After two weeks of losses, markets in Europe have opened higher this morning despite the Chinese central bank fixing the Chinese yuan above the 7 level for third day in succession. While the direction of travel is clear and that the yuan is likely to weaken further, it would appear that as long as the decline happens gradually, markets are more likely to be comfortable with it.
This also helps explain why European markets are enjoying a bit of a respite this morning and why gold prices are slightly lower. Unfortunately it doesn’t mean that this is likely to continue as investors still remain fearful that the current economic climate is unlikely to improve.
This is borne out in bond markets where yields are still falling, apart from Italy where they rose last week on concerns over new elections.
US markets also finished on the back foot after President Trump suggested that the September trade talks with China might not take place at all, however even here we look set for a modest rebound when trading starts later today.
In company news SSE released a statement on the possible sale of its energy services division. The company confirmed it was in discussions with Ovo Group over the sale of the business that supplies up to 5.7m households in the UK.
Thomas Cook shares have plunged over 20% this morning on concerns that existing shareholders could be diluted further after it was announced that management were in talks over the injection of an extra £150m on top of the £750m already announced. Over the past two weeks the shares have rebounded 200% after Turkish tour operator Neset Kockar built up its stake in the company to 8% in an attempt to gain a seat at the table in the company’s restructuring talks with Chinese group Fosun, who own an 18% stake.
This request for additional capital appears designed to buy the company more time over the winter period, which is normally a quiet period, and with the recent weakness of sterling could well be a difficult period. The deal will also see the company deal with its debt burden, with over half of the debt turned into equity, however the company will still be faced with having to deal with a sector, whose margins are wafer thin, at a time when economic growth in Europe is grinding to a halt. The next few months are likely to be a difficult time for all travel companies, let alone Thomas Cook.
Shipping services company Clarkson also released its latest interim numbers for the first half of this year, and which showed that revenues rose 10% on the same period a year ago to £167.8m, while underlying profits before tax rose by 5% to £20.1m.
The strength of these numbers suggests that, despite concerns about global trade slowing down, that for Clarkson at least, the global freight business looks robust. The company kept its full year outlook unchanged.
National Grid shares appear unaffected in the wake of last Friday’s UK wide power cut, amidst concerns that the company may face possible sanctions, as well as extra costs in the face of criticism that it may need to up its investment in order to ease its ability to transition to new sources of energy supply from renewables.
Tullow Oil is also higher on the back of the results of its Jethro-1 oil well in Guyana which showed that there was significant above expectations potential for net oil pay in that region. With still a number of new wells set to be drilled, this find has made the risk of investing time and effort into this region worth the investment, and significantly assuaged investor concerns over the overall cost.
The pound had a rotten week last week, hitting its lowest levels against the euro since January 2009 after the latest GDP numbers showed that the UK economy contracted in Q2. We’ve seen a bit of a rebound in early trading this morning, with the market negativity looking slightly over done, in the short term.