Equity markets are set to finish sharply lower this afternoon on account of the strained US-China relationship. 

Europe

The situation between the US and China has been brewing recently. Tensions have been on the rise in relation to Hong Kong – as the Chinese government is tightening its control over the region. This week, the US government closed a Chinese consulate in Houston, and as a response, the Chinese government ordered the US consulate in Chengdu to close. To add to the mix, Mike Pompeo, the US secretary of state,called on the US’s allies to end the ‘blind engagement’ with China. The politician was critical of the Beijing administration and traders are running scared as they fear a further deterioration of the relationship between the two nations is on the cards. Earlier in the week, the FTSE 100 was above 6,300 and the DAX 30 was north of 13,000, so dealers have been quick to trim their exposure to stocks.      

Centrica has been struggling for years as tougher competition in the energy provider market has led to smaller outfits poaching customers from the bigger players. The rise of comparison sites like MoneySuperMarket has fuelled this activity. The Centrica share price has tumbled more than 85% in almost seven years as the company has gone from bad to worse. As a way of tackling its problems, the group announced it will sell Direct Energy, its North American business, for $3.6 billion Funds raised from the deal will be poured into its pension schemes, and debt will be paid down. The company will focus on its UK and Ireland business. Centrica is trying to become leaner, like many of its smaller competitors. The lockdowns have had a negative impact on the business as energy demand was hit. The group posted a first half statutory loss of £135 million. Centrica is aiming to achieve cost savings of £1 billion between 2019 and 2022. The stock is up 15%.

IMI shares are in demand as the company reinstated its dividend. In March, the company decided to hold off on paying a final dividend due to the uncertainty caused by the pandemic. Today, the company confirmed it will pay a final dividend, and it is proposing to pay an interim dividend too. In recent months, many companies have trimmed or halted their dividends, so the news that IMI has resumed their payments, makes the company attractive to income seeking investors. First half operating profit increased by 2.5% to £121 million, and that was helped by a marginal rise in operating margin to 14%. Net debt dropped by over 18% to £420 million. It says a lot about a firm that is lowering its debt, while returning to dividend payments too.

Ferguson, the plumbing specialist, announced that group trading has improved steadily from April. The company commented that revenue from its UK business has been more encouraging since the lockdown was eased.

The pandemic has hurt Vodafone, in particular the roaming division, as travel bans greatly impacted people moving between countries. The telecoms company revealed a 1.3% fall in first quarter organic revenue, but keep in mind that equity analysts were expecting a decline of 2.4%. It remains on track to slash operating expenses by €400 million. The earnings outlook was left unchanged, but it did caution about a possible downside risk. The company’s Towers business will be listed on the stock market in Frankfurt. Germany is the largest market for the Towers division, and that is why Frankfurt was chosen over London for the listing.

Pearson, the publishing housing, has been impacted by the health emergency, as the closure of schools and test centers have been a big blow to the company. Underlying first half revenue fell by 17%. The adjusted operating loss was £23 million, and the group said the Covid-19 impact was roughly £140 million. The group is very secure in terms of cash as it has liquidity of approximately £1.6 billion, so it can comfortably continue trading. The interim dividend was left unchanged at 6p. Pearson predicts a recovery in the market, but it warned that uncertainty persists.

International Consolidated Airlines Group shares are in the red as there is talk the group will look to raise over £2 billion from a share offering at the end of the summer. 

It was reported that ASOS is considering cutting 500 jobs. The stock is down over 4%.

Indivior shares have surged on the news that it has agreed to pay $600 million in relation to criminal charges and civil complaints connected to Suboxone. The huge fine should draw a line under the case.  

US

Tech stocks have declined the most today as it seems that traders have fallen out of love with the sector. The likes of Apple, Alphabet and Facebook have greatly outperformed in recent months, but lately they have lost some of their appeal. The S&P 500 is off as wider sentiment has been hit by the US-China situation. The US economy continues to recover. The flash manufacturing and services PMI reports for July were 51.3 and 49.6 respectively, and both readings were higher than the June metrics, but they were shy of economists’ forecasts.  

Intel shares are in the red today on the back of the second quarter update last night. The company said there were manufacturing issues with the 7-nanometer transistors, so that would delay the release of the next generation chips. AMD’s chips already use those transistors so they will continue to be ahead of Intel in that regard. The second quarter numbers were well received, but the forecast was a little mixed. EPS was $1.23, exceeding the $1.11 forecast. Revenue came in at $19.73 billion, while equity analysts were predicting $18.55 billion. The forecast for the third quarter was mixed. The EPS and revenue guidance were $1.10 and $18.2 billion respectively, while the consensus estimate was $1.14 and 17.9 billion respectively. AMD’s shares are up on news that Intel’s chips will be delayed.   

Verizon Communications posted second quarter EPS of $1.18, topping forecasts. Operating revenue slipped by 5.1% to $30.4 billion, but it exceeded the $29.93 billion consensus estimte. The telecoms company saw a jump in demand for phone and internet services as working and studying from home surged amid the pandemic. The group cited the closure of stores, and in turn the fall in sales of devices for the drop in revenue. 

FX

The US dollar index fell to its lowest level since September 2018. The mixed jobs data from the US yesterday has put extra pressure on the greenback. The initial jobless claims reading increased to 1.41 million, from 1.3 million. It was the first time since March the metric rose, and that is probably down to the re-introduction of some lockdown restrictions in certain US states.

EUR/USD and GBP/USD are higher thanks to the continued fall in the US dollar. The flash manufacturing and services PMI reports from France, Germany and the UK all showed major improvements from the June readings, so it is encouraging to see the economic rebound is continuing.

The CMC AUD index is in the red as the ‘commodity currency’ has been hit by the fall in copper. The rising tensions between the US and China have impacted the Australian dollar as China is a big export market for Australian goods.

Commodities

Gold traded above $1,900 for the first time since September 2011. The bearish trend of the US dollar has helped the metal, as the inverse relationship between the two has been strong lately. In recent weeks, the metal has seen its popularity increase on account of depressed bond yields. Should gold’s bullish trend continue, it might retest the $1920 area – the record high.    

WTI and Brent crude oil hasn’t moved much today, despite the turmoil on the rest of the markets. They are off 0.25%, as the heightened trade tensions between the US and China has failed to have a big impact on the energy market. China is the largest importer of oil in the world, so should any economic disruption come from the political spat, we could see oil slide. It is worth noting that oil hit a four month high during the week, so the wider trend is still positive. 

 

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