Banks feel the pinch and all eyes on the US.
Weekly market review and outlook: Mergers and interest rates
The week started off with some M&A stories as Just Eat was in agreement to being gobbled up by Dutch group Takeaway.com while The London Stock Exchange announced plans to acquire Refinitiv, a financial data and analytics vendor. Just Group and the LSE both soared, while the LSE was lifted higher by the publication of its latest (very good) results and set new all-time highs. After Sports Direct failed to publish its results on time the previous week having declared at the last minute to its auditor that it had received a large tax bill from the Belgian authorities, investors got their chance to have their say, sending the shares down heavily on Monday morning.
The latest earnings season is fully underway and it is clear that the banks are feeling the pinch from the uncertainty in the global and UK economy, while the increased production rates of the two oil giants BP and Royal Dutch Shell failed to make up for the drop in oil prices during the second quarter. A host of issues at Centrica resulted in the group cutting its dividend and the CEO to announce that he will be stepping down. There were some good news corporate stories though; Next continues to buck the trend on the gloomy high street while Smith & Nephew continue to benefit from increasing healthcare needs around the world and its exposure to China.
However, it was the macro events that the market had been gearing up for, specifically the US Federal Reserve’s much anticipated cut in interest rates, the first since the financial crisis. There were some faint hopes (and demands by Trump) that it could have been a 50 basis point cut, but in the end it was a sensible 25 basis point cut taking the rate to 2.25%. Markets though were much more interested in Jerome Powell’s vision of where rates are heading in the medium term. Ahead of this, up to four rate cuts were being priced in by the year end, but his wait and see stance on economic data, which is still relatively buoyant have dashed these hopes somewhat, leaving risk assets to adjust to the downside. If the latest US jobs figures (published after this article) follow expectations of another 165,000 jobs created during July, the Fed will feel somewhat vindicated.
The Bank of England left rates on hold as expected, but markets again were most interested in the forward outlook. Mark Carney reiterated the bank’s stance that UK interest rates need to rise unless there is a No Deal Brexit.
The unsurprisingly surprising significant event of the week ended up being another tweet from Trump on Thursday evening, slapping another $300bn of tariffs on Chinese imports. Markets weren’t impressed, it sent oil prices plunging and stock markets around the world down by several percentage points by the end of the week.
The week ahead: 5 August -
The upcoming week is a little lighter on scheduled events, the UK will publish the preliminary estimates of second quarter GDP where the consensus is that economic activity slowed significantly, potentially even falling. While the slowing global economy may explain part of this, it is likely to be the lull in activity following the previous Brexit deadline of March 29th that will take most of the blame. Businesses have been using up supplies that were stockpiled ahead of this, the latest set of manufacturing and industrial production numbers for June should reflect this.
Japan also produces its latest set of GDP numbers, activity there too is expected to have slowed materially with the consensus view that they only managed to grow by 0.1% compared to 0.6% in the first quarter.
The trade and tariff wars hit the manufacturing and industrial sectors more directly, the services sector so far seem to be avoiding the negative sentiment. China, the Eurozone and the US all publish their latest services sector PMIs for July, all of which are expected to show a reasonable level of confidence, however the UK’s data set is likely to be the weakest amongst this cohort, just barely expected to expand.
The latest corporate earnings season will still be in its peak, look for results from HSBC, possibly impacted by the Hong Kong protests and lower net interest margins going forward while Rolls Royce could reflect the issues at the airlines and tourism sector, International Consolidated Airlines reports too. Elevated stock markets should help Standard Life Aberdeen, Aviva and Legal & General’s earnings while WPP battles against lower corporate advertising spend and online giants like Google and Facebook.
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