Federal Reserve Chairman Continues to Defy Market Expectations
This week, while we await the results from local council elections, there was a chance to indulge in the sport of interest rate speculation; an old favourite from “the before times” when simple things like the strength of the global economy were all we had to worry about. New Federal Reserve Chairman Jerome Powel is proving to be a difficult opponent, with a knack of contradicting himself every few weeks and shaking off the pack who might have been coming close to guessing his next move. On Wednesday he wrongfooted a market that had become over confident in an upcoming rate cut and sent equities into a bit of a panic.

Elsewhere, the Bank of England also got in on the act, upgrading its 2019 growth forecasts and setting off a rate hike speculation frenzy of its own. Unlike in the US however, the shadow of Brexit dampens down the chance of a surprise. The uncertainty of if, when or how the UK might depart the EU makes any near-term rate hike unlikely; however, the bank looks to be signalling that its itching to tighten as soon as Brexit is out of the way.

IPO: Beyond Meat Sizzles on Debut
Shares of Beyond Meat, the fast-growing vegan burger maker, proved immensely popular on its Nasdaq debut with the stock closing up 163%. The stock initially priced at $25 before closing at $66. Beyond Meat revenue grew $55m last year but continues to remain loss making ($30m per year). This IPO will help its plans to aggressively expand sales outside of America. Market cap of the company currently stands at roughly $4bn.

Consumer food trends continue to evolve as plant-based diets grow popular. In turn the “fake meat” market is starting to become increasingly crowded. Rival Impossible Foods, whose vegan food mimic the composition of meat, has partnered with Burger King to trial a vegan Whopper burger before rolling it out across America. Sales of plant-based meats in the US grew by 42 per cent over three years. In the UK, the meat-free market is set to grow from £560m (2016) to £658m in 2021.

Global: Headwinds Continue to Buffet Semiconductor Stocks
It’s been a terrible, albeit, unsurprising few days for chipmakers who reported weak quarterly earnings. Slowing global orders from data centres and a lack of innovative new phone products to tempt consumers squeezed company margins in Q4 2018.

And last quarter’s resurgence for semiconductor stocks, driven by optimism, proved short lived once results were announced. Samsung Electronics posted a 60 per cent drop in profits last quarter while operating profits of its smaller rival SK Hynix fell 69 per cent and Intel’s expected revenue for this year is set to miss its target ($1bn below $71bn analysts’ expectation).

As a result, countries such as Taiwan and South Korea which rely on exporting semiconductor products continue to struggle. This week Taiwan’s year on year GDP for last quarter was 1.7 per cent in contrast to the same period last year were growth was 3.2 per cent and its main chipmaker (TSMC) net revenue figures were down 16 per cent when compared to the same quarter last year.

US: FED Exercises caution and holds interest
Earlier in the week the S&P 500 continued its strong rally driven by tech earnings even though one of the largest tech firms, Google, posted lacklustre earnings which at one-point wiped $77bn off the company’s market cap. However, market activity diminished as investor focus turned to another key driver of US and global markets, the quarterly Fed interest rate decision. On the eve of rate announcement, three out of five components of the factory PMI gauge (employment, new orders and manufacturing) all cooled as trade uncertainty continues to drive manufacturing headwinds.

This data alongside muted global growth had led investors to believe a rate cut was likely, instead the Fed decided to exercise caution and maintain rates, even under intense pressure from President Donald Trump to lower rates in a bid to prop up growth and stock prices. The meeting minutes which may provide a clearer idea on what was discussed in regard to inflation and other economic data will be published in June.

European Elections Puts Brexit Talks on Hold

This week, after a delightful break, we get back to Brexiting. True to form, whatever small signs of progress there might have been have evaporated after cross party talks were reported to have ended without progress; it looks likely now that nothing will happen until after the elections. While the European elections are getting all the attention, the more interesting contest is in the local council elections. While the European elections will be fought between Brexit focused fringe parties, that isn’t indicative of a general election. If the Tories get wiped out in the local elections however, that will likely focus the minds of government MPs. A credible opposition threat might stop the party from fighting with itself and unify around a compromise position.

