Markets await trade talks, HKEX pulls LSE bid

Morning Note

Global markets appear in a holding pattern, EasyJet shares dip despite strong Q4, LSE dips as HKEX pulls out

Markets are largely moving sideways as investors wait for the trade talks between the US and China to play out. Headline risk though is significant. Hopes of a comprehensive deal are all but zero, but there’s yet the gambler’s optimism that something can be achieved in a much narrower sense. China is making it clear it’s not ready for a comprehensive agreement. A small, narrow agreement is possible but even this seems to be asking for too much as the two sides remain far apart. In narrowing the scope of this week’s trade talks China has simultaneously lowered expectations and reduced the risk of disappointment from a negative outcome.  

Markets are also looking for direction in terms of the next Fed move. Expectations for a cut at the next meeting have declined to a little under 70% from as high as 90% last weeks. A slew of Fed speakers this week and the CPI print will offer a clue. However we feel this is more a matter of timing – expectations for a cut by year end remain c90%. A further uptick in the core CPI number this week would give hawks more ammo to stall and could push expectations further out the time horizon.


Wall St declined but European shares rallied yesterday. The FTSE 100 closed a whisker short of 7200. The DAX was a shade off 12,100. SPX closed half a percent weaker at 2938.

European stocks are mixed and kind of mooching around the flat line, but the FTSE 100 is higher again today as the selloff we witnessed last week is pared. Ranges that have been in force since the end of July, early-Aug capitulation remain in place. US futures look stronger today.

German industrial production numbers are bad again but not as bad as feared. Month on month production rose 0.3% against the flat reading expected. Year-on-year, industrial production slipped 4.0% against the 4.3% expected.

Oil is a tad firmer at $53. Gold has eased off its highs above $1500 as yields rose a touch but seems to be fairly comfortable anchored to this level for the time being and until we get some fresh direction for markets.

EURUSD snapped its winning streak. The pair has failed three times in the last three sessions to break the 1.10 ceiling, which poses a risk of a retest of the recent 2-year lows around 1.0870.

GBPUSD is facing a great deal of Brexit-related uncertainty. This uncertainty is paralysing cable which was very reluctant to make any kind of move on Monday. Anything outside 1.22 or 1.24 may be followed.

On Brexit, we are entering the final phases of this merry dance between the government, parliament, the courts and the EU. The Scottish Inner House will rule on whether the court can sign the extension letter in place of the PM. One feels like it only plays into the hands of Boris and the Brexit architect Dom Cummings – the narrative is that the establishment is breaking Brexit and going against the people.

Equities

HKEX has pulled its offer for LSE Group. A concerted charm offensive failed to pay off for the Hong Kong group as investors balked at the anti-trust, regulatory and deliverability issues that the tie up implied. And, not least, LSE is fully committed to the Refinitiv deal. Finally, the premium on offer, though chunky, was not enough to compensate shareholders. There was never a cash element, just new shares in a HK-listed group.

As we said at the time, this deal was a non-starter for a range of reasons, any one of which would have been enough to block a merger. Still we’re slightly surprised HKEX didn’t try again – the fact they didn’t suggests their charms, dubious as they are, were completely lost on the big shareholders. Shares slipped 6% to £70 on the open, but what remains unclear is whether one of the large US exchanges comes in.

EasyJet delivered a robust Q4 update that indicates more resilience in the face of well-known sector headwinds. It’s the first update since Thomas Cook collapsed and suggests airlines are fine (the problems for TC were a mix of package-specific and legacy issues). We note a couple of upgrades recently for the sector. The worst may be over now a number of headwinds have apparently peaked. Thomas Cook’s failure can only help EasyJet grab market share. There’s not a mention of Brexit uncertainty. Higher oil prices and FX headwinds are eating into the bottom line, but cost-saving is paying off.

Management expects full year headline profit before tax of between £420 million and £430 million, in the upper half of the previous guidance range. Passenger numbers for the full year increased by 8.6% to 96 million, driven by an increase in capacity of 10.3% to 105 million seats. Load factor for the full year will decrease by 1.4 percentage points to 91.5%. Shares were off over 5% on the update despite the good numbers.

Hollywood Bowl delivered a positive update. Total revenues +7.7% with like-for-like revenue growth of =5.5%.  Management expect to report profit before tax growth in excess of 10%, slightly ahead of market expectations. Investors can now expect additional capital returns, too.