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Investors hang up on Vodafone, Commerzbank shares jump on bid speculation

Having come off the back of big losses yesterday, markets in Europe have rebounded today, helped to some extent by the reduced prospect of an immediate escalation in the US-China trade war, and a slightly softer tone from President Trump in some of his tweets this morning.

There is still a couple of weeks to go until China’s retaliation kicks in on 1 June, and similarly any new US tariffs on Chinese goods won’t take effect until Chinese goods hit US shores in about 10 days’ time. There appears to be a degree of calculation going on here in that investors appear to be banking on any increased tariffs being in place for only a short period of time, with a deal being concluded soon after, hence today’s rebound. Time will tell whether that belief is prescient or naïve.

European market update

The best performers on the FTSE 100 happen to be the miners of precious metals: Fresnillo, Evraz as well as Glencore and Rio Tinto, a sign perhaps that investors remain cautious after the losses of recent days.

The FTSE 100 has outperformed today, reversing all of yesterday’s losses helped by decent rebound across all of its sectors, with Vodafone shares providing the main drag. Vodafone saw its share price fall quite sharply yesterday on speculation that we might see a dividend cut when the company released its full-year numbers this morning.

This speculation proved accurate as the company announced it would be doing just that cutting its full-year dividend by €0.06c to €0.09c, after revenue missed expectations, coming in at €43.67bn, well below expectations of €45.17bn, and sending its shares to a 10-year low. The dividend cut wasn’t entirely unexpected given the rising costs of rolling out its 5G network, which has already cost the company €5.4bn, and could well continue to push its costs up. The company also announced that its 5G network would go live on 3 July this year across seven cities in the UK, and that it is the costs of rolling out and upgrading its network that appears to have prompted the decision to cut the payout. In an attempt to maintain control of this rising debt the company announced the sale of its New Zealand unit yesterday for $2.2bn.

Commercial property and real estate has been under pressure for a while now, as retailers across the country close shops and press for rent reductions in the face of declining footfall on the high street. This is now trickling down into the margins of landlords with Land Securities Group, who run Bluewater in Kent, reporting that losses grew in its latest full-year numbers, with the company making a loss of £123m, up from a £43m loss a year ago. On the plus side revenue increased by 8.9% to £442m, but the company warned that rents were likely to fall further across its retail park and shopping centre portfolio over the next 12 months.

UK consumers' penchant for coffee, bakery, sausage rolls, vegan or otherwise, as well as sandwiches, appears to be padding out the waistline for Greggs, which has once more posted a strong trading update for the first 19 weeks of this year. Total sales rose 15.1%, a rise of 4.7% over the same period a year ago, while overall stores opened rose by 16, with 38 new stores opened and 22 closed. Management expressed their expectation that underlying profits were likely to be materially higher than previous expectations, sending Greggs shares up over 13% to a new record high.

Commerzbank shares have moved higher this afternoon on reports that Italian lender Unicredit is lining up a move, now that the talks with Deutsche have come to an end. Unicredit shares have slipped back, no doubt on concern that having managed to turn the bank around after four capital raises in the last 10 years, management are now on the cusp of repeating the mistakes of the past and over-reaching in their ambition.

This wouldn’t be the first time that Unicredit has considered a bid for Commerzbank, as it’s been a regular feature over the last three years, with the last story in 2017, when the bank raised €13bn. It wasn’t a particularly smart idea then, and while Unicredit’s balance sheet is in much better shape now than it was then, it doesn’t mean that it’s a good idea now especially when it already has a stake in Hypovereinsbank, and the German banking sector remains so low-margined. Any merger would in all likelihood entail significant numbers of job losses to be viable, something the unions might find hard to swallow.

There is also the small matter of the German government's 15% stake in Commerzbank, and while they might be willing to consider selling it, the optics of selling out to Italy’s largest bank might not be politically palatable.

US market update

US markets have undergone a modest rebound after yesterday’s big sell-off despite the US Treasury outlining which remaining Chinese imports would be hit by a new round of tariffs, of 25%.

If these tariffs were to be implemented on $300bn worth of Chinese products, then nearly all Chinese imports to the US would be subject to 25% tariffs with all the spill over effects that would likely have on the US economy, in terms of higher prices.

While today’s stabilisation is welcome, with President Trump insisting that a deal will be done with China when the time is right, investors are likely going to have to wait over a month at the very least to establish whether the President’s optimism is in any way justified.

In any event the President’s softer tone appears to have encouraged investors back into the market as some of yesterday’s biggest fallers reclaim some of yesterday’s lost ground.

The best performers have been in the tech space, with Intel and Cisco helping push the Dow higher,  while recent vegan burger IPO Beyond Meat has continued to hold up well after its record one day price surge from $25, above $70 again. It was also one of the few risers yesterday, as the wheels came off everything else as all things vegan get the investor seal of approval.

This still feels like a passing fad, something that is fashionable rather than grounded in reality on any financial sense. At current market prices Beyond Meat is valued at $4.3bn on revenue last year of $87.9m, and losses of $28.7m, a rich valuation by any stretch of the imagination. 

Uber appears to be getting a brief respite, with the shares edging up as it tries to carve out a short term base, while we’re also seen strong gains in Zoom Video and Pinterest after yesterday’s losses. 

FX analysis

It’s been a mixed day in the currency space today with the Japanese yen weakening on the back of a slightly firmer tone to equity markets, while the pound has continued to come under pressure as it becomes increasingly apparent that the negotiations between the Labour party and the Conservative government are nothing more than a charade.

What’s surprising is that it’s taken markets so long to wake up to it. For now the pound is still above its April lows at 1.2865 against  the US dollar, trading just above 1.2900, however it does appear to be only a matter of time before we return to it, or perhaps even lower.

Commodities analysis

Oil prices have popped higher on reports from Saudi Arabia that its infrastructure was being targeted by drone attacks. While no one has claimed responsibility it surely won’t be long before Iran gets the blame with some US officials looking in Tehran’s direction.

Despite the firmer tone in equity markets, gold prices have managed to hold onto most of the gains from yesterday, which suggests that investors are in no hurry to pare back their holdings in the wake of yesterday’s sharp falls.

In terms of direction of travel it makes sense to hold more gold in the event the wheels do actually come off the equity market rally we’ve seen so far this year.

Cryptocurrencies have also continued their recent surge higher, with bitcoin moving above $8,000 for the first time since last summer’s July peaks at $8,482.


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