Financial Times Europe - 31.07.2019

(Axel Boer) #1
20 ★ Wednesday31 July 2019

Azad Zangana


Markets Insight


Under Armour it a two-month low afterh
soft domestic sales overshadowed
improving margins in the sportswear
maker’s half-year update.
North America revenues were down 3
per cent with management expecting a
worsening in the current quarter, in part
due to disappointing direct-to-consumer
trends.
Gartner, the IT advisory group, was the
S&P 500’s sharpest faller on a profit
warning caused by reduced research
revenues.
As well as raising worries about client
retention, the alert led analysts to
question whetherthe company needed a
bigger sales force to sustain growth.
Corning lipped after the optical cables
maker slashed sales targets for a second
consecutive quarter due to weakness in
the carrier market.
Berry Global, the packaging maker that
bought UK peerRPC his year,t fell after
guiding 2020 cash flow forecasts lower.
Quarterly earnings from Berry also
disappointed ith the company blamingw
supply chain problems.
Forecast-beating fourth-quarter
earnings liftedProcter & Gamble.
Capital One etreated on news that ar
hacker had obtained personal data on
more than 100m ustomers.c Bryce Elder

Wall Street Eurozone London


Siemens Gamesa, the wind turbine maker,
slumped to a seven-month low after
management said on a post-results
conference call that there was not
enough visibility to reiterate 2020
guidance.
Sector peerVestas ived in tandemd
after Gamesa listed among its problems a
potential no-deal Brexit, US import duties
and lower offshore volumes.
Bayer ell after cautioning that full-yearf
guidance was “increasingly ambitious in
view of the challenging environment for
the corp science business”.
Extreme weather in the US meant
Bayer’s second-quarter results missed
forecasts, with the company also saying
that compensation claims tied to its
glyphosate weedkiller had risen by 5,
to 18,400.
Deutsche Lufthansa ed the Europeanl
airlines lower after its interim results
underlined industry pressures first
flagged in a profit warning last month.
Lufthansa lefttargets unchanged but
short-haul overcapacity, rising fuel costs,
poor cargo volumes and price warsmade
that look ambitious, analysts said.
Campari ose after reporting 6.9 perr
cent quarterly organic growth, thanks
largely to a 20 per cent jump in sales of
its Aperol aperitif.Bryce Elder

Buy advice from RBC Capital Markets
helped liftJD Sports.
The broker said sales should hold
steady as young shoppers in Europe and
the US prefer multi-brand to single-brand
stores while margins at the US acquisition
should benefit from store conversions
and on-trend buying, which RBC saw as
JD Sports’ key competitive advantage.
Sterling’s continued decline helped
shield the wider UK market from the
trade-related sell-off in other markets.
BP as the day’s biggest blue-chipw
gainer after forecast-beating earnings
supported hopes of a hike to shareholder
returns before the end of the year.
Centrica it a 20-year low after theh
British Gas owner cut its dividend by
more than feared and set out a wide-
ranging disposal plan to tackle debt.
Fresnillo lumped on another cut tos
production targets. The bullion miner’s
half-year results missed the levels it had
set with a profit warning last month.
British American Tobacco nda Imperial
Brands unk after US peers Altria arnedw
of a deterioration in US cigarette sales.
Aston Martin lipped to another records
low after Merrill Lynch took the carmaker
off its “buy” list, saying a cash call to raise
between £250m and £500m was required
to repair its balance sheet.Bryce Elder

3 Germany’s export-reliant stocks slide
after Trump casts doubt on trade truce
3 Sterling falls further as tension
between UK and Irish PMs ratchets up
3 London’s FTSE 100 index gives up
some of Monday’s gains