Elsewhere speculation has begun over who will replace Mark Carney at the Bank of England. The current governor is due to leave Threadneedle Street in 2020 and his replacement will extremely influential given how dominant monetary policy has become in determining economic performance.

US: Earnings Season Results Surprise Analysts

With over a third of the S&P 500 companies having reported earnings, now would be an opportune moment to have an early look at the state of the US economy. Muted global growth and heightened political risk led to market analysts believing this quarter’s earnings will be negative. On the contrary, earnings so far look to be flat with the possibility of it ending positively. Tech stocks rebounded from last quarters losses with Microsoft and Facebook posting strong results closing up 3.3 and 5.9 per cent respectively this week.

Earnings were much less rosy for the most shorted US stock, Tesla. The electric carmaker reported a loss of $2.9 a share, much weaker than the anticipated $1.3 loss. This quarter, it has only increased production by an additional 1,900 cars (63,000 model 3 cars in produced in Q1). With three more quarters to go, its target of delivering 400,000 cars in 2019 looks very punchy. Shares in the stock closed down 4.3% per cent. However, Tesla is unlikely to directly affect the upward progress of the S&P 500, one of the requirements for inclusion into the index is at least four quarters of positive earnings, which the car-maker has yet to achieve.

EM: Macri’s Rocky Presidential Campaign Stokes Default Fears

Rampant inflation, ongoing recession and slowing growth was always going to be a slippery platform for Argentina’s President Mauricio Macri to run his second political campaign and what once appeared a cakewalk now looks very uncertain. Former President Cristina Kirchner whose policies of tax led to high inflation levels and subsequent default is rapidly gaining popularity and has taken a lead in the polls with only 6 months to go until general elections.

Headline inflation now stands at a 55 per cent and Macri’s inability to shore up votes largely stems from his austerity plan not being as effective as hoped. Investors spooked by last year’s currency crisis are now backing the country to default for the third time in less than twenty years. The 5-year credit default swaps rose up 30.54% during last week implying the probability of a default now stands close to 60 per cent.

Oil: US Threatens to end waivers to key importers of Iranian Oil

The second half of last year’s oil rally was caused by fears that sanctions imposed by the US would lead to an undersupply. Major importers of Iranian oil such as India and China were warned to wind down their reliance ahead of the November deadline. Subsequently, the Trump administration performed a U-turn granting extended waivers to these nations. The unexpected shift caught out the OPEC cartel and its allies who agreed to step up oil production and sent crude prices tumbling. This week, the US administration is set to end these waivers by May 2nd, depriving Iran of its main source of revenue. Following the announcement, oil prices rose by 2.9 per cent. While a similar scenario of Saudi Arabia and the UAE cranking up production is set to play out, this time levels may have to be higher as OPEC member states struggle. Over in Libya violence has erupted in the region and in Venezuela, a political deadlock has destabilised the nation.

UK: Debenhams Falls into Administration

Last week Debenhams entered administration after turning down two separate rescue plans from Sports Direct boss Mike Ashley. Instead it ceded control to lenders potentially putting 166 stores and 25,000 jobs at risk. Entering administration will also mean shareholders see their stakes completely wiped out which includes Sports Directs 30 per cent share in the high street retailer. Failing to keep up with cyclical fashion trends and nimbler online competitors have squeezed margins resulting in the 206-year old firm’s market cap falling from £980m to around £20m in just three years.

Debenhams isn’t the only store to struggle from the rise of ecommerce, BHS went under in 2016 and the House of Fraser confirmed it will close over half its stores late 2018. However, not all brick and mortar retailers have struggled – Selfridges have managed to post five consecutive years of profit.

US: Federal Reserve leave room for rate hikes this year

The Federal reserve meeting minutes of its March 19-20 policy meeting were published last week. Overall, there were no hidden surprises.  Some policymakers would like to see the target range modestly lifted this year if the economy picks up, several would happily like to see it shift either direction depending on economic data results.

However, the majority agreed on a cautious approach leaving the target range unchanged for the rest of 2019. Futures markets have already priced in no chance of an increase this year and in fact a 55 per cent chance of rate cut. Markets remained muted after the minutes were released as interests turned to the start of earnings season. Finally, US central bankers also debated on what to do after ending its balance sheet runoff in September. Some policymakers advocated resuming purchasing US treasury securities in order to stabilise the level of reserves after the programme has finished.

