20 ★ Thursday8 August 2019Richard Henderson
Markets Insight
Walt Disneyslipped to a two-month low
after results revealed a tough quarter for
the recently acquired 21st Century Fox
film studio and Star, its Indian TV and
streaming arm.
Disney’s theme park business also
dragged on performance after the launch
of Star Wars Land at Disneyland flopped.
Charles SchwabandE*Tradesunk
after Fidelity stoked competition fears by
revealing it would put new customers’
cash balances into money market funds
rather than a sweep account.
“The industry has largely done the
opposite over the past few years as
brokers have increasingly used the
economics on lower yielding brokerage
cash to offset pricing pressure
throughout the industry,” said Goldman
Sachs.
Match, the dating site operator, and
parent companyIACjumped after
reporting another acceleration in revenue
growth from its Tinder app.
Tinder’s addition of 503,000 users last
quarter, its second-fastest growth on
record, meant Match was able to hike full-
year targets.
Weight Watcherswas in demand after
better than expected quarterly earnings
helped support turnround hopes.
Bryce ElderWall Street Eurozone London
Commerzbankled lenders lower after its
second-quarter core profit came in 10 per
cent below the consensus forecast.
Corporate loan losses and pressure on
fees resulted in lower revenues and
higher provisions with Commerzbank
cautioning that hitting its full-year
revenue and net income targets had
become “significantly more ambitious”.
UniCredit’s quarterly profit also missed
the consensus forecast on revenue
pressures and came with a warning,
sending the Italian bank sharply lower.
Bayergained afterthe sale of its 60 per
cent stake inCurrenta, its environmental
management joint venture withLanxess,
to Macquarie Infrastructure and Real
Assetsfor gross proceeds of €1.35bn.
The stock also took a lift from news
that a lawsuit scheduled to start this
month — the first tied to its glyphosate
weedkiller to be heard outside California
— was likely to be postponed.
MorphoSys, the German antibody
developer, climbed after revealing its
Tafasitamab cancer treatment had been
given a green light to file for approval in
Europe two years ahead of plan.
Early recognition of a development
milestone payment fromGlaxoSmithKline
meant MorphoSys’ second-quarter
earnings beat forecasts.Bryce ElderSirius Mineralshit its lowest since 2015
after Berenberg cut the stock off its “buy”
list in response to this week’s shelving of
a junk bond issue.
The company’s plans to develop a
Yorkshire fertiliser mine still make sense if
finance can be secured but the risk of
failure was too high to stay positive, the
broker told clients.
Aim-listedBurford Capitalfell sharply
after Muddy Waters, the activist short
seller, confirmed that it was betting
against the litigation financing specialist
and published a critical report.
BAE Systemsclimbed on the back of
“buy” advice from Investec Securities.
Flutter, the bookmaker formerly known
as Paddy Power, rallied after leaving full-
year guidance unchanged.
Half-year results from Flutter showed
core earnings down 10 per cent dueto
duty and regulatory changes.
NMC Healthwas the FTSE 100’s
sharpest faller, the hospital operator
having already slid on Tuesday after
Muddy Waters tweeted to tease its
research without naming a target.
Barclays analysts said they had
received “numerous questions” about
NMC in response to the short seller’s
tweet, adding: “We believe accounting
concerns are misplaced.”Bryce Elder3 Global bond yields sink in flight to
safety
3 Gold surpasses $1,500 a troy ounce
after being swept up in haven rally
3 Oil prices dip amid worries that crude
demand will weakenGlobal bond markets rallied and Wall
Street’s stocks slipped as renewed
worries about global growth hit investor
sentiment.
The central banks of India, New
Zealand and Thailand lowered key
interest rates yesterday in moves
designed to tackle the threat of slowing
growth.
Weakmanufacturing data from
Germany added to the downbeatmood.
Industrial production in the country fell
1.5 per cent month on month in June,
stoking fears that Europe’s largest
economywas heading towards a
recession.
