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News

Europe rallies, Wall Street shaken by US-China tensions, gold pops

CMC Markets

The FTSE 100 and the DAX are higher this afternoon despite the strained relations between the US and China. 

The major European indices drifted lower in the middle of the day, but they are driving higher again. The two largest economies in the world could see their relationship deteriorate as Washington DC are trying to stop Huawei’s access to semiconductors. The US have previously had concerns in relation to Huawei on the ground of national security, as the worries were related to spying. A change in export rules from the US government, would make it more difficult for the Chinese company to acquire chips produced by US firms. The rising US-China tensions caused some jitters in stocks a few hours ago, but dealers have shrugged them off for now.       

Mining stocks such as Anglo American, BHP Group and Rio Tinto are some of the biggest gainers on the FTSE 100. The better than expected industrial production figures from China overnight boosted sentiment in the mineral extractors. Given China’s appetite for metals, any signs that the economy is recovering from the lockdown, typically helps the miners. Industrial production in China last month increased by 3.9%, which is a massive difference from the -13.5% that was registered in February. Fresnillo is up on the day too thanks to higher gold and silver prices.  

There is talk that BT are looking to sell a portion of their stake in Openreach, with the view to investing heavily in its own network. It is understood that Openreach is worth £20 billion, and the London listed company might sell-off some of its shareholding in the division in order to finance its £12 billion investment plan to get 20 million homes connected to full-fibre broadband within the next 10 years. BT have struggled in recent years. Openreach has been very valuable to the group so disposing of its shareholding would be like getting rid of the family jewels, but on the other hand it needs to reinvest in the business. Competition in the industry is tough, but it is likely to get tougher as Virgin Media and O2 are to merge, so the new unit will be looking to take business away from BT. The chatter about the Openreach sale has given the BT share price a much needed boost. If the disposal goes ahead, the fibre investment better make up for it, otherwise the wider bearish trend is likely to hang around.

William Hill shares are in demand today as the gaming company have taken steps to curtail their outgoings, and the cash burn rate has fallen to £15 million per month. In a bid to conserve cash, the group has suspended the dividend, cut marketing costs, deferred non-essential capital expenditure as well has scrapping pay increases and bonuses. The mass cancellation of sporting events has severely impacted the business, but it is in a conformable position in terms of financing – it has more than &pound 700 million in liquidity. The covenants connected to the revolving credit facility has been pushed back until 2021, so that provides some headroom. William Hill issued a trading statement covering the 17 weeks until 28 April. In the first 10 weeks, total net revenue for the group slipped by 5%, and for weeks 11-17, that metric slumped by 57%. The group is deriving a much larger portion of its revenue from outside of the UK, which is good from a diversification point of view. Some sporting events are due to recommence in the near-term, and William Hill in a strong position to ‘power up’ for when things go back to normal.

National Express confirmed that revenue in April tumbled by 50% on the year, which was in line with a recent guidance. Thanks to cost cutting measures, the group managed to eke out positive earnings in the timeframe – which was ahead of their forecast. The group’s liquidity position has been boosted since the last update as it now stands at roughly £1.5 billion. In terms of operations, things are looking positive as the UK division has started selling tickets for July services, and the school bus businesses in the US and Canada have positive prospects on the horizon. The stock is up 11%.

Rico Back has stepped down as CEO of Royal Mail. The company updated the market on its performance for April, where UKPIL saw revenue fall by £22 million. To make matters worse, costs jumped £40 million, as overtime for workers as well as PPE expenses, drove up the outgoings. The firm is seeing a big switch to parcel delivery from letters.

US

The S&P 500 and the NASDQ 100 are a little in the red as traders are worried about the latest developments between the US and China. Huawei, and any company connected to it, might be required to get permission from the US government to purchase semiconductors manufactured by US firms. Such a move is likely to upset the Beijing administration, so a retaliation would probably be on the cards.

US-China relations have been a bit rocky recently, so now traders are bracing themselves for another difficult patch. There is speculation that China might target US companies such as Apple and Qualcomm, as a way of getting back at the Trump government, hence why the stocks are in the red.

US retail sales plunged by 16.4% in April, missing the -12% decline that economists were expecting. The report that excludes auto sales was even worse, as the reading showed a 17.2% fall. The New York Fed manufacturing reading for May was -48.5, and that was an improvement in the -78.2 registered April. The preliminary reading of the University of Michigan consumer sentiment for May was 73.7, which was a slight increase on the 71.8 posted in April. There is growing evidence that things in the US are picking up again, so that is likely to be noted by traders.       

FX

GBP/USD slipped to a level last seen in late March as tensions between the UK and the EU have ticked up. The EU’s chief negotiator, Michel Barnier, said the third round of negotiations with the UK in relation to a post transition period agreement were disappointing. Divergences over financial services and other areas remain. No progress was made in relation to governance either. Despite all that from the EU’s side, the UK are still optimistic a deal can be reached.

EUR/USD is up on the day even though the eurozone posted awful data. The currency bloc contracted by 3.8% in the first quarter, and keep in mind the region saw growth of 0.1% in the last quarter of 2019. Germany, the largest economy in Europe, saw negative growth of 2.2% in the first quarter, and seeing as the fourth quarter of 2019 was revised to -0.1%, that means the country is in a technical recession. EUR/USD is up 0.16% even though the US dollar index is up 0.04%.

Commodities

Gold hit a one month high thanks to the rising tensions between the US and China. Yesterday the metal pushed higher, and broke out of its recent range, so today we are seeing a continuation of that positive move. Silver has seen an increase in demand also.

The WTI June contract and the Brent crude July contracts have hit one month highs as China’s demand for oil has increased. Refiners in China last month saw activity increase by 11% when compared with March. The numbers complimented the industrial production data from China, which also showed a nice rebound. The updates came at a time when concerns about US storage issues faded a little, so that helped the upward move.

 

 

 


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