Weekly Market Commentary – 2nd August 2019

Did the FED cut rates too soon?
Positive US payroll numbers, strong corporate earnings, and modest growth isn’t normally used as a base case to cut interest rates but this week, the Fed cut interest rates by a quarter percent. The Fed cited muted inflation pressures and implications of global developments as the reasons for its first rate cut in over a decade. Chairman Jerome Powell also left the door slightly ajar for further rate cuts in the near term. The markets which had priced in a rate cut where looking for a more dovish tone from Powell and subsequently reacted negatively when none was forthcoming.

Nevertheless, the Fed could be forced to cut rates further if President Trump’s antics continue. Like a kid in a giant candy store, he is unable to maintain a temporary truce with China. And while we know most G20 agreements are not worth the non-existent paper it is written on, the continued struggle will adversely affect global growth. China has yet to respond to the latest import threats but expect this to dominate headlines for the next few weeks.

US: Earnings recession fears fade away
Fears of an earnings recession are slowly ebbing away as tech results, a key component of the US economy posted positive results. Last week saw Google soundly beat earnings expectations, Facebook performed well albeit a $5bn fine. Only Amazon spluttered after five consecutive quarters of beating market expectations. This week, tech giant Apple reported higher than expected profits boosting its share price by three per cent.  Apple’s wearable segment was the main driver for the uptick in revenue. The smart wearable device sector is booming, around 117 million devices are to be shipped this year with Apple commanding the bulk of sales. Sales for this sector are expected to double by 2022 to become a $27bn market.

Free spending consumers have also helped restaurant, car makers and packaged-foods companies defy expectation. Nestle’s profited from its exclusive rights deal with Starbucks and pet care sales while Proctor & Gamble’s was buoyed by strong detergent and skincare demand. Finally, consumer’s new-found appetite for high end SUV’s drove General Motors results.

UK: Bank of England Leaves Interest Rates Unchanged
The Bank of England (BoE) in a widely expected move this week held interest rates steady. Brexit uncertainty and US-Sino trade tensions being the main reason for maintaining rates. An orderly Brexit could see the central bank hike up rates to stop the economy from running away. On the flipside, a No-Deal could see the BoE cut rates in the near term. The BoE also published its inflation report where it predicts a one in three chance of the economy shrinking by 2020 and inflation is currently at its two per cent target.

Elsewhere, Neptune Investment Management is set to be acquired by Liontrust Asset Management. The deal will see Neptune CEO Robin Geffen step down to spend more time on leading the investment team and the team will be moved over to Liontrust’s London office. As a result of absorbing Neptune, Liontrust’s assets under management will grow by £2.8bn to £17bn.

M&A: The Rise of the Terminals

Recently it has been rare to see a British firm acquire a foreign company but this week, the London Stock Exchange (LSE) bucked the trend by acquiring Refinitiv. The £22bn deal will see the LSE expands its presence in North America and Asia, and more importantly – it will step up its rivalry with Bloomberg. Refinitiv like Bloomberg also produces terminals to be used for trading and research purposes. By purchasing Refinitiv, LSE will become less reliant on transactions-based purchases and move towards a financial data service orientated model. In addition, it will also gain Refinitv’s stake in bond trading platform Tradeweb.

However, this deal is far from wrapped up and is subject to regulatory approval. The antitrust investigation is expected to be lengthy and if the deal isn’t approved, the LSE pay Refinitiv a break fee of £198m.

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