So Trump pledges a buffer for the farmers, China tries to stimulate growth, the eurozone has a wobble and Venezuela faces crazy inflation…
You will probably notice today that there’s a lot of comment related to the impact of Trump’s trade war. Trump administration plans up to $12bn in farm aid to ease concerns over trade disputes (Wall Street Journal, Vivian Salama and Jacob Bunge) shows that Team Trump is digging in for the long term as it announced yesterday that it would give $12bn in emergency aid to farmers of some of the hardest-hit commodities – including soybeans, sorghum, cotton, corn, wheat and port – amidst early signs that the US agricultural sector is starting to feel the pinch from Trump’s tariff rhetoric. * SO WHAT? * This is, as Agriculture Secretary Sonny Perdue put it, “a short-term solution that will give President Trump and his administration time to work on long-term trade deals”. Trump himself urged doubters to “Just stick with us – it’s all working out” but you can imagine how nervous the farmers will be feeling right now. The question is whether Trump can style this tariff thing out before a number of farmers go out of business.
Talking about digging in for the long term, China unveils measures to boost economic growth (Financial Times, Gabriel Wildau) shows that the State Council has announced a package of tax cuts and infrastructure spending to stimulate domestic growth as uncertainty increases re the impending US vs the Rest of The World tariff war. This announcement comes hot on the heels of an injection of $74bn on Monday into the banking system by the People’s Bank of China – the central bank’s biggest ever one-day cash injection via its Medium-term Lending Facility. * SO WHAT? * These moves are in direct response to the atmosphere of uncertainty engendered by the tariff threats being bandied about at the moment. There have been rumblings of a slowdown in the domestic economy as well, so the two combined probably prompted the government to take action. The only slight worry here is that cash injection – China is currently trying to wean itself off over-reliance on credit, so it will have to be careful not to fall into old habits.
Eurozone growth weakens amid gloom on export demand (Financial Times, Claire Jones) highlights the possibility that the eurozone economy could still be at risk of slowdown as the latest Purchasing Managers’ Index, which is closely followed by the European Central Bank (ECB) as an indicator of growth, shows that manufacturers across the Eurozone are getting nervy about the threat of a global trade war and that growth is likely to remain weak in the second half of this year after a strong 2017. Chief business economist Chris Williamson at IHSMarkit – the company that produces the PMI figures – observed that “manufacturers are not carrying as much unnecessary stock and investment decisions are also being scrutinised a lot more closely. At the same time, raw materials, especially steel, are becoming more expensive”. * SO WHAT? * Food for thought for tomorrow’s ECB meeting. The ECB only recently announced that it was going to phase out Quantitative Easing measures that were implemented in the wake of the eurozone crisis, despite a slowdown in economic growth (you’d expect a winding down of QE if things were going great guns on the eurozone economy – not really if it was losing momentum as it seems to be doing at the moment). Having said that, the PMI is still above danger levels, so there is no immediate need for the ECB to reverse direction – but it will be monitoring the situation closely.
We get all antsy when our rate of inflation starts edging towards 3% – but just think how different it could be in Inflation could top 1,000,000% in Venezuela this year (The Guardian) as the International Monetary Fund (IMF) made the prediction that it could reach this level by the end of this year and Alejandro Werner, director of the IMF’s western hemisphere department, warned that “the collapse in economic activity, hyperinflation, and increasing deterioration…will lead to intensifying spill over effects on neighbouring countries”. * SO WHAT? * Venezuela has fallen spectacularly from grace as the one-rich oil producing country is gripped by a five-year crisis that has left it short of medicine and food and resulted in shortages in electricity, water and transportation – driving many to cross the border into Colombia and Brazil to seek relief. If the IMF’s forecasts were borne out, the economy would have contracted by an eye-watering 50% in five years, which would make its economic downfall one of the biggest in the world for the last 60 years. President Nicolas Maduro, who won a second six-year term as president in May despite all his country’s massive economic and political problems, has blamed the horrendous performance of his economy on the trade spats between Europe and the US. He certainly has his work cut out for him – but then again, at least the oil price is trading at robust levels currently, so things could be worse.
In vehicle-related news, Peugeot drags Vauxhall back on track and Harley-Davidson warns about tariff impact…
Peugeot PSA drives struggling Vauxhall to first profit in 20 years (Daily Telegraph, Alan Tovey) sounds rather lovely after a long nightmarish period for Vauxhall-Opel ending with Peugeot-PSA taking over ownership from General Motors last June. Since then, group revenues have risen by 40% and operating profits by 48% versus profits at PSA’s existing brands, Peugeot and Citroen, rising by 30%. * SO WHAT? * Peugeot’s takeover had raised fears of mass job losses for Vauxhall UK’s 14,000 staff, but although the axe came down on a third of the staff at the company’s Ellesmere Port plant, it doesn’t look like things will get too bad from here. As Jose Asumendi, the JP Morgan analyst put it, “This is simply the quickest turnaround I have seen in the auto industry in many years”.
