Equities softer on Trump tariff threat, Hong Kong woes

Morning Note

In a rare feat, Donald Trump managed not to move markets with his speech at the Economic Club of New York. Perhaps like the perpetual drunk droning on, the regulars have stopped listening. It was the usual smattering of boasts, ridicule and attack on the Fed (‘Give me some of that money’).

On trade, a phase one deal ‘could happen soon’. Well we’ve hearing that for months. And Trump threatened to raise tariffs on China if no agreement is reached – this has not helped sentiment in Asia and is also a factor for European sentiment. ‘They’re going to be raised very substantially. And that’s going to be true for other countries that mistreat us too,’ he said. Delay to tariffs on EU autos is awaited but not in the bag until it’s signed.

Markets recovered ground yesterday. The S&P 500 rose to a shade below Friday’s all-time high. The Dow was completely flat and the Nasdaq hit a record high before paring gains. Europe rallied to erase much of the damage wrought by Monday morning.

Today though mixed messages on trade from Trump and ongoing fears about the seemingly uncontrollable situation in Hong Kong has left Asian equities shaken. Hong Kong dipped another 2%, with China, Tokyo and Sydney all weaker. Hong Kong appears to be a city in complete chaos. One fears it could get a lot darker for the people of the city before the light emerges. 

European equity markets are taking their cue from Asia with a softer open. The Stoxx 600 dipped about 0.25% in early trade while the FTSE 100 was off 0.5%. There are jitters again like we saw on Monday morning.

Jittery markets provided support for gold, which rallied off lows around $1450, briefly touching $1445, to trade around $1462. Pressure remains on the bulls though with near-term downtrend in tact. The rally lacks confidence. Potential moves back to long-term trend support and a double 50/38% Fib level around $1360-70 looks feasible. The chart pattern is more bullish, pointing to a bullish flag retracement nearing completion. Next support is at $1440. Oil was weaker along with Asian equities.

There’s always one….The Reserve Bank of New Zealand surprised just about everyone by electing to leave rates unchanged at 1%. Markets had been positioned for a cut – the kiwi flew through 64 as a result. NZDUSD jumped from 0.63250 to north of 0.64 and held gains. The RBNZ is keeping ammo in reserve.

In FX, EURUSD which had trapped in a narrow range at 1.10125 is threatening to breach 1.10 on the downside. German and US inflation data later today may offer some escape. The October 15th low at 1.0990 offers support. GBPUSD is holding around the 1.2850. We can expect the pair to bounce about the 1.28-1.30 channel until closer to the election. USDJPY is holding the 109 level and the 200-day line is now the support.

Equities 

The REITS are facing a war on the high street. After Land Securities’ harrumphing about CVAs dragging its into the red, British Land has also felt the pinch from a struggling retail market after writing down the value of its by £600m in the last 6 months. 

The company wrote down the value of its portfolio by 4.3% to £11.7bn from £12.3bn as of March. But within this Retail values slumped 10.7%, whilst Offices rose 0.4%.

Reported losses ballooned from £48m in HY 18/19 to £404m in the first half of the current financial year. Underlying profit fell 10% to £152m.

We’d thought that the more diversified REITs (offices, mixed use space, not so retail heavy) would not be as badly affected as Intu by the high street collapse. But they too are facing immense pressure on rents and valuations as retailers shut up shop. A third of store vacancies since April 2017 following CVA or administration are still empty.

Unlike Intu though there’s no talk about raising cash – diversified REITs are in better shape as the office market remains robust – as long as those Services PMIs hold up.

Taylor Wimpey has also reiterated full-year guidance and sees strong cash generation and demand holding up. A sales rate of 0.92 vs 0.77 last year is noteworthy. Some mixed signals on margins ( sees lower) and cost pressures (also seen lower).

Low interest rates, strong employment levels, rising real wages and Help to Buy mean things remain pretty solid for housebuilders. Key question – will the next government extend Help to Buy?

Smiths Group – guidance unchanged after 11% rise in underlying revenues in last quarter.