Europe
It’s been a solid end to the week for European stock markets despite further evidence that Europe’s biggest economy, Germany continues to undergo a crisis of confidence.
The latest IFO Business confidence survey came in at its lowest level since 2012, raising concerns that Q1 is likely to be as weak, if not weaker than the previous two quarters where the Germany economy was shown to have stalled, however this hasn’t stopped the DAX from pushing up to its highest weekly close since November, on the basis that the ECB will be forced to change tack with respect to any monetary policy changes.
Furthermore, it would appear that with one week to go until the 1st March trade deadline that investors are assuming that it will be more than likely extended, given some of the smoke signals coming from recent discussions, as well as all the chatter over various memoranda.
It is reported that President Trump will be meeting China’s top trade negotiator Liu He, later today to assess the progress on the ongoing talks, and this is also lending support to the belief that next week’s deadline is likely to get pushed out. That is already something that President Trump has indicated might happen given his recent comments that the date was not set in stone.
In company news Legoland and Alton Towers owner Merlin Entertainments (LON:MERL) has sold its Australian ski resorts for £95m to US based Vail Resorts, as it looks to expand in Asia markets, while UK dairy company Dairy Crest (LON:DCG) has agreed to a 620p acquisition by Canada’s Saputo Dairy.
Earlier this week education publisher Pearson (LON:PSON) announced the sale of its US K12 courseware business to Nexus for $250m. This business provided the education material for course work for students from kindergarten to 12th grade, as the company focuses its efforts on virtual school and higher education.
Today’s full year numbers show that the business in the US continues to be challenging, with revenues declining 1%, which in turn helped contribute to an overall sales decline of 9%.
Profits did rise to £553m, though this was largely due to the disposals of Wall Street English and the online University partnership in Mexico, UTEL, while the company has managed to reduce its debt to £143m from £432m at year ago. For 2019 the company said it expected to see profits to improve to around £600m.
US
After a disappointing session yesterday US markets rebounded strongly on the open, ahead of today’s expected meeting between President Trump and China’s top trade negotiator in Washington, with the main attention also on Kraft-Heinz’s share price (NASDAQ:KHC) after last night’s huge write down and $12.6bn loss, after they reported their latest numbers after the bell.
Not only did the company announce a huge $12.6bn loss, management also cut its dividend, and announced that the company had been subpoenaed by the SEC for accounting irregularities.
For the company that attracted so much opprobrium for its shabby behaviour over its purchase of Cadbury all those years ago, as well as its failed attempt on Unilever (LON:ULVR) more recently, you might be forgiven for feeling a little bit smug right now, as well as relieved that these corporate raiders have been hoisted by their own petard. Sometimes you have to sell a product people want to buy, rather than just focus on costs to the exclusion of everything else.
On the earnings front we’ll be looking to the latest numbers from cloud storage minnow Dropbox (NASDAQ:DBX). When the company IPO’d just under a year ago there was more than a little scepticism that it deserved its $17 a share $7bn valuation. In the aftermath of the launch the shares did reach a peak of over $42.50 putting aside those concerns with interest, however the shares have since halved from those frothy peaks, though they haven’t dropped below their initial IPO valuation.
Even allowing for the falls in the shares the company remains vulnerable in an extremely competitive cloud environment, where it has to compete with Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) cloud services to name a few. This means that in terms of pricing it is vulnerable to loss leader pricing by its bigger rivals who could choose to squeeze margins due to their bigger scale. In November the company surprised by beating expectations of revenues and profits and this is expected to continue in Q4 with profits of $0.08c a share.
Intel (NASDAQ:INTC) shares have enjoyed a good start to the session helped by an upgrade from Morgan Stanley (NYSE:MS).
On the economic data front there is little in the way of US data, however Canada is releasing its latest retail sales numbers for December, which aren’t expected to show a significant improvement on the poor November numbers. For all the optimism that the Canadian economy is in fairly good shape, there is some concern that the recent rises in rates has started to impact house price values, as well as consumer spending.
December retail sales are expected to reinforce these concerns with a drop of 0.3%, still an improvement on the 0.9% decline in November, but reinforcing the perception of a consumer that is struggling with the combined effect of rising interest rates and lacklustre wage growth.
FX
The euro has managed to hold up fairly well despite another set of poor economic indicators out of Germany.
The pound has had a decent week despite the fact that progress on getting any significant changes to the withdrawal agreement seem as far away as ever, and while there was some weakness on reports that there wouldn’t any so called “deal in the desert” as EU leaders meet in Sharm El Sheikh at the weekend, it proved short lived. It is becoming increasingly likely that there will need to be some form of extension whatever happens, irrespective of whether there is a deal or not agreed in the next few weeks.
Commodities
Brent crude prices have continued to gain support from an increasing expectation that the US and China will extend talks in their ongoing trade dispute. The big risk to this current move up to three month highs is that the business cycle is still not showing much sign of picking up, and with US output at record highs, the OPEC supply cuts may not see inventories come down anywhere near as fast as expected.
Precious metals prices have had another good week as a weaker US dollar, as well as supply shortages help push palladium and platinum prices ever upwards. Palladium is now on course for three successive weekly gains, while platinum is on course for its best week since the beginning of the year.
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