Tubers and Tariffs
The Beast from the East has apparently contributed to the Jersey Royal potato season being at least three weeks behind schedule this year. But April’s crop wasn’t the only casualty of the recent cold snap.
A busy week of Markit/CIPS Purchasing Managers’ Index surveys revealed that the UK’s construction industry seized up in March due to snow-related disruption, with civil engineering suffering the sharpest drop in activity for five years. There were suggestions that the collapse of Carillion contributed to the slowdown, with economic, political and Brexit uncertainties also fuelling caution. However, the housing sector bucked the wider trend, while a solid rise in employment numbers in the construction industry and a rebound in business expectations raised hopes that March was a blip rather than the start of a longer-term slide.
The severe weather also afflicted the services sector, which registered its weakest performance since July 2016, the month after the EU referendum. The survey excludes the retail sector, so possibly understated the weakness, but – taken with the latest manufacturing and construction data – it points to GDP growth of about 0.3% in the first quarter; which is in line with the Bank of England’s forecast.
The storm cost supermarkets £22 million in lost sales in March as shoppers stayed wrapped up at home. However, shoppers’ stockpiling of groceries ahead of its arrival helped boost supermarket sales figures by 2.5% over the year. Unsurprisingly, warming foods were favourite – sales of tinned soup were up 27.5% and hot drinks up 8.4% over the month.
Yet soup and potatoes didn’t top the week’s food and beverage news. The soft drinks industry levy – or ‘sugar tax’ – came into force on Friday, amid much debate about its likely effectiveness. The introduction of the levy means the UK joins a small handful of nations, including Mexico, France and Norway, which have introduced similar taxes. Manufacturers’ responses have varied. Ribena’s new low-sugar recipe has been likened to drain cleaner by some angry fans.
Lovers of sugary, non-alcoholic beverages weren’t the only drinkers to receive bad news last week. Troubled drinks firm Conviviality, the wine and spirits supplier to J D Wetherspoon’s 900 pubs, officially went into administration after failing to raise £125 million from investors to resolve a cash crisis. On Friday, Bestway, one of the UK’s biggest wholesalers, agreed to buy the company’s shops, which include Bargain Booze and Wine Rack, saving 2,000 jobs.
There was also disappointing news for the UK car market, as new registrations shrank by 15.7% last month compared with March 2017. However, last March was a record month as customers bought new cars ahead of a change in vehicle excise duty. What is clear is that registrations have been falling steadily for a whole year, with diesel models suffering particularly badly.
Sky’s the limit
The week began with a further development in the long-running saga of the attempt by Rupert Murdoch’s 21st Century Fox to buy the 61% of Sky it doesn’t already own. An offer from Disney to buy Sky News eased some of the political objections to the deal.
“The regulator has taken the view that by having control of Sky News and a number of UK newspapers, Rupert Murdoch would have too great an influence on UK news outlets,” commented Nick Purves of RWC Partners. “The proposed move by Disney now makes it more likely therefore that the Fox offer can finally proceed.”
However, a surprise offer for Sky from Comcast, the US cable group, at a premium to the Fox offer has further complicated the picture. If Comcast is serious in its bid to derail Murdoch’s plans then Sky shareholders look set to benefit from a shoot-out between the two bidders. The Competition and Markets Authority needs to deliver its recommendation to the government by 1 May.
Equity markets oscillated throughout the week in response to the fast-moving trade stand-off between the US and China. On Monday, China imposed $3 billion in retaliatory tariffs on US imports of 128 products, including soya beans, cars and orange juice. Markets reeled midweek in response to further threats from both sides to impose 25% duties on a range of exports worth $50 billion.
Markets rebounded sharply on Thursday in response to comments from President Trump’s top economic adviser, Larry Kudlow, who said the administration was involved in a “negotiation” with China – but not a trade war. The FTSE 100 jumped 2.3% as markets sensed an easing of tension, while German stocks recorded their biggest one-day gain in a year.
Thursday’s recovery came despite news that China had filed an official legal challenge with the World Trade Organization (WTO) over the US’s proposed $50 billion of tariffs on more than 1,300 Chinese products. China and the US now have 60 days to resolve their complaint, or they face litigation at the WTO from a neutral panel of arbitrators.
But further tit-for-tat actions followed on Friday as President Trump instructed officials to consider a further $100 billion of tariffs against China. In response, the country’s Ministry of Commerce spokesman Gao Feng said: “We do not want to fight, but we are not afraid to fight a trade war.”
Yet despite the escalating economic brinkmanship, behind the scenes US and Chinese officials are still talking and laying out all the options. As mid-term elections approach, President Trump is very aware of what a large-scale fall-out in US equity markets would do for his approval rating.
Failure to resolve the dispute poses an obvious risk to the continued health of the US and global economy. As it was, those fears were compounded by the release of lower-than-expected US jobs data on Friday. Non-farm payrolls increased by 103,000 last month; the fewest jobs created by the US economy in six months.
Consequently, global markets ended the week on a downbeat note. The S&P 500 was down 1.37% over the five-day period. However, the FTSE 100 missed Wall Street’s late fall and gained 1.80% over the shortened week. The MSCI Europe ex UK finished the week up 0.62%.
US technology companies with large operations in China could be threatened by an escalation in the trade dispute; which was just one reason why tech stocks continued to make the headlines and exert a big influence on markets. On Monday, Wall Street shares plunged to their lowest level in weeks in a wide sell-off led by technology firms. Intel was a big loser on reports that Apple planned to stop using its chips for its computers, while Amazon suffered after new attacks from President Trump.
Mark Zuckerberg, Facebook’s founder and chief executive, confirmed that he would testify to US Congress on Wednesday this week, to answer questions over user privacy, the Cambridge Analytica data breach and Russian meddling in the US presidential election.
Facebook admitted that 2.7 million people in the European Union may have had their data improperly shared with the political consultancy firm. Thirty organisations, including Facebook, are being investigated in the UK by the Information Commissioner’s Office as part of its probe into the use of personal data and analytics for political purposes, the body has said.
The last two weeks’ sell-off has wiped billions of dollars from the values of Amazon, Facebook and Twitter; yet Spotify, the music streaming group, bucked the bearish mood for technology stocks when it made its debut on the New York Stock Exchange on Wednesday. The stock jumped 26% from its starting point within the first few hours of trading, valuing the company at $29 billion.
RWC Partners is a fund manager for St. James’s Place.
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