Week In Review: Trade Tensions Weigh
Stocks fell this week as trade tensions helped to keep buyers at bay. The benchmark S&P 500 index ended the week lower by 0.9%. The tech-heavy Nasdaq lost 0.7%, but did notch a new all-time high on Wednesday, and the Dow Jones Industrial Average tumbled 2.0%.
At the start of the week, investors were still weighing the prospect of a trade war between the U.S. and China after President Trump confirmed last Friday that he has approved a 25% tariff on $50 billion worth of Chinese goods. Beijing responded swiftly to that news, vowing to implement equivalent duties on U.S. goods.
The story added a new chapter on Monday evening when President Trump asked his administration to identify an additional $200 billion worth of Chinese goods that he says will be hit with a 10% tariff should China follow through on its promise to retaliate. In addition, if China retaliates against the new $200 billion list, Mr. Trump said he will place tariffs on yet another $200 billion worth of Chinese goods.
The industrial sector, which is viewed as being in the crosshairs of protectionist trade actions, was the worst-performing S&P 500 group this week, losing 3.4%. Similarly, chipmakers, which derive a large chunk of their revenue from shipments to China, were also under pressure, sending the Philadelphia Semiconductor Index lower by 3.6%.
President Trump issued another tariff threat on Friday, this time targeting the European Union. The president said the U.S. will be imposing a 20% tariff on all automobiles imported from EU countries if the EU fails to remove duties on imports of U.S. automobiles. On a related note, as of Friday, the European Union has officially implemented tariffs on $3.2 billion worth of U.S. goods in retaliation to U.S. tariffs on imports of steel and aluminum that went into effect earlier this month.
Elsewhere, the Organization of Petroleum Exporting Countries (OPEC) met in Vienna this week to discuss easing production caps that have been in place for more than 18 months. The meeting was reportedly contentious, but the countries eventually agreed to boost oil output by a less-than-expected 600,000 barrels per day. WTI crude futures rallied to a four-week high on Friday following the news, and the energy sector reclaimed losses registered earlier in the week, finishing with a weekly gain of 1.5%.
In U.S. corporate news, Walgreens Boots Alliance (WBA) will be joining the Dow Jones Industrial Average on June 26, taking the spot of General Electric (GE), which was one of the original Dow components and has been a continuous part of the average for more than a century. The decision follows a disastrous 18-month stretch for GE shares, which have dropped around 60% since the end of 2016.
Separately, media names returned to the spotlight on Wednesday when Walt Disney (DIS) increased its offer for 21st Century Fox's (FOXA) entertainment assets. Disney is now offering $38 per share, up from its previous offer of $28 per share and better than last week's offer from Comcast (CMCSA) of $35 per share.
E-commerce companies, including Amazon (AMZN), eBay (EBAY), Wayfair (W), Overstock.com (OSTK), and Etsy (ETSY), sold off on Thursday after the U.S. Supreme Court ruled that states can require online retailers to collect sales tax, overturning a 1992 precedent.
Also of note, Intel's (INTC) chief executive, Brian Krzanich, resigned after breaking the company's non-fraternization policy, Oracle (ORCL) shares dropped to a 15-month low after the company's quarterly update provided less insight than usual into its growing cloud business, and Starbucks (SBUX) shares hit a three-year low after the company announced it will be scaling back store growth.
U.S. Treasuries ended the week on a modestly higher note, pushing the benchmark 10-yr yield lower by two basis points to 2.90%.
Closing Market Summary: Down Week Ends on High Note
The S&P 500 ended the week on a positive note by advancing 0.2% on Friday. Energy shares led the broad-based rally thanks to a spike in oil prices, which surged to a four-week high as OPEC wrapped up its latest summit in Vienna. However, financials, technology, and consumer discretionary stocks lagged, keeping gains in check. For the week, the S&P 500 lost 0.9%.
Friday's session was range-bound to say the least. The S&P 500 held a gain between 0.2% and 0.5% throughout the entire session, sticking to a 12-point range. Trading volume was extremely high due to the annual re-balancing of the Russell 1000 and Russell 2000 indices. Roughly 2.2 million shares changed hands at the New York Stock Exchange.
The OPEC summit was the biggest event of the day, as it ended on a somewhat unexpected note. Following a contentious two-day meeting, the oil-producing countries agreed to increase total output by roughly 600,000 barrels per day -- far less than the top end of estimates, which were calling for an increase of up to 1.5 million barrels per day.
