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FTSE 100 Hits Four Month Low As Trade Concerns Weigh

Published 31/08/2018, 15:49
Updated 03/08/2021, 16:15

Europe

European stocks have limped into the end of a disappointing month in the wake of last night’s comments from President Trump that the EU needs to do much more to come to an agreement with the US on trade, and dismissing its proposal to remove tariffs on all motor vehicles.

The US President compared the EU’s trading policies to be as bad as China’s, but on a smaller scale, while at the same time threatening to walk away from the (WTO) World Trade Organisation. His remarks that he remained open to the beginning of another $200bn of tariffs on Chinese goods is also ratcheting up concerns of an escalation in the coming weeks.

German automakers BMW, Volkswagen (DE:VOWG_p) and Daimler have all slipped back modestly in the wake of President Trump’s rejection of the EU’s proposal, with the EU pushing back by saying it would retaliate if the US President reneges on his promise not to impose car tariffs.

The FTSE100 has also come under pressure hitting a four month low in the process, with the tech and telecoms sector leading the decliners.

The worst performer has been Sage Group (LON:SGE) after CEO Stephen Kelly announced he was stepping down. The company did reiterate its full year guidance, while reassuring that a new CEO would be in place as soon as possible. Vodafone (LON:VOD) was also lower despite completing its Idea Cellular merger into India, giving the UK telecoms giant access to another 408m extra customers.

On the upside Whitbread (LON:WTB) shares have surged to their highest levels since December 2015 on news that Coca Cola is paying $5.1bn for the Costa Coffee business. This seems like a great deal for Whitbread, getting a premium price for an asset that Coca Cola may well be able to make better use of in terms of increasing the brand’s global reach.

We also saw a positive market reaction to the latest trading update for Restaurant Group (LON:RTN), owner of Frankie and Benny’s, which has been undergoing a restructuring process of its own, as it completes the process of closing 33 underperforming outlets. While sales fell 3.7% on a like for like basis and profits were slightly lower at £11.7m, there is evidence that the business remains on course to meet its full year guidance. Higher business rates, wages have hit margins quite hard across the retail sector this year, while consumers have become much more discerning in terms of their dining habits.

Management have taken steps to address these issues with new delivery services, but it remains too soon to suggest the business is out of the woods quite yet.

US

US markets have picked up where they left off last night, opening lower ahead of the long US Labour Day holiday weekend, though they still look set to close higher for the third successive week in succession. US investors appear much more sanguine about the risks of a $200bn escalation in the China/US tariffs than their counterparts in Europe and Asia.

Coca-Cola (NYSE:KO) shares are likely to be in focus in the wake of the $5.1bn acquisition of the Costa Coffee chain from Whitbread. This seems like a good way for a global brand whose primary focus is sugary drinks to focus away to the café culture of coffee shop retail. The worry is that they Coke is paying a premium price for a business that is low margin, and very competitive as new independent specialist coffee shops squeeze the bigger players profit margins. On the plus side Coca Cola’s huge global distribution network will be able to introduce the Costa brand of iced teas and coffee to a more global audience.

Apple shares (NASDAQ:AAPL) have opened at new record highs as speculation grows about a September 12th launch of a brand new high spec iPhone XS, which is said to come in a new gold colour scheme. There is also speculation about upgrades to the Apple Watch along with rumours of some new iPad upgrades, particularly on the Pro side, with talk of new features like Face ID. A new iPad mini wouldn’t be particularly unwelcome either given it hasn’t been updated since 2015, which suggests it may well get phased out.

FX

The US dollar has remained fairly well supported for the second day in a row against a broad range of currencies, however it is unlikely to be enough to prevent a third successive weekly decline on its trade weighted index

The euro has slipped back after the latest flash estimate of EU CPI for August showed a modest decline to 2%, from 2.1%. Core prices also slipped back to 1%, dealing a blow to those on the ECB governing council who want to move forward on moving rates higher sooner rather than later. It is much harder to make the case for talking up the prospect of rate rises if inflation shows no signs of moving higher.

The pound looks set to post its best week against the euro since early May on optimism that, despite all the August fire and fury of political posturing, we may well see a more pragmatic approach to Brexit proceedings as we head towards a possible Brexit denouement in the autumn. It’s also been a fairly decent week against the US dollar, after this week’s change of tone from EU chief negotiator Michel Barnier, about the prospects of a bespoke deal, as we approach the October/November deadline.

Commodities

After a disappointing July, oil prices have managed to recover a decent proportion of those losses this month as tensions over Iran, and falling inventories help to underpin prices. The economic meltdown in Venezuela isn’t helping sentiment as the global supply capacity diminishes further. Two years ago Venezuela output was in the region of 2m barrels a day. It is currently nowhere near that, and with President Trump threatening to upend the global order in trade, Brent oil prices could retest their July highs.

Gold prices have continued to disappoint as a safe haven closing lower for the fifth month in succession they may well have seen a short term base, after closing higher last week and in all probability being able to hold onto most of those gains this week, due to some seasonal buying interest. Festival season in Asia usually helps in terms of demand and this could well prompt some inventory restocking in the weeks ahead.

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No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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