Friday 02/08/19

1. In MACRO NEWS, Trump hits more Chinese goods with a 10% tariff, Asian manufacturing suffers, Japan/Korea relations are about to get worse and the Bank of England leaves the interest rate unchanged
2. In FINANCIALS-RELATED NEWS, LSE buys Refinitiv, Barclays raises profits and Revolut offers share trading
3. In INDUSTRY NEWS, German car manufacturing suffers and consumers hold off smartphone purchases for 5G
4. In OTHER NEWS, I bring you the cutest fist-bump ever!

So Trump pokes China with his tariff stick, Asian manufacturing suffers (as do Japan/Korea relations) and the Bank of England leaves interest rates unchanged…

Trump threatens new Chinese tariffs, rattling investors across markets (Wall Street Journal, William Mauldin and Vivian Salama) highlights the latest development in the ongoing US-China trading spat – that Trump has decided to extend tariffs to pretty much ALL Chinese imports (10% tariffs on an additional $300bn-worth of Chinese goods). This will include various consumer products like smartphones, apparel and toys and will come into force on September 1st. * SO WHAT? * The US already has tariffs on $250bn-worth of Chinese goods, so I suspect orders will get pretty frenetic as buyers try to beat the deadline. Interestingly, the tariff hike was apparently opposed by the US Trade Representative Robert Lighthizer, Treasury Secretary Steve Mnuchin, White House economic adviser Lawrence Kudlow AND national security adviser John Bolton – but Trump just went ahead and did it anyway! Markets didn’t like this and were weaker across the board – and oil prices cratered by 8%, their steepest drop since February 2015. High level discussions are due to start again next month and Trump maintains that he wants to reach “a comprehensive Trade Deal”. One unfortunate consequence of this action is that Apple’s US sales of iPhones and other Apple products will be affected because most of them are made in China. It would either have to absorb the costs or pass them on to the consumer. The other thing is that Apple is likely to be a target for retaliation in China – so it’s going to get hit from both sides. However, it’s not just Apple that will suffer – toymakers and other manufacturers are going to have to either absorb higher prices or pass them onto consumers. 

Asian economies gripped by manufacturing woes (Financial Times, Siddarth Shrikanth, Daniel Shane and Edward White) cites various data releases yesterday that show manufacturing conditions in south-east Asia weakened for the second consecutive month in June as factory output fell for the first time in two years – as did manufacturing activity across Japan, South Korea and Taiwan. China’s manufacturing slowdown continued, but wasn’t as bad as analysts had been expecting. Asia’s

economies have been hit by a combination of US-China trade frictions and slowing global demand – and it doesn’t look like things are going to improve much in the near term at least.

I mentioned worsening Japan/South Korea relations last week but Japan set to remove South Korea from export ‘white list’ (Financial Times, Robin Harding, Edward White and Song Jung-a) shows that the dispute is going up a gear as, according to one former minister, Japan is about to take South Korea off Japan’s list of friendly countries and make exporters obtain licences when they ship a variety of products, including chemicals and electronic goods, to South Korea. The South Koreans are threatening to cancel an intelligence-sharing agreement in response. Japan has already restricted exports of three chemicals that South Korea’s semiconductor industry relies on heavily – fluorinated polymide, photoresists and hydrogen fluoride etching gas. Japan has a near-monopoly on all of them. * SO WHAT? * This all goes back to Japan’s use of Korean “comfort women” in WW2, which the Koreans have obviously never forgiven and that the Japanese want to forget – and this issue flares up every few years. Going ahead with taking South Korea off the “white list” will cause major disruption to the tech supply chain – for instance, research from Korea Investment & Securities suggests that South Korean companies will have to get individual approvals for 857 of the 1,120 strategic materials they import from Japan. This will no doubt result in a surge of effort to make South Korea less reliant on Japanese imports in the long term – but they are scuppered in the short-term.

Bank of England holds rates but struggles to hold line on Brexit forecasts (Financial Times, Delphine Strauss) shows that our central bank has gone against the trend in the US (where the Fed cut interest rates) and Europe (where the ECB is about to cut interest rates) and kept our interest rate unchanged despite sharing everyone’s gloomy outlook on the global economy. * SO WHAT? * There’s a lot of noise going on about this but TBH, it seems to me that the main reason why the Bank is keeping things unchanged is that it wants to keep its powder dry for Brexit – where it might have to make a big cut (at least initially) to help boost the economy. Our current interest rate is only 0.75%, so you can see why it would want to give itself the most wiggle room to cut before having to resort to what the ECB is expected to do – have negative interest rates.