“The crisis in the automotive sector is
continuing unabated,” said Ralph Solveen,
deputy head of economic research at
Commerzbank. “The main reason for this
weakness is now likely to be significantly
weaker foreign demand.”
Investors took note of the souring
sentiment. A rush into the safety of
government bonds left the yield on
Germany’s 10-year Bund down 6 basis
points to a new record low of minus 0.
per cent.
The script was repeated across theAtlantic. The yield on the 30-year
Treasury fell 12bp to 2.15 per cent, its
lowest level since 2016. Meanwhile, the
yield on the 10-year note dropped 9bp to
1.65 per cent.
Government bonds were not the only
haven assets attracting attention. The
price of gold rose more than 2 per cent to
breach $1,500 a troy ounce, its highest
level since 2013.
The risk-off trade seeped into Wall
Street trading.
The Dow Jones Industrial Average was
down 1 per cent, dragged lower by asteep fall inWalt Disneyafter its results
disappointed analysts.
The S&P 500 index fell 0.7 per cent by
midday in New York while the
technology-heavy Nasdaq Composite
index was 0.8 per cent lower.
Oil prices plummeted as escalating
US-China trade war tension raised fears
that crude demand would decline.
Brent, the international benchmark,
dropped 4 per cent to $56.46 a barrel
while WTI, the US marker, dipped almost
5 per cent to $50.99 a barrel.
Nikou AsgariWhat you need to know
Spooked investors seek the safety of US debt
Source: BloombergTreasury yields ( ) Jul Aug -year-yearThe day in the markets
Markets update
US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2853.61 1449.92 20516.56 7198.70 2768.68 101541.
% change on day -0.98 0.25 -0.33 0.38 -0.32 -0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 97.673 1.122 105.770 1.215 7.041 3.
% change on day 0.044 0.268 -0.578 -0.164 0.121 0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.631 -0.586 -0.201 0.484 3.055 7.
Basis point change on day -11.130 -5.100 -1.510 -3.000 -0.700 -13.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 330.87 56.46 51.09 1465.25 16.39 2727.
% change on day -0.42 -4.08 -4.59 0.00 -0.61 0.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.Main equity markets
S&P 500 index Eurofirst 300 index FTSE 100 index||||||||||||||||||||
Jun 2019 Aug2800288029603040||||||||||||||||||||
Jun 2019 Aug1440148015201560||||||||||||||||||||
Jun 2019 Aug7040736076808000Biggest movers
% US Eurozone UKUpsFleetcor 5.
Cvs Health 5.
Assurant 4.
Newmont Mining 4.
Kroger (the) 2.Bayer 6.
Ferrovial 2.
Reed Elsevier 2.
Casino Guichard 2.
Sap 2.Just Eat 6.
Flutter Entertainment 5.
Fresnillo 5.
Bae Systems 3.
Itv 3.
%DownsE*trade Fin -5.
The Charles Schwab -5.
Walt Disney (the) -5.
Svb Fin -5.
Citizens Fin -5.
Prices taken at 17:00 GMTSeadrill -9.
Commerzbank -6.
Unicredit -4.
Saipem -3.
E.on -3.
Based on the constituents of the FTSE Eurofirst 300 EurozoneNmc Health -11.
Standard Life Aberdeen -7.
Spirax-sarco Eng -6.
Rolls-royce Holdings -3.
Legal & General -3.
All data provided by Morningstar unless otherwise noted.P
rudence comes at a cost. That
is one lesson equity investors
should keep in mind this
August, a month sorely lack-
ing the tranquility typical of
this period.
Monday’s bloodbath was the worst
day of the year for US blue-chip stocks —
investors ended the day 3 per cent
poorer. The drawdown extendedthe
previous week’s selling when the two
central drivers that have consistently
movedmarkets failed, almost in unison,
across a bruising 24 hours.
