The prospect of a speedy conclusion to the current tensions between the US and China continues to recede, and as such the caution of the last few days, runs the risk of turning into a full-blown retreat from those sectors that are likely to be hit the hardest, from further escalations.
In Asia trading we saw more selling come from through as both the Nikkei 225 fell for the second day in a row, and the Hang Seng fell below its 200-day MA for the first time since January.
Markets here in Europe have also opened lower on the back of the weaker tone with last nights Fed minutes adding little to the colour about the next possible move in US rate policy.
The minutes do show that the Fed is in no particular hurry to move on rates in the near future, however these minutes pre-date the break down in trade talks between the US and China, so the macro environment has altered significantly.
This would suggest that this week’s comments by St. Louis Fed President James Bullard are likely to be more pertinent in relation to the thinking of the FOMC. As a reminder he said that the FOMC may have overdone it when they hiked rates in December.
While he was careful to state that this didn’t mean he was looking to reduce rates right now it is perhaps interesting to note that this may well be an attempt to prepare the ground for a possible move lower over the next 12 months, and maybe as soon as December.
On the data front we’ve seen mixed numbers in French and German manufacturing and services flash PMI’s for May. German manufacturing has slipped again at 44.3, below last month’s 44.4, and services was also weaker at 55. The French data has shown a slight improvement but nothing to get particularly excited about.
The pound has continued to slide, not surprising given what’s going in at Westminster right now, with Prime Minister Theresa May rocked by the resignation of Andrea Leadsom, Leader of the House of Commons, over the recent changes to the Withdrawal Agreement Bill, which tacked on the prospect of a confirmatory referendum.
The sands of time appear to be running out for the Prime Minister as European elections start today, with the UK and the Netherlands going to the polls, to elect their representatives in the European Parliament.
The fact that the UK are holding these elections at all speaks to the failure, not only of the government’s policy, but also to MPs of all political persuasions at Westminster, as they put their own narrow party interests ahead of the interests of the country.
While it is unlikely that the Prime Minister will go today, she could well be gone by Monday when it becomes apparent how badly the Conservative party has done in today’s European poll. The main opposition Labour party aren’t likely to be in position to celebrate either, as they are also likely to lose big, due to their ambiguous and opportunistic stance on Brexit.
Anyone hoping for a quick resolution to the current impasse is likely to be disappointed, and a big win for the Brexit party in today’s elections could complicate matters further, not only in trying to get any deal passed, but also in any attempts to get a further extension, in a few months’ time. EU leaders are unlikely to be amenable to another extension if UK politics show little sign of coming to a cross party consensus.
The likelihood of a new election appears to be getting closer by the day, with the polls pointing to the prospect of another minority government, especially if the Brexit Party were to field candidates as well. This also helps further explain the weakness of sterling, with investors torn between the unpalatable choice of a no deal Brexit, or a Corbyn led Labour minority government.
In company news, Merlin Entertainments (LON:MERL), owner of Madam Tussauds and Alton Towers, has opened sharply higher after activist investor ValueAct urged the business to take itself private at a price of 450p a share. The investors who have a 9.3% stake in Merlin has said the business is undervalued and would be better placed to make the changes necessary to improve this value in private hands.
In the telecoms sector Talk Talk's (LON:TALK) attempts to compete with Virgin Media, Sky and BT (LON:BT) in the broadband space have continued to make progress as the company invests in high speed fibre. The company has continued to add users despite revenues falling slightly to £1.63bn, a 1.3% decline from last year.
Deutsche Bank’s share price (LON:0H7D) has continued to fall to record lows today as its AGM gets underway today with attention likely to be on the future of Chairman Paul Achleitner with some shareholders urging to go sooner rather than later. A litany of poor decisions, scandals and various management changes have seen the share price hit record lows, with concerns rising over the banks long term viability, amidst uncertainty about the future direction of the organisation.
US markets also look set to open sharply lower as rising trade concerns weigh on investor sentiment, with earnings announcement continuing to come thick and fast.
Kraft Heinz (NASDAQ:KHC) has been in the news recently for all the wrong reasons. When Warren Buffet bought his stake in Heinz a few years ago he probably didn’t imagine the car crash that has happened since then. While Unilever (LON:ULVR) is probably heaving a sigh of relief that it fended off last year’s approach it has become clear that Kraft Heinz management haven’t been paying attention to the underlying business. Forced to restate its accounts for the last three years, due to procurement issues, the shares have dropped sharply on the last year, to record lows. Even without restating its accounts the company had been struggling with too many products, and too much focus on cutting costs to the detriment of investing in products that consumers want to buy. First quarter profits are expected to come in at $0.60c a share.
US electrical retailer Best Buy (NYSE:BBY) is also expected to announce its latest Q1 update later today. Having nearly gone out of business a few years ago, the company has enjoyed a decent turnaround in the last six years. With about 15% of the US consumer electronics markets the company has gone from strength to strength. Its ability to take on Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT) by offering in house expertise to its customers saw its last quarterly numbers come in well ahead of expectations. The trade war with China is one area that could impact its numbers over the next 12 months, with any increase in tariffs likely to impact its margins, something that CFO Coryn Barry warned about in the company’s Q4 update, and could well expand upon in this week’s update in light of the recent rise in tariffs to 25%. Expectations are for Q1 profits of $0.86c a share.
Dow Jones is expected to open 170 points lower at 25,606
S&P500 is expected to open 18 points lower at 2,838
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