EM: Saudi Aramco’s Record-Breaking Bond Sale

Last week it turns out the world’s most profitable company isn’t Apple, but petroleum company Saudi Aramco. Ahead of its debut bond sale it decided to finally open up its secretive books to potential investors. The company posted a $111bn profit in 2018, twice that off Apple. Subsequently, Saudi Aramco sold $12bn of bonds after receiving over $100bn in orders, quickly becoming one of the most oversubscribed deals ever recorded for emerging markets.

With earnings before tax of $224bn last year and low debt relative to its cash flow, the oil company doesn’t need to issue bonds. However, the sale does go a long way in establishing Saudi Aramaco’s legitimacy as an independent company rather than a functioning arm of the Saudi Government. The Government were shunned last year following the murder of Jamal Khashoggi on Turkish soil. Although no official state sanctions have yet to be applied, it appears the markets have drawn a line in the sand over last year’s event.

Brexit Delayed Until October

Last week the Brexit saga took another step towards its ultimate outcome, dragging on into infinity. A conditional delay to the end of October 2019 is welcome but unlikely to change anything. Hopefully government will use this time to come up with a workable solution, but don’t be surprised if we have to beg for another extension after this one. The hard-irreconcilable truth is that a desirable Brexit isn’t deliverable either by WTO, reopening the withdrawal agreement or any other means, and a deliverable Brexit isn’t desirable, as Theresa May discovered in three separate Commons defeats.

Even if the Brexit process comes to a halt, as seems possible, it isn’t going away. The uncertainty that is weighing on investment will always be present when every election, leadership contest or opinion poll threatens to kick the whole process off again. While the current political situation seems unlikely to deliver Brexit, it is still all that we’ll be talking about for many years to come.

Europe’s Largest Money Laundering Scandal

This week we take a brief Brexit respite to focus on what could be the biggest money laundering scandal in history. Between 2007-2015 around €200bn of non-residential flows was passed through Danske Bank’s Estonian branch unchecked. The Danish firm bought Sabro bank in 2007 to expand its Baltic operations but was warned prior to purchase by Russia’s central bank of fraudulent activity which it ignored.

Subsequently, the branch wasn’t onboarded onto the groups IT platform in 2008 to save costs which meant the branch didn’t have to adhere to anti-money laundering procedures. In 2011 The region generated 11% of profits even though it accounted for 0.5% of the bank’s total assets.

Many of the Nordic Banks quickly moved to dissociate themselves from the fallout, however, this week Swedbank CEO was fired as investigators honed in on similar claims. What this story does highlight is a shocking lack of a central European anti-money laundering agency. Leaving it to national regulators and local police will inevitable mean smaller nations like Estonia and Latvia struggle to enforce rules.

Eurozone: Italy’s Debt and Budget Deficit set to Rise

This week the Organisation for Economic Cooperation and Development (OECD) produced an updated special outlook report on Italy. The budget deficit is set to rise past its agreed target with the European Commission from 2 per cent to 2.5 percent in 2019. It could spiral further to 3 per cent in 2020 if Rome doesn’t increase sales tax. In addition, GDP is expected to shrink by 0.2 per cent this year. Finally, unemployment is forecasted to rise from 10.6 last year to 12 per cent in 2019.

A series of inept governments, the Great Recession and Eurozone debt crisis have all played a hand in Italy’s debt-to-GDP ratio spiralling to around 132 per cent. A period of quantitative easing helped bring down yields substantially creating breathing room for a country laden with sovereign debt, but the government missed its window of adding further taxes to bring debt to more manageable levels. Instead a populist coalition have gone down the route of attempting to slash taxes and increase public spending, a budget proposal that swiftly put the nation at loggerheads with the Commission.

Markets: LYFT IPO fails to take off

Following a bumper IPO debut for Lyft, shares in the car sharing company fell by 12 per cent earlier in the week as investors cashed out of the stock. At the heart of the downturn is doubts about Lyft’s future profitability. The group continues to be loss making accruing around $2.3bn since 2016. Investors are willing to bet heavy on potential high growth tech stocks such as Amazon, which took close to five years to post a small return.  However, this patience runs up to a limit with other tech stocks being abandoned due to either taking too long to post a profit (Twitter) or continues to be loss making (Snap).