Global stock markets fell yesterday after
Donald Trump criticised China’s handling
of trade talks, saying in a tweet that
Beijing’s officials “just don’t come
through” in trade negotiations.
“Whatever shred of optimism markets
had about the ongoing trade negotiations
were dealt as a severe blow,” said
Stephen Innes, managing partner at
Vanguard Markets, who was commenting
on the US president’s remarks ahead of
further Sino-US trade talks.
Wall Street was in the red with both the
Nasdaq Composite and S&P 500 indices
down 0.3 per cent by midday in New
York. The Dow Jones Industrial Average
was 0.2 per cent shy.
Mr Trump’s warning was also felt
across the Atlantic with Germany’s
export-reliant companies and carmakers
hit hard. The continent-wide Stoxx
Europe 600 Automobiles & Parts index
closed 2.3 per cent lower,
underperforming the broader Stoxx
Europe 600 benchmark that ended the
day 1.5 per cent down.
Alongside trade jitters, Germany’s
Xetra Dax index was knocked by
disappointing reports from some of its

leading companies. The Frankfurt index
closed 2.2 per cent down following
discouraging reports onLufthansa nda
Bayer.
The airline slid 6 per cent after it
revealed a 25 per cent drop in second-
quarter earnings while shares in the
chemicals group sank almost 4 per cent
following news of an additional 5,
lawsuits over its Roundup pesticide that
is allegedly linked to cancer cases.
Ahead of today’s Federal Reserve
monetary policy meeting, in which
policymakers are expected to cut interest

rates, there was a modest sell-off in
Treasuries with the yield on the 10-year
note up 2 basis points at 2.07 per cent.
For the second day running, it was
sterling that stood out among leading
currencies. The pound continued to hover
near two-year lows, falling another 0.
per cent to $1.2172 as Irish prime minister
Leo Varadkar rebuffed the hard Brexit
plans of his British counterpart.
London’s FTSE 100 gave up some of
Monday’s gains, falling 0.5 per cent,
although a 3 per cent rise inBP h elped
limit the index’s decline. ikou AsgariN

What you need to know


German stocks hit by trade jitters and poor earnings
Indices rebased

Source: Bloomberg















Friday Monday Tuesday

Xetra Dax

Stoxx Europe 

The 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 3009.42 1516.75 21709.31 7646.77 2952.34 103348.
% change on day -0.38 -1.40 0.43 -0.52 0.39 -0.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 98.052 1.114 108.645 1.215 6.884 3.
% change on day 0.008 0.090 -0.165 -0.654 -0.118 0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 2.071 -0.400 -0.156 0.634 3.176 7.
Basis point change on day 1.300 -0.800 -0.540 -1.800 -0.300 -3.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 348.05 64.10 57.25 1419.05 16.39 2846.
% change on day -0.39 0.44 0.42 -0.10 -0.30 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

| |||||| |||||||| |||||
May 2019 Jul

2720

2880

3040

| |||||||||||||||||||
May 2019 Jul

1440

1480

1520

1560

| |||| |||||||| |||||||
May 2019 Jul

7040

7360

7680

8000

Biggest movers
% US Eurozone UK

Ups

National Oilwell Varco 8.
Westinghouse Air Brake 8.
Martin Marietta Materials 6.
D.r. Horton 5.
Leggett & Platt 4.

Cap Gemini 2.
Air Liquide 0.
Carlsberg 0.
Deutsche Boerse 0.
Wartsila 0.

Bp 3.
Micro Focus Int 2.
Jd Sports Fashion 1.
Taylor Wimpey 1.
Diageo 1.
%

Downs

Gartner -19.
Under Armour -14.
Under Armour -13.
Hca Healthcare -9.
Corning orporated -7.
Prices taken at 17:00 GMT

Seadrill -11.
Lufthansa -6.
Fresen.med.care -5.
Commerzbank -4.
Acs Const. -3.
Based on the constituents of the FTSE Eurofirst 300 Eurozone

Centrica -19.
Fresnillo -17.
Int Consolidated Airlines S.a. -5.
Imperial Brands -4.
British American Tobacco -4.
All data provided by Morningstar unless otherwise noted.

