Investments Commission (“ASIC”).

FSCA (ZA)

Products

  • CFD
  • Strategy Builder

  • Clients’ funds kept in segregated bank accounts
  • Negative Balance Protection

Markets.com, operated by TradeTech Markets (South Africa) (Pty) Limited (“TTMSA”) Regulated by Financial Sector Conduct Authority (‘FSCA’) under the licence no. 46860.

Selecting one of these regulators will display the corresponding information across the entire website. For more information click here.

Marketsi
An individual approach to investing.

Whether you’re investing for the long-term, medium-term or even short-term, Marketsi puts you in control. You can take a traditional approach or be creative with our innovative Investment Strategy Builder tool, our industry-leading platform and personalised, VIP service will help you make the most of the global markets without the need for intermediaries.

Share Dealing in the Markets Group is only offered by Safecap Investments Limited regulated by CySEC under license number 092/08. We are now re-directing you to Safecap’s website.

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