West Texas Intermediate crude futures rallied 4.5% to $68.59 per barrel in reaction, helping the energy sector (+2.2%) finish unchallenged atop the sector standings; the next best-performing group -- materials -- added 1.4%. In total, eight of the eleven sectors finished in the green, with financials (-0.5%), technology (-0.4%), and consumer discretionary (-0.1%) being the three laggards. Unfortunately for the bulls, those three groups are heavily-weighted, representing around 50% of the broader market combined.
The financials and consumer discretionary sectors were holding up alright until the afternoon when they dropped to fresh session lows, while technology was weak throughout the session. Within the tech space, software company Red Hat (RHT 142.14, -23.59) tumbled 14.2% after disappointing guidance for its fiscal second quarter overshadowed its better-than-expected Q1 results.
In Washington, President Trump announced a new tariff threat via Twitter on Friday, vowing to slap a 20% tariff on automobiles produced in EU countries if the European Union fails to remove duties on imports of U.S. autos. The U.S. stock market dropped to new lows following the tweet, but didn't stay there for long.
U.S. Treasuries finished Friday on a flattish note, although shorter-dated issues showed relative weakness. The yield on the benchmark 10-yr Treasury note finished unchanged at 2.90%, while the yield on the 2-yr Treasury note climbed two basis points to 2.55%. The U.S. Dollar Index declined 0.4%, slipping from an 11-month high.
Investors did not receive any notable economic data on Friday.
- Nasdaq Composite +11.4% YTD
- Russell 2000 +9.8% YTD
- S&P 500 +3.0% YTD
- Dow Jones Industrial Average -0.6% YTD
>>> Asset Class Flows (Table 1)
* Equities: large outflows $12.9bn ($0.4bn ETF outflows, $12.6bn mutual fund outflows)
* Bonds: biggest outflows in 18 weeks ($5.9bn)
* Precious metals: biggest outflows since Dec’16 ($0.8bn)
>>> Equity Flows (Table 2)
* US: inflows 7th straight weeks ($5.1bn)
* Japan: notable outflows ($1.8bn)
* Europe: massive outflows continue ($2.7bn)
* EM: biggest outflows since Nov’16 ($5.1bn)
* By style: inflows US growth ($7.0bn), US large cap ($4.8bn), US small cap ($1.3n), US value ($14mn)
* By sector: inflows consumer ($0.7bn), energy ($0.5bn), utilities ($0.4bn), materials ($0.3bn), tech ($0.3bn); outflows healthcare ($0.2bn), real estate ($0.4bn), financials ($1.4bn)
>>> Fixed Income Flows (Chart 6)
* Biggest IG bond fund outflows since Dec’16 ($2.6bn)
* HY bond outflows 7th consecutive week ($1.4bn)
* 9th straight week of EM debt outflows ($1.7bn)
* 7th straight week of muni fund inflows ($0.4bn)
* Modest Govt/Tsy outflows ($0.6bn)
* Small TIPS outflows ($0.1bn)
* Bank loan fund inflows 17 consecutive weeks ($0.4bn)
The fight between Airbnb and New York City is heating up
The company is accusing New York City lawmakers of being paid off by the hotel industry, days before a crucial hearing.
Airbnb is stepping up its ongoing battle with New York City, days before a crucial hearing that it says could limit the company’s prospects in one of its largest markets.
On Tuesday, a New York City Council committee is set to hold a public hearing on a bill that would require disclosure of names and addresses of hosts on its platform, a move Airbnb opposes. Today, Airbnb is releasing a report accusing over a dozen council members of bias because they’ve received campaign contributions from the hotel industry.
Airbnb’s report tallies donations of more than $450,000 going to 15 council members over four years from donors Airbnb described as part of the hotel industry, including the Hotel Trades Council, a union for hotel workers.
If passed, the bill would require Airbnb and other short-term housing rental companies to disclose addresses and names of hosts who rent on their site directly with the Mayor’s Office of Special Enforcement, the agency that investigates cases of illegal rentals.
City officials say that access to that information will make it easier for the city to crack down on illegal rentals. Airbnb says it worries the city will use the data to punish not only bad actors renting illegally, but also lawful hosts who are within their rights to rent their homes on the platform.
It’s the latest move in the eight-year feud between Airbnb and the city. At last month’s Code Conference, Airbnb CEO Brian Chesky said he sees “no end in sight” to the fight.