Jay Powell, the Federal Reserve chair,
dashed hopes of a prolonged easing
cycle and President Donald Trump
deepened the trade fracas.
Investors scuttled to safer corners of
the market. Real estate and utilities
weathered the downturn as investors,
fearing further tumult, favoured these
so-called bond proxies asarmour for
their equity portfolios.
Utility stocks are an interesting case
study. They are theclassic alternatives
to cyclical stocks, such as banks, whose
performance is tethered to growth,
making them vulnerable to recessions.
Dull, slow-moving electricity and water
companies churn out dividends from
safe, commanding market positions.
NextEra Energy, the largest utility in
the S&P 500 basket of blue-chips, has
outperformed the broader index by
20 per cent over the past12 months.
As a group, utilities have gained more
than 11 per cent over the same period,
outpacing the S&P 500by about the
samemargin after Monday dipped the
index briefly into negative territory.
Outperforming the broader index
makes defensive stocks expensive and
increases the risk that yield-hungry
investors could miss out on a bounce in
cyclical and growth stocks. Investorssimply may be paying too much to play
it safe. Whether that is the case is a ques-
tion that should be considered given the
overpowering trend since the financial
crisis for stocks to rebound to new
records despite rocky patches.
Even after Monday’s pain, US stocks
have gained more than 14 per cent in the
year to date, retracing the worst
December since 1931 and shaking off a
quick bout of conniptions in May.
The question of whether investors are
paying too much for defensive stocks
was posed in a note from Andrew Lap-
thorne, head of quantitative equity
research for Société Générale.
Cyclical stocks such as banks fallsharply duringrecessions. During the
financial crisis, profits from these types
of company tumbled 60 per cent or
more. Investors rightly bet thatcon-
sumerswould forgo a new television or
holiday butwould still eat and wash.
Yet this thesis is not as strong as many
may hope. Profits for defensive stocks
also did poorly through the 2008 crisis,
dropping up to 40 per cent. This evi-
dence dents the appeal of these bell-
wether safety stocks at a time when they
are priced at a premium to cyclicals.
“Investors are then paying twice the
price for bond proxies than the more
economically exposed cyclical assets,”
Mr Lapthorne warned. “However, the
mistake they may be making is believ-
ing these companies are immune from
the economic cycle. This is not the case.”Jim Tierney, chief investment officer
of AllianceBernstein’s concentrated US
growth equities fund, is adamantthe
recent market dipis a passing concern.
The sell-off was an overreaction to
new trade tariffs that will hurt China
more than the US;multinationals will
simply adjust supply chains to sidestep
the higher costs. Investors who have
moved into defensive stocks will be
caught flat-footed, he argued.
“Defensive stocks have been a good
place to hide but there is not a lot of
value there,” Mr Tierney said. “There’s
not a lot of earnings growth in those sec-
tors — they have been supported largely
by lower interest rates.”
At the start of the year, a common
refrain among portfolio managers was
that a broad trade agreement, light on
details, would emerge within months to
neutralise the tensions.
It would sidestep the thorny issues
such as the transfer of technology to
Chinese companies that the US has long
railed against and instead offer an initial
step on the path to a deeperdeal.
Instead, the opposite hashappened.
Trumpian obstinacy and Chinese pos-
turing hasprolonged the unrest, which
is set to endure beyond next year’s presi-
dential election, said Goldman Sachs.
“While we had previously assumed
that President Trump would see making
a deal as more advantageous to his 2020
re-election prospects, we are now less
confident that this is his view,” said Jan
Hatzius, Goldman’s chief economist.
“We expect the newly announced
10 per cent tariffs on the last $300bn to
remain in place on election day and
other forms of tit-for-tat retaliation are
possible along the way.” Investors will
have to strap in for the ride.[email protected]Popular safety trade
for stocks is fraught
with jeopardy
‘Defensive stocks have
been a good place to
hide but there is not
a lot of value there’
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