It’s been a disappointing week for equity markets as investors pull back to the side-lines on the back of increasing concerns about rising geopolitical risk.
While markets have been content to put to one side rising concerns over an escalation between the US and China as both increased the amount of the tariff burden to another $16bn of goods to 25%, it would appear that the implementation of new sanctions against Russia, and a growing crisis in Turkey is giving investors too many balls to juggle.
US markets, on the other hand, have managed to remain fairly immune to these concerns driven primarily by the tech sector, however, at some point you have to think that even here gravity may well take over.
The Turkish Lira has hit new record lows on an almost daily basis and is likely to continue to do so in the absence of measures to stem the bloodletting. Talk of interest rate rises, capital controls may help stem the decline, along with talk of an IMF package, however, any such measures would require a significant climb down by President Erdogan, who thus far shows no signs of doing so.
There is also the geopolitical angle with Turkey being a key NATO ally, with the risk that the dispute with the US over the detention of their citizen, could shift the geopolitical dynamic in that region.
1) UK CPI/Wages/Unemployment – With concerns about a no Brexit deal rising by the week the UK economy continues to be at the forefront of investors’ concerns about the political stalemate between the UK government and Brussels. As far as the wider economy is concerned there are weak spots despite the recent Bank of England rate rise and the stronger Q2 GDP number we saw on Friday. Wage growth remains a worry in that it appears to have plateaued at 2.7%, despite a labour market that continues to tighten. Higher fuel costs are also hurting consumer spending power despite an inflation rate that fell to 2.4% in June. Retail sales have also started to slow despite a hot summer which saw sales of food, drink and clothing surge, with a surprise 0.6% decline in June as shoppers preferred the beach and the pub to shopping more generally.
2) China Retail Sales/Industrial Production (Jul) – 14/08 – last week’s trade data showed that the Chinese economy doesn’t appear to have been affected thus far by the recent US tariffs that were slapped on $34bn of its goods at the beginning of July. Furthermore the big jump in imports suggests that domestic demand remains fairly robust which should augur well for not only retail sales but industrial production as well. Higher energy prices as well as higher volumes of coal, iron ore and crude oil helped support imports, which should bode well for industrial production.
3) German and EU Q2 GDP – 14/08 – at the end of last month the latest flash EU GDP number showed a drop from 0.4% to 0.3% raising concerns in the wake of a weak French Q2 GDP number that growth in Europe was slowing down on a much faster basis than originally feared. This week’s German Q2 GDP could well go some way to help push some of those concerns to one side if the German economy rebounds from the slump seen in Q1 which saw a decline of 0.6% to 0.3%. The big worry is that the trade concerns that have impacted on economic growth in Q2 manifest themselves in Germany’s Q2 numbers which in turn will hold down the latest revision to EU Q2 GDP. Another 0.3% from Germany would be a disappointment and once again raise concerns that the slowdown seen in Q1 isn’t a temporary one.
4) Balfour Beatty (LON:BALF) – H1 – 15/08 – the UK construction sector has had a turbulent last few months from the collapse of Carillion to the “Beast from the East” which hit economic activity quite hard in Q1. Despite this Balfour Beatty which almost had a “Carillion” moment a few years ago has managed to set itself apart with a decent performance over the past 12 months. At its most recent trading update in March, the company saw underlying profits more than double to £196m, after the company decided to focus on higher margin work and steer away from the low value contracts that brought Carillion to its knees. The company did take on some of Carillion’s employees as it picked up some of the legacy work, including the Aberdeen Bypass. While this incurred some extra costs the company’s order book remains solid, as does the outlook, as the company continues its work on the Thames Tideway Tunnel and HS2. Having divested itself from its under-performing overseas operations investors will be looking at how management see the outlook for the sector as we look towards the second half of the year.
5) EU CPI (Jul) – 17/08 – inflation has been one of the indicators that have started to show signs of life in recent months, though not necessarily for the right reasons. Most of the rebound has been due to a rise in energy prices, the worst kind of inflation for consumers and business alike and raising concerns of rising prices and slowing growth or stagflation, a central banker’s worst nightmare. Expectations are for headline CPI to remain steady at 2%, while core prices remain subdued at 1%.
6) Nvidia Q2 – 16/08 – the last two quarters have seen chipmaker Nvidia post record revenues, with profits also rising strongly in Q1, helped by a strong gaming market as new games with better graphics drove sales of new and better gaming consoles. The Nintendo Switch helped boost Q1 revenue by 66% to $3.2bn, while the rising popularity of crypto currencies has also helped drive demand for faster and more powerful chipsets. With the share price within touching distance of its recent record highs the bar to further gains is increasingly high, so investors will not only be looking for continued revenue growth but also stronger forward guidance.
7) Walmart – Q2 – 16/08 – has been one of the few US retailers that have been able to take the fight to Amazon (NASDAQ:AMZN) in terms of the on-line shopping experience. Big box retailers have come under increasing pressure from the low overheads model that Amazon is able to bring to the table, but Wal-Mart (NYSE:WMT) is managing to keep up, with its stronger grocery offering. It is also transforming its international exposure, looking to sell its stake in Asda to Sainsburys, while paying $16bn for Indian e-commerce giant Flipkart, stealing a march on Amazon on what could be a huge future market. The company stated it the purchase was likely to reduce its profits for 2019 by about 25c a share. Its stake in Chinese e-commerce fine JD.com has also had its ups and downs after the company posted a $1.8bn loss in the previous quarter.
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