Over the past decade, Airbnb has had similar battles with other cities but eventually reached data-sharing agreements with some, including San Francisco, Chicago, Seattle and Vancouver.
Airbnb isn’t the only one waging a public battle in this New York City fight: Last year, the hotel industry ran an ad campaign suggesting that terrorists use Airbnb rentals.
It looks as though Airbnb is set to lose this one, though. So far, 40 of 51 council members have signed on to the bill.
“It is clear from this broad level of support and the personal stories we continue to hear from everyday New Yorkers that this bill needs to be passed to address the urgent housing crisis our city faces, no matter how hard short-term rental companies try to assert differently,” wrote a spokesperson for Carlina Rivera, the New York City council member leading efforts to pass the bill, in an email to Recode.
Satellite groups no longer UK’s sleeping giants
UK-EU dispute over Galileo and approach for Inmarsat sharpen focus on sector
Satellites were once the sleeping giant of UK technology. But the debate around the €10bn Galileo navigation system, focus of a bitter dispute between London and Brussels over post-Brexit access to the EU’s military-grade service, has thrown the industry into the limelight.
The approach for Inmarsat, Britain’s largest satellite company, by cash-rich US rival EchoStar has sharpened the focus on the sector.
Analysts argue that Inmarsat should hold out for a significantly higher offer but if EchoStar does bring the London-based company into its orbit there will only be a handful of choices left for investors looking to tap into the satellite industry.
Avanti Communications
Avanti was up for sale in 2016 as it grappled with indebtedness. But this year it went down the debt-for-equity route instead after warning shareholders the stock could be worthless if they did not agree to a balance sheet restructuring.
The company hopes the days of regular warnings on the parlous state of its finances may be behind it. With a new chief executive — Kyle Whitehill, who joined from Africa’s Liquid Telecom, having spent 15 years at Vodafone — it hopes to finally deliver on its promise. That could involve a new plan to target the Latin American market, say people with direct knowledge of the company’s strategy.
Its prospects were given a boost last month when an arbitrator said the Indonesian government would have to pay it $20m over a contract dispute. The decision was welcome given the company’s last trading statement, covering the nine months to March 2018, showed its losses before interest, taxation, depreciation and amortisation widening from $11.4m to $18m, with revenue dropping by almost a third to $31.3m. But the company will need to show revenue progress if it is to drag itself out of the mire.
Bigblu Broadband
Satellite Solutions Worldwide, backed by property developer Nick Candy, has spent most of its existence mopping up tiny telecoms companies as it looks to build a specialist capable of connecting the 5 per cent of homes that fibre networks will never reach. In May it rebranded itself as Bigblu Broadband to bring the 20 companies it has bought across nine countries under one name.
It is inevitable that such a buying spree will add assets of little interest to the core business. Bigblu said only 82 per cent of its 100,000 or so customers were connected via satellite. It has now sold off a large portion of the non-satellite rump with a A$1.5m (US$1.1m) deal to sell 11,000 Australian customers connected to the NBN network to rival Superloop. Full-fibre fans should note that Bigblu argued that those fibre users, which it picked up after buying SkyMesh in 2016, contributed “minimal ebitda to the group”, with margins well below that it achieves in satellite.
Christopher Mills, the activist investor behind Harwood Capital Management, was appointed to the board in May after building a stake, and is seen to be expecting big things from Bigblu.
Mercia Technologies
Launching satellites is an expensive business fraught with risk. Their success depends on filling the bandwidth with something people want to use, whether it is television delivered to a dish on a house or GPS signals to a smartphone.
The government has been trying to foster an industry of niche satellite services for a number of years and finance is starting to emerge. Leeds-based SatSense just raised £750,000 from NPIF-Mercia Equity Finance, part of the Northern Powerhouse Investment Fund, to develop its app that can detect subsidence down to the millimetre.
Mercia Technologies is a fund based near Warwick that hopes to spot companies that have missed out on the ample capital pouring into the London and Cambridge tech clusters. Although SatSense has already been backed by one of its funds it is exactly the sort of company Mercia is hoping to unearth and it says it could be the subject of a direct investment in the future.
Mercia, which was backed by prominent fund manager Neil Woodford when it floated, has not been a shining star on the market. However, its results for the six months to December showed the fair value of its portfolio rising 24 per cent to £65m, revenue rising 65 per cent to £5m and a post-tax profit of £1.4m. With £55m of cash available, Mercia looks secure.