23 Aug 2018

Juan Palenzuela

Good morning, 

Tuesday was a seismic day for the president of the United States, with two former associates of his in major trouble in the law courts. One of them, Michael Cohen, pleaded guilty to a number of criminal charges and accused the president himself of instructing him to break campaign finance law.

Having said that he would take a bullet for the president less than a year ago, Cohen has dramatically changed his stance on the president. In a series of interviews through his attorney yesterday, Cohen questioned Trump’s loyalty to the United States and said he was “unfit for office”. Lanny Davis, Cohen’s attorney, added that Cohen’s breaking point occurred at the Helsinki Summit last July. “The Helsinki conference scared him. That he (Trump) would stand up, agree with Vladimir Putin and dismiss his own national security service at the same time… it was a very telling moment” Davis told Sky News.

The magnitude of the impact that this chain of events could have on Robert Mueller’s Special Council Investigation remains uncertain, as Cohen is not required cooperate with investigators as part of his plea deal. However, Lanny Davis hinted that his client is in fact “happy to help” and that he possesses information “of interest” to the probe. Cohen’s collaboration would be a critical step closer to the White House for the Special Council.
Some will say that Cohen is trying to use Trump as his scapegoat and he wouldn’t be the first disgruntled employee to lash out at his former boss. There may be evidence of a visit by Cohen to Prague during the election campaign to meet with Russian officials, although Cohen has vehemently denied this in the past. It will be interesting to see, if he is to collaborate with Mueller, whether those denials persist, peter out, or if the question stops being asked altogether? Cohen might just be able to avoid the worst heat of the investigation for the time being, either by clearing his name as a collaborator, or by shifting the conversation to more lofty matters.


US and Chinese officials met yesterday for the first time since June in a bid to find a solution to their deepening trade conflict. Despite the meeting, a new set of tariffs that collect 25% duties on 279 Chinese import product categories started being implemented earlier today. As expected, China decided to retaliate with new tariffs effective from today on imports from the US worth $16bn, mirroring the value of the export goods caught by the US taxes. The most significant products affected include fuel, steel products, automobiles and medical equipment.

The Government Expenditure and Revenue Scotland (GERS) report was published yesterday morning, reigniting once again the debate over independence. The report states that Scotland spent £13.4bn more than it raised in taxes in the past financial year, compared with £13.5bn the year before. This year’s deficit is equivalent to 7.9% of GDP, while for the UK as a whole it was 1.9%.

Credit Suisse, one of Switzerland’s largest banks, has frozen roughly 5.1 billion Swiss francs (£4 billion) linked to Russia to avoid U.S. sanctions, further increasing pressure on Moscow. Switzerland has long been a popular destination for Russia’s wealthy elite. In 2017 almost $6.2 billion (£4.8bn), or 14% of total Russian cross-border outflows, went to Switzerland, almost three times as much as went to the United States, according to the Russian Central Bank. The sanctions were announced in April by Steven Mnuchin, US Treasury Secretary, to penalise Russia for its involvement in the war in Syria, its annexation of Crimea, and for “attempting to subvert Western democracies”.

Business & Economy 

Saudi Arabia’s hopes for the public market listing of its state-owned company, Aramco, seem to be fading away. Yesterday, Reuters reported that the budget for its financial advisers – JP Morgan, Morgan Stanley and HSBC – has not been renewed since June. The IPO was, in any case, becoming less urgent because of higher oil prices, relieving pressure on Saudi finances. In addition, senior regional sources told The Guardian that the deal was postponed due to fears that Aramco’s valuation, which is estimated to be around $2 trillion, would be much less than expected. The IPO was set to be the largest ever and formed part of a wider plan led by crown prince Mohammed bin Salman to reinvigorate the Saudi economy.

Federal Reserve officials have discussed the possibility of raising interest rates soon to counter excessive economic strength, and also examined how global trade disputes could affect businesses and households. Officials held a meeting on at the start of August, but the minutes were not released until yesterday.

Tesla’s bond investors are betting that the company’s plan to go private will not materialise,  according to Reuters. This move suggests that the credit market has rolled back the chances of a buyout. Data from the equities options market indicates that those investors are also sceptical.


What happened yesterday?

London stocks reversed their early losses to rise on Wednesday as investors observed the latest round of US-China trade talks, which were set to conclude today.

The FTSE 100 was up 0.11%, or 8.54 points to 7,574.29, even as the pound was 0.08% higher versus the dollar to 1.2907, but short of its session-highs of 1.2937.

The S&P 500 share index closed yesterday having gone 3,453 days – nearly nine and a half years – without a fall of 20% or more, which is a measure traditionally used by analysts for measuring market performance, granting it the status of the longest bull market in US history. The current rally started in March 2009, and it continues as the global economy recovers from the last recession.

The Dow Jones Industrial Average ended down 0.34% at 25,722.60 and the S&P 500 was down by 0.04% at 2,861.82, while the NASDAQ Composite went up 0.38% to 7,889.10.

Arcontech Group

Anglo Pacific Group
Bank of Cyprus Holdings Public Limited Company
John Laing Group
Macfarlane Group
OneSavings Bank
Phoenix Group Holdings (DI)
Premier Oil

D4T4 Solutions    
The Fulham Shore

UK Economic Announcements
(11:00) CBI Distributive Trades Surveys

International Economic Announcements
(13:30) Continuing Claims (US)
(13:30) Initial Jobless Claims (US)
(14:00) House Price Index (US)
(15:00) New Homes Sales (US)

Columns of Note 

Writing for Bloomberg, Tim Culpan argues that Xiaomi, a Chinese consumer electronics company, should rethink its long-term strategy. After reporting for the very first time, the company’s results confused investors, just as its business model does: revenue was up by 68%, but gross profit climbed only 47%. Net income flipped from loss to profit, while operating profit went from positive to negative. One thing that remained consistent, at 67%, was the revenue from phones as a share of total revenue. However, internet and lifestyle products accounted for only 23% of total sales and considering that the company has highlighted this category as its key differentiator, Culpan says it is underperforming. It is time for Xiaomi to figure out what it does, he concludes.

In the Financial Times, Andrew Edgecliffe-Johnson makes the case for business leaders standing up against protectionism. He writes that while executives are increasingly involved in social activism, they forgot to defend the rules-based order that allowed their firms to prosper in a time when it is under attack. It is important to note, says Edgecliffe-Johnson, that this does not involve partisanship. It is about a set of values that transcends any particular president or party. If they really care about their firm’s long-term interests, CEOs should recover those values, he says.

Did you know? 

During World War 2, Allied engineers recognised that they could add extra armour to their planes without compromising performance. The question was where to add it. Experimentation was possible, but costly, and pilots would lose their lives.

For every bomber that returned from Axis-controlled territory, the engineers could see where the the planes had been hit by anti-aircraft fire. When Abraham Wald, a Hungarian mathematician working for the US’s Statistical Research Group, was assigned the task of developing a statistical model to determine where best to reinforce the planes, he advised not to reinforce the areas hit by enemy fire. His critical observation was of the bias in the data he was observing, noting as he did that he could only see the planes that survived. This became known as ‘survival bias’.

Wald thus instructed the engineers to reinforce the areas of the planes that were not hit by bullets, which improved the rate of planes returning home safely.

Parliamentary highlights 

House of Commons
In recess until 4 September 2018
House of Lords
In recess until 4 September 2018
Scottish Parliament
In recess until 4 September 2018