Uber and Lyft remain locked in battle over market share. What is more concerning for investors is the size of Lyft’s losses particularly as its customer base is predominately within the US.  Rival Uber is expected to undergo its own IPO potentially as early as next month. Uber’s global reach means that its initial market cap would be much higher and is estimated to be around $120bn on debut.

Global: Trade Talks to Enter Final Stretch

Trade talks fuelled the global rally this week as investors grew increasingly hopeful of a deal concluding in the near term. The S&P 500, Nikkei and FTSE 100 all ended up 2.3, 2.8 and 1.9 per cent respectively. Top level officials appear to have cleared most of the hurdles but a few key stumbling blocks, namely China’s demand to lift the original tariffs along with who will monitor or enforce the agreement remain. The agreement would see China commit to buying more commodities from the US in addition to allowing American companies 100 per cent foreign ownership by 2025.

Elsewhere, US jobless claims fell to a 48 year low as the labour market remained resilient amidst sluggish world growth. Claims for unemployment benefits dropped by 10,000 to 202,000 for March.

Parliamentary Votes make Brexit No Clearer
Last week we have had yet more votes on Brexit and are still no clearer about what will ultimately happen. As we write this the government is having yet another go at getting its universally despised deal over the line, but this time with the fun twist that her replacement gets to tear up whatever has been agreed and plunge us all back into darkness at a later date.

At this stage it looks unlikely to pass and a longer extension will be required while the Commons cobbles together a compromise that it can live with and possibly puts back to a confirmatory referendum. On the plus side utter disdain for the way Brexit has been handled by the government is one of the few things holding the country together.

Bonds: Sovereign Bonds Rally in Weak Global Environment
Last week saw a convergence of gloomy global growth outlooks from central banks drive sovereign prices up. In turn yields (interest rates) of German bunds were negative for the first time since 2016, and the US 10-year government bond yield dipped to its lowest level this year. By exiting riskier assets and locking into longer term yields, it indicates investors are expecting low growth and for interest rates to fall.
The bond market already believes the next move by the Fed will be a rate cut this year (70 per cent probability) with the committee already having ruled out further rate hikes in 2019. Another factor driving fear into the markets is the yield curve inversion. The spread between the ten-year and three-month government bonds inverted at the end of last week and continues to remain negative. An inverted yield curve is used as a signal of slowing growth and a precursor that a future recession is likely to happen in one to two years.

Turkey: Lira Rout Sparks Government Currency Crackdown
Last week Turkey created a currency crunch in order to halt the slide on the Lira, which it blames on JP Morgan for starting. The overnight cost of borrowing liras on offshore swap markets jumped over 1,200 per cent. This effectively puts local banks under huge pressure to not provide liquidity to foreign investors and more importantly, constrains them from betting against the currency. With local elections only a few days away, the move is only expected to be temporary.

Subsequently, the only other way to reduce Turkish exposure is to dump stocks and bonds, which investors have been doing by the bucketload. Turkey’s benchmark, the ISE National 100 index fell close to five percent earlier last week. Turkey 5-year credit default swap which essentially is the cost of insuring exposure to Turkey’s sovereign debt rose by 42 basis points to 451bps.

UK: Majestic Wine set to Close Stores
House of Fraser and Pound World have both collapsed in the last year and last week, Majestic Wine added itself to that list by announcing plans to close its UK stores although how many will be shut will not be announced until June. The company is instead going to undergo a name rebrand and focus on increasing its online subscription arm Naked Wines which it acquired in 2015 for £70m. Naked Wines are eyeing up expansion to the US which is a key driver of growth for the business. The US direct to consumer market is expected to grow by 15 per cent on an annual basis.
Meanwhile, retail sales are starting to become impacted by a disorderly Brexit. Sales volume fell sharply for the month of March by 18 per cent and marked a four-month run where sales haven’t grown. Anna Leach, CBI head of economic intelligence, said: “Even accounting for Easter timing, the high street’s poor run continues. While real wage growth is picking up, consumer confidence has been hit by escalating uncertainty over Brexit and concern over the economy’s future.”

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