European markets have sunk like a stone this morning after President Trump’s unexpected decision to announce 10% tariffs on the remaining $300bn of Chinese goods, from the 1st September. it is difficult to understand the President’s thinking here given that these particular tariffs are likely to hit his base the hardest, given that these goods will include the staples of the US consumer, like apparel, toys and electrical goods.
This helps explain why US retailers felt the brunt of last night’s sell off in the US yesterday, as pressure builds to absorb any price increases into their margins. It’s also important to remember that US consumer confidence rebounded strongly in July. It’s likely to take a big hit lower if these tariffs come to pass.
If President Trump carries on like this he may well get his rate cuts, but at what cost? 50 basis points of cuts when set against 10% to 25% of tariffs isn’t likely to be a winning strategy, at a time when he is just over a year away from a US election, but then who said what the President does makes any sense?
With China saying they will retaliate and South Korea and Japan also falling out over trade, this latest development in the trade war has taken a significant turn for the worst.
The biggest decliners today have been the usual suspects of auto makers, miners and oil and banks as concerns about a further slowdown in economic activity and much lower rates clobbers risk appetite.
Yields have continued to plunge, the German 10 year yield within touching distance of -0.5%, while US 10 year yields are near their lowest levels in nearly 3 years at 1.84%.
The UK has also seen its borrowing costs plunge despite the rising risk of a no deal Brexit with the 2 year yield inverted between 2 and 5 years, with the 2 year yield above the 5 year yield.
The pound is still under pressure, despite the slide in the US dollar, after the Conservative party narrowly lost the by-election in Brecon, seeing their parliamentary majority narrowed further.
On the earnings front we’ve seen Royal Bank of Scotland (LON:RBS) surprise the markets with some pretty decent numbers in Q2, as well as announcing a special dividend of 12p a share, securing a windfall for the UK taxpayer of about £1bn.
Overall profits beat expectations, coming in at £1.3bn, well above the £96m we saw in the same quarter last year, and also above Q1’s numbers when the UK economy was much more resilient. None of this has been enough the spare the shares sell off today after management warned about the outlook.
British Airways owner IAG (LON:ICAG) appears to be bucking the trend when it comes to the market sell off today after reporting operating profits that beat expectations.
In the three months to June the company saw an 18% increase in profits to €960m, helped by a decent increase in passenger revenue of 7.2%. passenger revenue per seat also rose 1.3% as the company benefitted from its diverse set of brands from Aer Lingus, to Vueling.
BT Group (LON:BT) has also announced its latest Q1 trading update, with revenue down 1% to £5.63bn, down 1% from a year ago. Profits after tax have also come in lower at £505m.
The revenue declines have come across all of the business, with enterprise and global showing the biggest declines. The company’s Openreach division did show an improvement with a 1% rise in revenues to £1.27bn.
Overall the numbers were slightly better than forecasts due to a continued focus on cost cutting as new CEO Philip Jansen looks to gear the company up for the roll out of 5G and all the challenges that is likely to entail.
US markets are likely to continue their falls today as European markets plunge in the wake of last night’s tweets from President Trump, today’s US payrolls report could well be completely incidental to today’s carnage.
Dow Jones is expected to open 80 points lower at 26,503
S&P500 is expected to open 13 points lower at 2,940
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