After a pretty brutal start to the week for global stocks, with US markets posting their worst day this year, and an Asia session which saw stocks over 3% lower at one stage, European markets have opened in a slightly better fashion that was expected to be the case a few hours ago.
The reason for this modest stabilisation appears to have been the decision by the Peoples Bank of China to fix the yuan higher than expected, in this latest game of trade war cat and mouse. The central bank allowed it to weaken through the 7 level yesterday, as a counter response to President Trump’s decision to announce 10% tariffs on the remaining $300bn of Chinese goods, from the 1st September.
It would appear that the Chinese are sending a message in its decision to fix the yuan higher than expected. In pulling the yuan higher it is not only looking to manage any decline, but also looking to contain any damage in terms of confidence in their stewardship of the Chinese currency and economy.
It also buys time for cooler heads to prevail when it comes to escalating events further, however given the US President’s track record on escalations that seems doubtful, given that the US Treasury labelled China a currency manipulator only hours before.
In any case markets in Europe has seen the FTSE100 open lower, while the DAX has opened higher after German factory orders rose strongly in June, by a greater margin than expected.
This move by China may have brought investors a brief respite after several days of selling but it remains to be seen whether today’s move is emblematic of a short term base, or just merely the precursor to a dead cat bounce.
It is important to understand that a further escalation is in neither sides interest, however good sense has long since ceased to be an arbiter of future policy moves where the US and China are concerned.
The next move appears to lie in the hands of the US and President Trump.
The latest half year numbers from Rolls Royce (LON:RR) appear to show that while the underlying business continues to perform well the problems with the Trent 1000 engines are likely to act as a drag on profitability for the next three years, with the company estimating that they will cost up to £100m to fix.
Intercontinental Hotels Group (LON:IHG) also appear to show an improving trend on revenue, rising to $2.28bn, an increase of 8%, with operating profits rising by 14% to $457m.
The overall performance across regions was patchy with the US underperforming, while the UK market was more positive. In Asia there were concerns that the unrest in Hong Kong could hit the company’s numbers in the second half of the year. In the first half there is already evidence of an impact on the business with revenue per room down marginally, in Hong Kong as well as in the Greater China region.
It would appear that investors share those concerns with the shares modestly lower on the open, though they are still 20% up on the year.
UK defence contractor Meggitt (LON:MGGT) has also announced that it is on track to deliver margin improvement of 0 to 50 basis points in 2019, while upgrading its revenue outlook, for the full year.
On orders and revenue the company has seen an increase of 7%, for the first half with profits before tax rising 2% to £145m.
The Australian dollar is the best performer today after the Reserve Bank of Australia held off from cutting interest rates at its latest meeting overnight, though the rebound was also helped by the higher yuan fix that saw the Chinese central bank dial back expectations that they would let the currency fall further after it broke through 7 yesterday.
US markets look set to stabilise after yesterday’s big sell-off which saw the Dow post its largest fall this year.
On the earnings front Disney shares have had a great run of it of late, hitting record highs on a regular basis throughout the summer.
This outperformance in recent months is testament to the high expectations around the launch of its new streamlining service Disney+ which is due to launch on November 12th this year. At a cost of $6.99 a month it appears deliberately designed to undercut Netflix’s pricing model, with the shares up over 30% in the last six months.
The biggest problem Disney will have, in what is becoming an increasingly crowded and fragmented market, is one of limited consumer appetite for multiple subscriptions.
This isn’t likely to be too big a problem in the short term given the company’s multiple revenue streams, from its theme parks as well as the acquisition of Sky, which suggests that in the short term they might look to use it as a loss leader, to squeeze the competition.
Dow Jones is expected to open unchanged at 25,717
S&P500 is expected to open unchanged at 2,844
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