T


he sharp fall in sterling in
the wake of the 2016 Brexit
referendum would help
“rebalance the UK econ-
omy”, in the words of Lord
Mervyn King, former governor of the
Bank of England. But since then, the UK
has struggled to improve its trade
position and has certainly not seen any
boosttoGDPgrowth.
The idea was that a fall in sterling
would rejuvenate British industry:
exports would become cheaper to over-
seas buyers,leading to higher demand
and sales. Faster growth in exports
would boost the economy, along with
jobcreationandwages.
The pound is once again under pres-
sure with a further depreciation
expected if the UK leaves the EU with-
out a deal. But while some commenta-
torscontinuetoarguethataweakercur-
rency can help the stimulate the econ-
omy, the data suggest a different narra-
tiveisplayingout.
Between the end of 2015 and the end
of the first quarter of 2019, trade-
weightedsterlingfell12.1percent.
Meanwhile, the manufacturing sector
as a share of the total value added of the
economyrose from 10.02 per cent to
10.07 per cent. And as a share of total
employment, manufacturing increased
from 7.69 per cent to 7.7 per cent —
hardlytherebalancingsomehadhoped.
The trade data are even worse.In the
first quarter of 2019, net trade reduced
GDP growth by 3.4 percentage points
compared with a year earlier. This is the
most negative quarterly year-on-year
contribution from trade since records
beganin1955.
Granted, pinning this on sterling is
unfair as thestockpiling of goods in the
run-up to the March Brexit deadline
played a large role but there is plenty of

other evidence of the lack of improve-
mentintheUK’sexternalperformance.
Currency is just one of several key
drivers that a standard trade model
would rely on to explain the volume of
exports.Taking a simple weighted aver-
ageofGDPgrowthusingtheUK’sexport
sharestends to be three to five times
more powerful in explaining growth in
exportsthancurrency.
When examininga nation’s export
performance we should also take lobalg
trade into account — the question is, has
the UK managed to take a bigger slice of
theworldtradecake?
Since 2000, the volume of global

exports has almost doubled while the
UK’shas risen by almost two-thirds,
accordingtoSchroders’calculations.
Britain’s share of global exports has
therefore fallen, despite trade-weighted
sterlingfalling29percentoverthesame
period.Alongside currency moves,
there are two additional factors to con-
sider when explaining the UK’s dismal
performance.
The first is the competitiveness of the
labour market. The UK has long been
known for having one of the most flexi-
blelabourmarketsintheworld.
Yet it has not been able to keep up in
terms of productivity growth,allowing
the cost of labour per unit of output ot
riseversusthatofitscompetitors.
The trade-weighted euro has risen by
23 per cent since January 2000, for
example, while the sterling equivalent

has fallen 29 per cent. Despite this wide
gulf, the performance ofGermany’s and
the UK’s real effective exchange rates —
that is, the nominal trade-weighted
exchange rate adjusted for unit labour
costs — has almost been the same over
this period.So the advantageof a depre-
ciated sterling has largely been lost
against Germany due to poor labour
marketperformance.
The second factor to consider is
whether exporters have pricing power
in foreign markets. Most of the value of
the UK’s total exports is generated by a
small proportion ofcompanies, often
large multinationals hat are protectedt
bypatentsandintellectualproperty.
AgoodexampleisGlaxoSmithKline,a
global top 10 pharmaceutical company
that has the ability to price its drugs in
foreignmarkets.
But as sterling has depreciated, many
British exporters ave simply left theirh
prices unchanged and become more
profitable in sterling terms. This is great
for investors but less so for the economy
in real terms — without the increase in
exports, part of the expected benefit
fromthecurrencydepreciationislost.
If sterling falls far enough,companies
will choose to export rather than serve
the domestic economy and the UK will
beabletocompete.
But in order to not erode the competi-
tive advantage, a much larger deprecia-
tion than what we have seen would be
needed and labour costs would have to
remainatcurrentlevels.
The costof such a currency fall in
terms of higher inflation, lower
purchasing power and the destruction
of the value of savings would be
devastating.

Azad Zangana is senior European
economist at Schroders

Weaker sterling has


failed to turbocharge


the UK economy


Without an increase in


exports, the expected
benefit from the currency

depreciation is lost


JULY 31 2019 Section:Markets Time: 7/201930/ - 18:54 User:stephen.smith Page Name:MARKETS2, Part,Page,Edition:EUR , 20, 1


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