Europe

It’s been a broadly negative day for markets in Europe today, as trade tensions reassert themselves after the EU announced it was preparing countermeasures to further US tariffs and it was reported that China and US trade talks had stalled.

The FTSE100 has been a bit of an outlier, outperforming due to a weaker pound as companies that don’t report in sterling, pushed higher with Royal Dutch Shell and BP both rising by more than 1%, and Unilever also having a good day, after reporting numbers that were slightly below expectations.

In its latest trading update, the company said a vote would be held on 25th and 26th October on its plans to move its listing to the Netherlands and out of the FTSE100. While management have blamed Brexit, a more probable reason is that Dutch takeover rules are much more restrictive and would make a fresh bid from Kraft Heinz much less likely. The makers of Marmite, Dove soap and Magnum ice cream announced a disappointing Q2 saying that problems in South American markets were holding back its numbers on Brazil and Argentina. Sales rose 1.9% lower than the 2.3% consensus while turnover fell excluding its spreads business declined by nearly 5%. The company kept its forward guidance unchanged.

The worst performers have been mining stocks on the back of weakness in commodity prices with Anglo American and Antofagasta amongst the worst performers, as copper, platinum and palladium prices hit multi month lows. If the global economy is supposed to be growing then commodity prices are telling us a completely different story. Since the beginning of June, all three metals have declined well in excess of 10% and are well below the highs of the year.

Advertising agency group WPP is lower after a disappointing second quarter trading update from French sector peer Publicis, which saw the business report a sharp fall in Q2 sales.

Sky shares have also fallen back after Comcast pulled out of the deal to buy 21st Century Fox assets, saying it preferred to focus its efforts on Sky and a move into Europe. If Disney were to cede on this then the price for Sky would most likely be much less given that Sky would no longer have access to either the Disney or 21st Century Fox content catalogue, which may help explain some of this afternoon’s weakness.

The problems at Debenhams have given Sports Direct a bloody nose today as the company reported a sharp drop in profits after it took an £85m write-down on its stake in the struggling retailer, while the problems at House of Fraser, where the company has an 11% stake haven’t helped either. Profits fell to £77.5m, while UK sales fell 2%. The international business did offer some balm for investors as group revenue rose 3.5%. This doesn’t appear to have appeased investors who have sent the share price sharply lower.

It hasn’t been all negative news on retail today, despite this morning’s disappointing June retail sales data. While the headline number missed expectations some of the internals were very positive. Food retailers had a strong June, with the best three month on three month food growth since May 2001, on the back of the World Cup, as sales of food and drink helped push Tesco and Sainsbury’s up towards the top of the FTSE100.

US

US markets opened lower today on this morning’s reports that trade talks between China and the US, had stalled, and that the EU was preparing a counter response to President Trump’s new round of tariff threats.

On the earnings front IBM posted numbers that beat expectations, with profits and revenues both exceeding forecasts.

Philip Morris the tobacco producer also posted quarterly profits well above expectations while also raising its full year forecast.

On the data front there was more good news with US weekly jobless claims coming in at their lowest level since 1969, the same year as the moon landings.

Comcast appears to have thrown in the towel on acquiring 21st Century Fox, instead choosing to focus on Sky instead as it looks to gain access to the lucrative European market. While this seems a sensible decision given concerns over a bidding war with Disney, the Sky assets are probably worth less given that it wouldn’t have access to the Disney catalogue in the event Disney just acquires the Fox assets.

FX

The US dollar has made another one year high in the wake of Fed chief Jerome Powell’s recent comments to US lawmakers, rising across the board, helped by the latest weekly jobless claims figure coming in at its lowest level since 1969, which has helped push US 2 year yields above 2.6%, a 10 year high, as markets increasingly price in significantly higher US rates in the short term.

The US dollar has also continued to rise against the Chinese yuan amid suspicions that the Chinese are deliberately letting their currency slide in order to mitigate some of the damage that might be caused as a result of an escalation in the trade war with the US.

The strength of the US dollar has also seen the pound slide further to new 10 month lows below 1.3000, despite a week of economic data that has been more good than bad. The political risk premium in owning sterling has risen in recent days as a result of the increasing political gridlock at the top of UK government with respect to the Brexit negotiations. 

The latest UK retail sales numbers for June rounded off a quarter where we saw a significant improvement in UK consumer spending in April and May, though the June numbers fell short despite a football World Cup boost for food, drink and big screen TV’s which wasn’t enough to manifest itself into the headline numbers from the ONS this morning. The latest data showed that June retail sales came in at -0.5%, a number that appears to diverge from a number of other surveys that showed an increase in consumer spending in June.

The weakness of today’s numbers has also thrown some added shade on whether the Bank of England will look to raise rates in two weeks’ time, though it’s unlikely any decision will be swayed by a single data point, which means we may still see a rate move, unless politics intervene in the interim.    

Commodities

The surging US dollar has seen commodity prices slide sharply, with copper prices hitting a one year low on rising concerns over further trade escalations between the US and China.

Oil prices on the other hand appear to be edging back higher again after Saudi Arabia appeared to indicate that it was reaching the limits of its spare capacity, and wasn’t prepared to pump any faster on expectations that it expected to see substantial stock draws in the second half of the year, and that it expected August exports to decline.

This is likely to be bad news for President Trump if he wants to keep a lid on US gasoline prices, ahead of the US midterms in November. If prices continue to edge off their recent lows expect to hear more about a possible Strategic Petroleum Reserve (SPR) release by US officials in an attempt to keep US prices below $70 a barrel.

Gold prices have also remained under pressure with rising yields taking the shine off the precious metal.

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