Despite nervousness about China-US relations and the decision by US authorities to lay criminal charges against Huawei CFO Meng Wanzhou and request extradition from Canada, Asia markets managed to hold up fairly well, with the Nikkei 225 closing the day almost unchanged.
As a result European markets have opened higher, after the sell-off yesterday in the US on the back of disappointing earnings from Caterpillar and NVidia.
Nvidia has been cited as a particular concern after the company cut is revenue projections by $500m, due to Chinese slowdown concerns, however the US chipmaker had been in decline well before concerns about Chinese growth, with the shares down over 40% from its October peaks. This weakness was due to the sharp declines in bitcoin which has hit sales of chips to bitcoin miners. This isn’t likely to change unless cryptocurrency prices start to move higher, something that doesn’t look imminent at this point in time.
The housing market is always one of those bellwethers of the UK economy that offers a good yardstick of how well the overall economy is performing, with the results of housebuilders of a particular interest. This morning’s full-year numbers for Crest Nicholson showed that, despite an increase in sales volumes of 3%, margins declined from 20.3% to 16.7%. This has the effect of dragging profit-before-tax down by 15% in 2018, to £176.4m.
Management pointed to a slowdown in London sales caused by ongoing political uncertainty, as well as higher costs, for the underperformance, but did say that forward sales were strong, and that cost inflation had moderated.
Royal Mail’s latest trading update for the nine months up to Christmas showed that revenue rose by 2%, with management saying that profits are expected to come in at the lower end of between £500m and £530m. As expected, the decline in letter volumes continued to act as a drag, with a decline of 8%. Its parcels division rose 10% in pre-Christmas volumes, and 6% overall, though the increase wasn’t enough to prevent a 1% decline in revenue.
On the outlook front, letter volumes are expected to decline further, by about 8%, though the company kept its overall guidance unchanged. Investors were unsurprisingly unimpressed, sending the shares down to a new record low, as concerns about growth prospects in the UK and Europe increased, on the basis that the management don’t appear to have a coherent plan to deal with an ever-rising cost base at a time when growth prospects remain cloudy.
Domino's Pizza also updated the markets with its latest Q4 trading update, announcing that group sales rose 5.5% in the 13 weeks to 30 December, coming in at £339.5m, as the company posted its busiest ever run-up to Christmas. Like-for-like sales growth rose 4.5%, while sales in the Republic of Ireland jumped 7.5%. The only downside was in its international business, where difficulties in Norway and Germany caused the business to post a loss of £3m-£4m for the current fiscal year, which is expected to bring down overall profits to the lower end of the consensus range of £94-£98m.
The pound is likely to be a particular focus today as the UK parliament gets set to debate and then vote on a series of amendments to Theresa May’s withdrawal agreement and political declaration, as a number of MPs strive to take the option of a 'no deal' Brexit off the table.
The decision by Prime Minister May to throw her weight behind the amendment brought by Graham Brady, chair of the backbench 1922 committee, was a little unexpected and appears to have been designed to split the opposition to her deal, as well as acknowledge that she shared some of the concerns around the Irish backstop, and will try and get EU leaders to reopen the withdrawal agreement, to revisit the backstop.
This is one of at least ten amendments that could be selected by the Speaker of the House of Commons to be debated in the next 24 hours, as MPs try and arrive at a common position that carries a majority. This lack of coherence and consensus has resulted in a little sterling weakness in the last 24 hours, though this shouldn’t be too surprising given that we hit 18-month highs at the end of last week against the euro.
With concerns about a China slowdown at the forefront of investor thinking and the big drop in Nvidia’s share price yesterday, all eyes will turn to Apple’s Q1 numbers later today after the bell, following the falls seen yesterday.
We’ve managed to recover the losses seen at the beginning of the month when Apple warned that a slowdown in China would curb its revenue estimates for the quarter. The cut from $92bn to $84bn caught a few investors on the hop, particularly since the pre-Christmas quarter tends to be a good one for Apple. $84bn is still a decent chunk of change, however there has been some concern that Apple is overreaching on price point, particularly given $1,000 price points.
The decision to revive its cheaper iPhone SE model earlier this month appears to be a nod to the fact that sales are struggling, with particular attention likely to be on the average selling price number, for signs that sales are slowing at the top end. In November this came in at $793, the fourth successive quarter it’s been above $700. A sharp drop here would suggest that demand for the more expensive models is slowing sharply and that a peak in iPhone sales or Apple fatigue is creeping in, as consumers tire of the incessant minor upgrades, and lack of innovation elsewhere.
Despite the positive start for European markets, US markets look set to open lower later today as investors wait for the next shoe to drop on the earnings front, starting with Apple later today.
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