The rising hostility in US-China trade relations continues to keep the FTSE under pressure and the negative impact has been further amplified by the US decision to ban the use of Huawei equipment in the country.
President Trump may have decided that opening another trade front would be too much at the moment and there is now talk that the decision to bring in punitive tariffs on European and Japanese car makers which was due to be taken this week may end up being postponed for as long as six months. This would give car makers a breather and help European indexes, notably the DAX.
Trade signals from Asia are also negative this morning with the Nikkei sliding lower on the Huawei news. Chinese stocks were spared only because investors hope that the continued trade war will push the Chinese government to provide financial support to local markets and that in turn this will keep feeding overall economic growth in the country.
UK consumer goods and travel take a hit
The delayed effect of the unresolved Brexit situation of the last few months is continuing to erode consumer enthusiasm over non-essential goods and purchases and the hardest hit seem to be travel and consumer goods companies.
Luxury goods maker Burberry (LON:BRBY) reported flat profit in the first quarter which was followed by a decline in the company’s shares but by far the worst hit stock this morning is Thomas Cook (LON:TCG) travel with a 17.6% decline. The company issued its third profit warning in less than a year saying that it had lots of holidays left to sell as consumers remain cautious about travel spending.
Middle East tensions push oil higher
Middle East tensions are also ratcheting up with several stealth attacks on Saudi Arabian tankers and pipelines. The US has issued a series of warnings about Iran and has followed this up with increased its military presence in the Gulf and the recall of its diplomatic staff from Iraq.
Brent crude is trading back above the $72 mark, having fallen previously on concerns that the US-China trade dispute would dent Chinese demand for the raw material. However, the threat of a new conflict in the Gulf could potentially have a much bigger impact, at least in the short term.
Slowdown in Burberry's key Chinese market
Evidence of a slowdown in Burberry's key Chinese market has reared its head in these results.
Revenue growth in Mainland China has slowed to a low single-digit percentage, while the Hong Kong market appears to have gone into reverse in the second half.
The weaker performance in Asia will add to fears that China's slowing economy will sap demand for luxury goods, blunting any boost that Burberry is hoping to get from its turnaround strategy.
The turnaround plans appear to be progressing well, with initial reactions to Riccardo Tisci's new collection apparently positive. But any more weakness in Asia will put more pressure on the collection to be a knockout success.
Investors will have to be patient, with management indicating it'll take until the second half of next year for the true impact of Tisci's designs to materialise.
Thomas Cook’s dismal result
The pressure on Thomas Cook to execute a major asset sale has been turned up a few notches with this dismal result.
The write-down announced today has contributed to an eye-popping amount of red ink, net debt has blown out to more than £1.2bn and, what's worse, management has warned of even more pain to come.
A tough trading environment characterised by Brexit uncertainty is clearly hurting Thomas Cook, as Brits put off holidays until they get a better grasp of how long they can stay in the EU and the pound remains weak.
Thomas Cook is also having to grapple with increased competitive pressure from the likes of On the Beach and new digital platforms like Airbnb that are making it easier for punters to plan cheap holidays on their own.
About the only real positive news in today's update is that Thomas Cook has received multiple bids for its airline business. But with losses mounting and a new £300m financing package contingent on a successful sale, management is looking more and more like a forced seller -- and that can't be good for maximising bid prices.
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