Mihai Nechita

Fri, Nov 30

Stocks Watch - 30/11/2018

Since our last update, the Equities market have been characterised by an increase in volatility. Up until Friday, 23rd November 2018, all major indices have moved lower, influenced by the negative sentiment surrounding global growth trends as well as political developments surrounding Brexit and the Italian Budget.  This week into month end, sentiment has turned slightly more positive following excellent Black Friday and Cyber Monday sales, EU leaders agreeing on the Brexit deal and Italy indicating that they would work with the European commission on the budget.  Last Wednesday, the Federal Reserve Chairman Jerome Powell indicated a softer tone when describing the current interest rate path. His comments which seemed more dovish positively influencing the equity market.

In the US, the sell-off was led by the growth stocks from consumer discretionary and information technology sectors which had previously lost investors’ confidence in their ability to deliver the same rates of return as in the past. Apple (AAPL) was the company capturing the headlines with its significant downturn in performance. The negative sentiment was amplified by news coming from several smartphone components suppliers cutting the revenue outlook through citing reduced demand from a “large customer”.  Foxconn, Apple’s top manufacturing partner, announced plans to slash expenses ahead of a difficult year. Naturally, this increased the negative sentiment surrounding the short-term perspective of Apple. The bad news kept coming for the company which had pulled back to the $ 800 billion mark, after having reached the $1 trillion mark in August.  President Trump also announced Apple products imported from China may be included in his next round of enhanced taxation.

General Motors (GM) have announced that they will implement a restructuring plan by cutting production of slower selling models and shift focus to the production of electric vehicles. This plan will reduce the workforce in the US by 15,000 workers. The decision to cut the workforce in the US raised criticism from President Trump where he threatened to remove government subsidies provided to the automaker. The stock initially reacted positively to the restructuring plan but gave back a part of the gains following the President’s comments.

Morgan Stanley (MS) have downgraded Goldman Sachs (GS) following their implication in the 1 Malaysia Development Berhard (1MDB) scandal in which former president Najib Razak was accused of corruption. Goldman Sachs had generated about $600 million in fees from helping 1MDB to raise $6.5 billion in capital.

Amazon (AMZN) announced Cyber Monday was the biggest ever shopping day in their 24-years history but have not disclosed the total sales value. Mastercard (MA) estimates Black Friday hit $ 23 billion, a 9% increase relative to last year whilst Adobe Analytics have estimated the total online sales were $7.8 billion, an increase of 19% relative to last year. The news gave a positive note to the Monday trading day.  

In the UK, headlines were held by further developments on Brexit, with the plan finally approved by the European Union and a Parliament vote scheduled in two weeks’ time.  The Pound Sterling movement positively influenced the FTSE 100 and recorded a lower decline relative to the falling European Indices during the same period.

The British holiday company Thomas Cook (TCG.LN) cut its forecast for full-year operating profit on Tuesday and suspended the dividend due to a weakened UK market. This was the second downgrade in two months. Naturally, the stock reacted negatively to this news.

The stock of precious metal miner Fresnillo (FRES.LN) has reacted negatively to proposed changes in the legislation by Mexico’s new president which will make it more difficult for miners to operate in the country.

EasyJet (EZJ.LN) the second largest European low-cost airline, has reported an increase in earnings and revenues relative to the previous period last year, but maintained their guidance for a lower revenue per seat moving forward, even though there are expecting higher summer 2019 demand.

Credit Suisse (CSGN) have upgraded their view on UK equities suggesting that the political uncertainty surrounding the Brexit has created a value opportunity in the UK stocks.

The Bank of England published the results of the latest credit stress test, successfully showing UK banks could survive a disorderly Brexit and credit crunch-style economic shock. The banks have been tested against a crisis scenario more serve than 2008 global financial crisis.  For the second year, no bank has been forced to raise capital.

In Continental Europe, the markets have been influenced by the Italian budget situation. Initially, the Italian Government defied the European Commission by resubmitting an unrevised budget which put the EC in the position to decide on the disciplinary process. The Italian Government later indicated that concession could be made on the 2019 deficit levels in order to avoid a “war” with the European Union.

The European banking sector was characterised by increased volatility following the news flow and contributed to the decline of the pan European indices.

The energy supplier EON (E.ONSE) has reported for their first nine months of the year an increase of 25% in their net adjusted income. They also maintained guidance for the full year. The company is expecting earnings before interest and tax with average growth of 3-4% until 2020.  The company stock reacted positively to the announcement.

Lastly, the German pharmaceutical company Merck Kgaa (MRK.DE) announced a lower third quarter profit but raised its full year organic sales growth expectations based on the performance of the its Health Care and Life Science Businesses. The profitability has been impacted by the foreign currency exchange, predominantly by worse than expected depreciation of the Argentine Peso and Brazilian Real.