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US, China trade and Brexit optimism sends stocks to one month highs

The risk on mood that we saw yesterday, which was helped by driven by events in Hong Kong, received another lift in Asia this morning on reports that the US and China were set to resume trade negotiations in October, with face to face meetings in Washington, as the other never ending story, apart from Brexit, played out into its next chapter.

Putting to one side the fact that these talks were supposed to be happening this month, and the fact that this has been a familiar pattern for two years now, markets still prefer to take an optimistic view.

For now it appears that markets are looking to the horizon with optimism, then we’ll probably follow a familiar playbook of another President Trump twitter tantrum, which will send markets lower, before we get more talk of possible talks, which then sees markets rise again, before a rinse and repeat.

At the risk of being cynical we’ve been here so many times before and been disappointed so there is little expectation that this rebound will be any different. There is also the not insignificant fact that tariff levels are well above the levels they were at the beginning of this year, and that more than anything ought to inform markets as to how much progress we’ve made thus far.

Despite all of that markets have seized on the less confrontational tone and are pushing higher this morning on optimism that these talks might actually be different, with the DAX and FTSE100 opening higher, with the DAX pushing up to its highest levels in a month, while the FTSE100 has slipped back on the back of a stronger pound.

As far as the latest Brexit developments are concerned the pound has continued to edge higher, moving to five week highs against the euro as hopes of a Brexit extension increase.

While a lot of the narrative appears to be on how damaged the Prime Minister is after recent events, it surely can’t be that unexpected the way events have panned out, which suggests that this may be part of a wider plan to portray parliament and opposition MPs as obstructionists and wreckers, something that he may well allude to when he speaks later today. As such any further sterling upside could well be limited with respect to whether or not we get an election before or after 31st October.

On the data front German factory orders for July were even more disappointing than expected, plunging 2.7% on the month, and 5.6% year on year.

For most of this year the headlines around UK retail have been of the more dismal variety with announcements of job losses and shrinking margins with one or two notable exceptions. This morning we heard from another of these exceptions as Boohoo.com upgraded its profit expectations in a first half trading update, announcing that group sales growth was now expected to be between 33% and 38%, up from 25% and 30%, with margins expected to remain steady at 10%. As a result the shares have jumped to their highest levels in over two years.

House builder Redrow’s share price is slightly higher after announcing that revenues rose 10% to £2.1bn, in another decent year for the company. Completions rose 13% to 6,443 while profits rose to £411m. Despite the slowdown in the housing market it would appear that some house builders are performing better than others, with Redrow outperforming its peers. Management expressed some caution about the outlook, particularly with respect of changes to help to buy as well as Brexit uncertainty.   

CYBG shares have hit a record low after announcing a further provision of £300m to £450m in respect of PPI, dropping over 20%, becoming the latest bank to up its provisions this week, following in the footsteps of Royal Bank of Scotland and Lloyds Banking Group.

US markets also had a positive finish yesterday, and look set to build on that later today with a positive open with the S&P500 set to open at its highest levels since the beginning of August when President Trump announced the extension of tariffs on the remaining $300bn of Chinese goods to the US.

Slack Technologies are likely to be in focus after the company announced that losses were likely to be a lot higher than expected in the coming quarters, despite higher revenues.

Another new entrant to the US stock market, Zoom Technologies gets a health check, when it announces its Q2 numbers later today, hoping that it doesn’t suffer the same punishment as Slack. It has seen steady progress thus far, from its IPO price of $36, peaking at $107 in June. In Q1 sales more than doubled from the same quarter the year before. It ended Q1 with 58k customers as total revenue rose to $122m with most of that coming from the US.

The company managed to report that cash flow was positive in Q1 and expects to see total revenue for the current quarter to come in at $129m with profits of $0.01c a share. The company said it expects to see total revenue for the year to come in at $535m at the lower end of expectations, and profits of $0.03c a share. With the shares currently up above $90 a lot of good news is already priced in, which means the potential for disappointment is quite high.

On the data front we have the latest ADP employment report which will give us an insight into whether the US economy is showing any signs of slowing down with respect to the labour market, ahead of tomorrow’s US employment report for August.  Expectations are for 148k new jobs to be added, slightly down from July’s 156k.

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