That old chestnut of the US-EU trade war reared its head again in Harley-Davidson warns of bigger hit from tariffs (Financial Times, Cat Rutter Pooley and Patti Waldmeir) as Harley-Davidson cuts its profit margin forecast for the full year as the motorbike manufacturer admitted that tariffs would hit it harder than it had originally thought. President and chief exec Matt Levatich said that “we are working with the [Trump] administration, with all the governments we can, to get these tariffs removed. We are very engaged; there is constant dialogue”. Despite all this, its results were actually pretty solid – and the shares were up by 8% in early afternoon trading. Levatich added that “Our manufacturing optimisation, demand-driving investments and commitment to manage supply in line with demand remain on target and continue to strengthen our business”. * SO WHAT? * It’s good that the company had robust results, but it really does need to get this tariff thing sorted as 39% of bikes sold are outside the US and it is ultimately aiming for 50%. Tariff chat is going to delay this growth – and I would have thought Harley-Davidson will be more targeted than most given that it is symbolic with America. If Trump decides to punish it for shifting some production capacity overseas, the company will get grief from both its domestic AND international business. It does seem to be unfortunate by being the piggy-in-the-middle in this case.
INDIVIDUAL COMPANY NEWS
There’s a bit of news today regarding Facebook in Facebook user numbers to fall in Europe as tougher data laws bite (Daily Telegraph, Matthew Field) which says that user numbers in Europe could fall for the first time due to the ongoing impact of the General Data Protection Regulation that prompts users to opt-in to having data collected. But then maybe it can balance this negative news out a bit via Facebook setting up ‘innovation hub’ in China in bid to boost presence (Wall Street Journal, Liza Lin) which highlights the announcement made by Facebook yesterday that it could help develop and support China’s developers and start-ups as part of its plan to beef-up its presence in the country where it has been blocked since 2009. * SO WHAT? * China is obviously a massive potential market for Facebook and so it is having to adopt various means to try to wheedle itself into the government’s good books (I mean, Zuckerberg even wears suits when he goes to China – that’s how serious he is about it!). This will be a slow burn if these efforts ever work, but I do think that the Chinese will be using Facebook as one of the pawns in the whole trade war thing.
Talking of which, Apple vulnerable in US-China showdown (Wall Street Journal, Tripp Mickle, Yoko Kubota) highlights the vulnerability of Apple to the vagaries of the US-China trade negotiations as it not only manufactures there (making its most profitable product a Chinese export, and therefore subject to increased US
tariffs) – it is also Apple’s most important market outside the US (which means that the Chinese government could target it for “special treatment”). Smartphones weren’t included in the $34bn tariff package announced on July 6th or the second package expected to be announce this month, or even in the third round. However, with Trump now threatening to slap tariffs on virtually everything that China ships to the US – including iPhones – Apple is looking vulnerable. * SO WHAT? * Although China could just use Apple as an example, you would have thought that they are not going to be TOO hard on the company given the number of jobs it provides. 10,000 people are directly employed by Apple in China, but if you include all the related companies and operations, Apple estimates that it accounts for 3m jobs via its supply chain which includes the likes of Foxconn and 1.5 million app developers. Apple is probably more vulnerable than others re tariffs because it has not diversified its manufacturing base – so it can’t just reshuffle production. Samsung, on the other hand, makes over 80% of its smartphones outside China, so shouldn’t be affected too much. There’s not much Apple can do at the moment, so it’ll just have to see how the dust settles.
Nearer home, Football spurs record alcohol sales (Daily Telegraph, Sophie Christie) cites a report by Kantar Worldpanel that gives reason for good cheer as England’s unexpected run in the World Cup along with the sunny weather helped power booze sales. Apart from Christmas and Easter, more money was spent on alcohol in the week when England played Colombia and Sweden than ever before! Asda was the best performer of the “Big Four” supermarkets whilst Lidl and Aldi both saw strong sales.
Talking of booze-related stuff, Queen’s Club delivers chance for Fevertree (The Times, Dominic Walsh) highlights the continued success of Fevertree Drinks as it announced stellar results. The shares closed at record levels yesterday to £36.50 – versus the £1.34 it floated at in 2014! As Russ Mould, investment director at AJ Bell put it, “Fevertree is a true British success story, showing how it is possible to take a seemingly commoditised product, introduce a higher-quality version and shake up a market where the previous leader Schweppes had its eye off the ball”. Let’s hope Fevertree continues to stay ahead!
…And finally, in other news…
Are you a fashion-forward sort of person? Well you might have to change your views of the much-maligned Crocs brand of footwear because High-heeled Crocs are now a thing – and people have no idea what to make of them (The Mirror, Robyn Darbyshire https://tinyurl.com/ycx5w3vw). Nice.
As always, thank you for reading Watson’s Daily!