Nerves before US-China trade talks and a little reverberation from yesterday’s meeting of the Federal Reserve have kept markets on edge. As equities fell out of favour, bond yields rose. Fixed Income investors chose to focus more on an estimate showing lower inflation in the eurozone than hints at higher inflation expectations from the Fed.
Annual eurozone inflation at a measly 1.2% in April is hardly in keeping with the idea of a global reflation and synchronised global growth. The cooling in economic activity outside the States goes someway to explain why equities have not responded better to strong corporate earnings. Good earnings were baked into stock prices, but so was a rip-roaring European economy - and the latter is not happening.
After a string of daily price gains thanks to sterling weakness, the shares of multinationals firms within the FTSE 100 were mostly lower on Thursday.
Reports that MPs had sent a letter to the UK competition watchdog with questions about the proposed Sainsbury’s Asda merger saw the shares of Tesco (LON:TSCO) and Morrisons (LON:MRW) head higher. Gains of over 1% put Tesco and Morrisons at the top of the FTSE100 for daily gains. The political intervention is being seen as increasing the likelihood of the deal not going through. Anything that boosts its chance of keeping the number one supermarket spot should benefit Tesco shares.
Shares of medical device-maker Smith & Nephew (LON:SN) saw one of the biggest declines of the day after downgrading its 2018 sales guidance. The shares have been hit particularly hard because the softer outlook increases breakup risk. New chief executive Namal Nawana will now be under more pressure to divest some of its assets from its big activist shareholder Elliott Advisors.
On Wall Street, a strange post-earnings conference call has sent shares of Tesla (NASDAQ:TSLA) spiralling lower. At one point, CEO Elon Musk referred to queries from analysts as ‘boring bonehead questions’. Tesla shares have lost a quarter of their value since reaching record highs last year. Found and CEO Elon Musk’s enthusiasm for the future of electric vehicles (EVs) explains a lot of the investor excitement that went into a sky-high valuation. However Musk needs to get the balance right; be a Maverick- but keep the investors (that fund Tesla while it makes massive losses) on side.
Weakness in the dollar since the Fed meeting dampened the effect of disappointing UK service sector data on the British pound. GBPUSD is grappling with its 200-day moving average. If you factor in the decline in manufacturing and service activity in April, the weak GDP growth in the first quarter and Brexit uncertainty over the Irish border, a UK rate rise doesn’t look likely until the Autumn.
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