19 October 2018

Stuart Taylor

19 October 2018

Good morning,

Hardly a week goes by without a new development in the trade war between China and the US as the two economic superpowers play ‘tariff tennis’ with each other's goods. The exchanges have caused fevered speculation amongst analysts and commentators over the level of damage this has brought to each economy. This morning, the picture for one half of the dispute become a little clearer. 

Beijing has released the latest GDP figures and they show the slowest quarterly growth rate in the country since the depths of the global financial crisis. Data by the National Bureau of Statistics showed the world’s second-largest economy grew 6.5% year-on-year in the third quarter of 2018, the weakest growth rate since the first quarter of 2009 and short of analyst forecasts of 6.6%.

China’s official GDP data has long been recognised as notoriously flawed when it comes to offering a reliable measure of the country’s economic health, but it does offer a useful indicator of its growth trajectory.  

Today’s figures are the first to be released since Donald Trump slapped China with two sets of tariffs, targeting $250bn worth of Chinese goods, and it is difficult to argue against the assessment that the ongoing trade war, combined with numerous domestic challenges, is weighing heavily on China’s financial fortunes.

Nevertheless, the country’s government remains on course to exceed its own full-year growth target of 6.5%, and indeed the trade war may actually have delivered a short-term export boost in September as companies rushed to ship goods before new US tariffs kicked in towards the end of the month. However, the prevailing sense is that the worst is yet to come as the uncertainty intensifies. This appears to be a conclusion that Beijing has reached too. They have already sought to boost investor confidence in their stock exchanges which have been hit hard by the geopolitical tension, and made attempts to build resilience and liquidity in the financial system by cutting the amount of cash banks can hold in reserve.

With no resolution to this global dispute in sight, President Xi Jinping and his administration are faced with some difficult decisions as they look to jump-start an economic engine that had purred along nicely for more than a decade.

News

Theresa May’s offer to extend the transition period after Brexit is ready to be accepted by the EU, though the invitation has enraged MPs in the prime minister’s party. EU Council president Donald Tusk has said that they would agree to extending the process if it would smooth the path to an agreement. However, David Davis, the former Brexit secretary, was calling ministers yesterday to urge a change of course in the negotiations.

A committee of MPs have said that a ban on sales of new petrol and diesel cars should be brought forward by eight years to 2032. A report by the Business, Energy and Industrial Strategy committee have labelled the government's current plans to ensure all new cars are "effectively zero emission" by 2040 as "vague and unambitious" and said the government’s actions don’t match the ambition of its words.

Donald Trump has said that he presumes Jamal Khashoggi is dead and the consequences for Saudi Arabia could be “very severe” if it were to be found that its leaders ordered the journalist’s killing. The president’s comments come after he was briefed on the situation by his secretary of state, Mike Pompeo, on Pompeo’s return from a trip to Riyadh and Ankara.

Business & Economy 

The BBC has said that Netflix and Amazon could be subsidised with public money originally taken from the BBC’s budget to pay for rural broadband. The move is part of the government’s plans for the scheme’s £60m surplus to be handed to private production companies in order to assist with the production of children’s TV, programming in the UK’s indigenous languages and commercial radio.

Unilever may ditch its plans to overhaul its corporate structure as it continues to struggle to remedy its Anglo-Dutch status, according to one of its most senior directors. Graeme Pitkethly, the company’s finance director, said he could not put a deadline on when it would make a decision on ending Unilever’s dual governance structure. (£)

Sanjeev Gupta, labelled the “saviour of steel, has asked rival commodity traders for loans after one of his main financial backers ran into trouble. GAM, the Swiss asset manager that owns at least $2.8bn of bonds issued on behalf of Mr Gupta’s family companies, has retrenched after discovering a breach of company policy by one of its key fund managers. (£)

Markets

What happened yesterday?

A weakness in mining shares contributed towards a fall on the FTSE 100 yesterday, as the index closed at 7,026.99, 28 points or 0.39% lower. It was a similar story on the FTSE 250 market, which closed 53 points or 0.28% lower at 18,961.35. On this more UK-focused index, Games Workshop had a particularly bad day after it warned of market “uncertainties”. By the end of trading, shares were down 4.95%, having slipped by as much as 8 per cent at one point in the morning. 

There was somewhat better fortune for Domino’s Pizza yesterday after the company announced a further £25 million share buyback and reported rise in quarterly sales. Shares in the company were up by 8 per cent in the morning, dropping back to a rise of 5.45% by the close of trading. 

On the currency markets, sterling was down 0.18% against the US dollar at $1.3093, having risen above $1.31 earlier in the day.

AGMs
Acacia Mining
London Stock Exchange Group
Provident Financial
Schlumberger Ltd. 

UK Economic Announcements
(09:30) Public Sector Net Borrowing
(11:00) CBI Industrial Trends Surveys

International Economic Announcements
(09:00) Current Account (EU)
(15:00) Existing Home Sales (US)

Columns of Note

In the week of US banks and brokerages announcing their latest quarterly results, Peter Atwater, president of Financial Insyghts and an adjunct professor at the College of William & Mary, writes in the FT that private client lending is growing rapidly on the back of a strong economy and soaring financial markets. Atwater warns that the entire luxury market, comprising of assets such as real estate and art, is at risk of a complete and simultaneous collapse if the low-cost debt bubble that has fuelled it over the past decade were to burst.

Writing in The Times, Philip Collins says prohibition of cannabis has failed and it’s time for the UK government to follow Canada and Colorado by legalising the drug. Collins calls on politicians to have the courage to correct a policy that he says has long become clear does not work. (£)

Did you know?

The Met Office began assigning names to storms in the UK in 2015. They are alphabetically named and alternate between male and female names during the season. At the end of the year, the names are reset. Following a pilot scheme whereby the Met invited suggestions from the public, 10,000 suggestions were put forward. Names that were rejected included Bluetooth, Ssswetcaroline, branch wobbler and - my personal favourite - In A Teacup. 

Parliamentary highlights

TODAY 

House of Commons
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House of Lords
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Scottish Parliament
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