The LSE/Refinitiv deal gets official, Barclays announces higher profits and Revolut offers commission-free share trading…

LSE buys Refinitiv in £22bn bid to be global data leader (The Guardian, Mark Sweney) has now agreed to buy Refinitiv in a transformational deal that will make it into a UK-based rival to the market information behemoth that is Bloomberg. It’s an all-share deal and LSE will be in the driving seat. LSE’s chief exec David Schwimmer (no relation to the bloke who plays Ross on Friends) described the move as “a rare and compelling opportunity to combine two world class businesses and create a global financial infrastructure leader. We will continue to be a global business headquartered in the UK” and the company’s shares rose by 5% on news of the confirmation of the deal. Inevitably, there are going to be job losses as part of the £350m of cost savings targeted over the next five years, but there aren’t any further details at the moment. Given that LSE has 5,000 staff versus Refinitiv’s 19,000 I suspect that there will be a lot of pain to come.

Talking about job losses, Barclays cuts 3,000 jobs despite profit rise (Daily Telegraph, Lucy Burton) shows that the bank announced its best performance since 2010 with pre-tax profits shooting up by 83%. This headline figure looks good, but it’s actually down to the fact that the company hasn’t had to face the massive £1.4bn misconduct charge it faced this time last year for selling toxic mortgages. Although Barclays cut its staff numbers by 3,000 in the second quarter, it plans to continue to reduce costs further and will not necessarily replace roles that it has cut. * SO WHAT? * I guess this is good news from an investor point of view, but the pressure will continue from activist

investors such as Ed Bramson who want Barclays to downsize its investment bank. Any performance weakness will make such voices louder – so this performance has probably bought it a bit of breathing space.

Revolut launches commission-free share trading (Financial Times, Nicholas Megaw) heralds another innovative new service from the challenger bank that will pit it against major trading platforms like Hargreaves Lansdown and further differentiate it from the likes of Monzo and Starling Bank. Customers who pay for its £12.99 “metal” subscription will be able to trade US stocks from Thursday, with the service rolling out to those on cheaper subscriptions over the next few weeks. There’s a sliding scale of how many free trades you can get depending on your subscription level, there will be no minimum investment size and Revolut will be the first European company to let investors buy fractions of shares. This contrasts with Hargreaves Lansdown, which charges between £5.95 and £11.95 per trade and AJ Bell and Barclays who charge between £4.95 and £10. Revolut believes it will make money by encouraging users to sign up for the subscription service. * SO WHAT? * OK, so the likes of Hargreaves Lansdown won’t be quaking in their boots just yet given that Revolut’s trading options are limited to US shares and can’t be held within tax wrappers such as ISAs or SIPPs. However, it seems that Nik Storonsky, Revolut’s chief exec, intends to democratise stock market investment as he said that “Investing in the stock market has been closed off to ordinary people for far too long, which has led to real problems for people as they search for effective ways to make the most of their savings”. I think that Revolut provides some very interesting and useful products for its customers and this is just another extension of that. The incumbents should definitely take note – and if they don’t, Revolut could soon start eating their lunch.

German car manufacturing continues to suffer and smartphone sales tail off ahead of wider 5G adoption…

Car industry woes weigh on Germany’s prospects (Financial Times, Guy Chazan) highlights the continued tough conditions facing Germany’s all-important car manufacturing industry as the insolvency of small equipment manufacturer Eisenmann this week symbolises the cumulative toll of the US-China trade war, Brexit and weakening Chinese car market. At the moment, the wider economy is still generally in good shape as unemployment continues to be around post-reunification lows but business confidence continues to slide, with the exception of construction. Claus Michelson, of the DIW think-tank says that “Orders are deteriorating, consumers are becoming more sceptical and even the labour market, which has been robust until now, is losing momentum. These are not good prospects for the current [third] quarter”. * SO WHAT? * The car industry is a key component of Germany’s economy as it accounts for

820,000 jobs domestically and 5% of the country’s GDP as over 77% of cars made there are exported. All car manufacturers are facing the same problems as mentioned above and the problem is now spreading to suppliers such as Continental and Shuler, among others. Tough times for the industry and its related suppliers.

Smartphone users hang on for 5G as global sales decline by 2.5% (Daily Telegraph, Natasha Bernal) cites a report by the well-repected research firm Gartner which suggests that global smartphone sales are expected to fall by 2.5% this year as consumers hang on to their existing phones and wait for 5G handsets next year. The research also suggested that demand for 5G network services next year is likely to increase handset sales by 2.8% in the second half of next year. * SO WHAT? * New generations of tech always have teething problems, but I really think that, once 5G gets more established, things will change considerably. Sluggish smartphone sales will see a big uptick as consumers see the cumulative benefits of superfast speeds that will enable not only existing services, but facilitate new exciting ones such as game streaming on mobile devices. New phone technology  – such as foldable phones – could also get consumers excited enough to part with their money after years of mobile phones showing only incremental improvements.

And finally, in other news…

I thought I’d leave you with something to brighten your day in Boy Shares Sweet ‘Fist Bump’ With Pro Soccer Player Who Also Has No Forearm (Inside Edition, Johanna Li https://tinyurl.com/y2ffebhf). What a great photo!