Pharmaceuticals, drugs

Europe

European markets have had a decent start to the month, after an escalation to the US China trade dispute was deferred well into next year. Some have suggested that it is premature to get too carried away and in some respects that is correct, but for the here and now, and in the absence of anything else it is still a positive outcome, and could drive some strong gains in the weeks ahead.

In the time horizon of a short term investor the prospect of an escalation is faraway into the future and now well down the list of things to be worried about.

Auto makers have made decent gains on the back of reports that China had agreed to look at the prospect of lower auto tariffs though this has yet to be confirmed by the Chinese. Daimler, Volkswagen and BMW shares have moved strongly higher.  The CEO’s of all three German car companies are due to meet US administration officials tomorrow in order to find out the lay of the land when it comes to future trade negotiations.

In company news Unilever has confirmed that it will purchase the Indian Horlicks unit from GlaxoSmithKline, a move that was flagged last week. The deal is expected to cost €3.3bn and is expected to include the health drinks portfolio of Glaxo in India and Bangladesh in which it will acquire an 82% stake in the business.

Glaxo also announced that it was going to pay $5.1bn for Tesaro a US based pharmaceutical oncology company, as CEO Emma Walmsley continues her policy of boosting GSK’s pipeline in that area.

Investors don’t appear to be too enthused with the idea pushing the shares to the bottom of the FTSE 100. 

Thomas Cook shares have continued to come under pressure after a broker note at the end of last week that branded them un-investable, with the recent profit warning raising the prospect that the company might need to raise extra capital. There appears to be a rising concern that senior management appear to be struggling with turning the business around, and given their large costs overheads there is a concern that margins could well come under further pressure.

While it would appear that nothing appears to have materially changed since the end of last year, the rise in insuring the cost of the company’s debt may be prompting some in the market to reassess their opinion on the company’s ability to get out of its current difficulties.

The decision by Stobart Group, owners of Southend Airport, to cut their Q4 dividend is also another reminder, if any were needed, that the travel sector needs to keep a rein on costs and while it is only a modest cut, the yield is still over 5%, it serves as a reminder that margins are likely to remain thin, with the shares down heavily, to a one year low.

Ted Baker shares have also slid sharply in the wake of the “hug gate” headlines at the weekend after it was reported that founder and CEO Ray Kelvin may have been too “touchy feely” for some members of staff’s liking.

On the other side of the equation home furnishing retailer Dunelm Group has had a good day after an upgrade from Peel Hunt with the broker citing improvements in trading margins in a tough retail environment, which should make it outperform in 2019.

US

US markets have started December firmly on the front foot today, following on from their strong finish last week, as concerns about a trade war escalation between the US and China get pushed well into next year.

US car makers enjoyed an uplift after President Trump tweeted that China had agreed to “reduce and remove” tariffs on US made auto imports onto the Chinese mainland. This claim is rather mysteriously absent from the declaration over what was agreed by both sides at the weekend, so it’s not immediately apparent why the US President believes that China has agreed to this, particularly since the US hasn’t reciprocated in any other way.

In any event Ford shares have moved higher, as has Tesla where the electric car maker has its biggest market.

On the data front the latest ISM manufacturing survey saw economic activity rebound in November to 59.3, after a slowdown in October. The employment component also enjoyed an uptick, however prices paid saw their biggest drop in six years plunging from 71.6 to 60.7, with most of the plunge likely to have been as a result of the drop in the oil price. It certainly adds an interesting dynamic to the discussions about the path of interest rates when inflationary pressures show such a significant fall.

FX

The pound has come under pressure, despite economic data that continues to show a UK economy that is outperforming the rest of Europe. Political concerns are once again acting as an anchor on sentiment as scepticism over whether Theresa May’s Brexit deal will get passed through parliament next week.

The US dollar has also slipped back a little, mainly on the back of perceptions of a slightly more dovish outlook from US central bank officials with respect to the pace and scope of further US rate rises as we look ahead to next year.

The weaker US dollar along with a slightly more buoyant tone to risk markets has helped push up the commodity currencies of the Australian and Canadian dollar, both of which have central bank rate decisions this week, with the RBA tomorrow and the Bank of Canada on Wednesday. Both central banks are expected to leave interest rates unchanged.

Commodities

Crude oil prices have got off to a strong start in December, helped in some respects by speculation that Russia and Saudi Arabia may have agreed some production cuts to help shore up prices after seven weeks of declines and an over 30% fall peak to trough from the multiyear high seen in October.  What this agreement looks like still isn’t entirely known with the details likely to come out later this week in Vienna when OPEC is set to meet, but the rally also has some technical elements to it as well with Brent prices rebounding from the 200 week MA.

A production cut of 325k barrels a day by Canadian producers has also helped underpin prices, though we are now starting to drift back from the intraday highs against a backdrop of uncertainty as to how big any cut will likely be.

The departure of Qatar from OPEC is unlikely to materially alter the dynamics of how the cartel operates, however it does give an insight into the uneasy politics such alliances bring to bear. Given its treatment in the last few months by its peers it would appear that Qatari leaders feel that there is little upside in being in an organisation that does nothing to represent its interests.

Soybeans have also rallied strongly on reports that China had agreed to buy an as yet unspecified amount of US agricultural products which would include soybeans.

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