Morning Note: Market selloff, Uber tanks again, Vodafone grasps the nettle

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Morning Note

It was another, more brutal sell-off on Wall St led Asian shares lower overnight, setting us up for a nervy session in Europe. Futures right now look positive but we may well see selling pressure re-emerge.

SPX closed 2.41% lower, taking it back to March levels. This was its worst decline since the turmoil at the start of January. The Nasdaq suffered its worst day since December as tech stocks were the worst hit from the fallout of the US-China spat. The Dow shipped over 600 points, to end around 25,324, with some of its biggest hitters affected by the China trade story directly (Boeing, Apple).

Risks for now seem very much skewed to the downside until we see some kind of equilibrium achieved again. The market is seeing the window for a deal causing tightly, although with tariffs not taking effect yet we could yet see some improvement in relations. If this is the third shoulder of a giant triple top in the market there is a hell of a long way to go lower. But we are probably not at that stage yet. The Fed remains on side – bets on a cut this year have shot up from around 50/50 to around 75%.

Commodities

Gold spiked higher as a risk-off proxy. Prices which had dithered around $1280 level for a while drive up through the big round number at $1300 and was last just down a shade beneath this.

Oil had risen amid escalating tensions in the Persian Gulf. However the reality of the trade war began to hit home later and crude prices slid again. Brent, which had leapt clear of $72, was last holding just shy of the all-important $70.60 level. This is a level we have talked about time and time again and it is proving something of magnet for Brent right – a decisive break in either direction could signal a fresh direction.

FX markets are completely ignoring the whole stooshie, although there a touch of movement in the Chinese yuan, but not a lot. Little movement for now as central bank liquidity is onside to keep volatility low. BoJ now also talking more stimulus should consumer prices lose momentum.

Uber stock reels post-IPO

It was a bruising session for Uber with shares down by more than 10% on the day. Adding insult to injury, they fell further after market to trade below $37.

Following the Uber and Lyft debacles, there are now questions over whether some remaining unicorns choose to lust this year. The likes of Airbnb and WeWork could decide to pull their planned IPOs until there is more certainty.

Moreover current market conditions do not seem favourable for listings right now and companies may prefer to wait for a rebound in the broad market before listing. That said, it’s too easy to lump all IPOs into the same basket and see a read across.

There have been notable positives in the latest round of IPOs – Beyond Meat, Zoom and Levi’s shares rising firmly from the strike price post-IPO. Perhaps it’s just a case of good old fashioned stock picking and valuations after all.

Vodafone cuts dividend

Vodafone has bowed to pressure and cut its dividend. Or rebased to use the euphemism. The dividend was cut from 15 eurocents to 9, which is a very hefty cut indeed and investors will punish this move. Unlike some notable others, though, Vodafone has grasped the nettle and chosen to put the future of the business ahead of short-term returns to yield hungry investors. Now it’s not great news, but at least it shows the new CEO is willing to think longer term and is seeking to manage the debt.

On top of controlling debt, one of Vodafone’s key problems is the very large investment needed for 5G rollout. Auctions in Italy and elsewhere (Sweden, Australia) indicate the enormous costs and further divestments to shore up the dividend whilst still investing enough in capex seems inevitable. It is very likely Vodafone will flog its towers as part of this strategy, or to use another euphemism in today’s update – monetise. Vodafone also announced that it will sell its NZ business for $2.2bn in a move that frees up some cash.

Today’s results were full of euphemisms actually. The raw results showed a 6.2% decline in revenues and a loss for the year of €7.6bn. But instead management is directing us to ‘alternative performance measures’, which show far healthier EBITDA growth of 3.1% and group services revenues rising by 0.3%. Caveat emptor. In addition to the 5G cost, Vodafone faces a number of competitive headwinds in Italy, Spain and South Africa. There’s a lot of restructuring going on amid big changes in the industry with 5G. Management seems to be grasping the nettle and should be allowed time to deliver on the strategy

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