While we remain broadly positive on the UK as a whole, there are still potential dangers that investors need to be aware of. One such example is Thomas Cook whose difficulties have been well documented over the last few weeks.
According to senior management at Thomas Cook it is Brexit uncertainty that is leading to their current difficulties. While it has no doubt had a marginal impact, it is more likely that their struggles are more aligned with their £1.5 billion debt pile they have on their books. To provide some perspective, given the recent plunges in its share price its market cap (market value) is just £265 million. So, the entire value of the company is just 18% of their current debt pile. To ensure their long-term survival they are hoping to sell their airline, the one part of their business that is profitable. Of course, selling will allow them to write-down part of their debt, but unless you can fundamentally change the business model and make the other areas of the business profitable, then you are only delaying the inevitable.
Unfortunately, it remains to be seen whether Thomas Cook will be successful in turning around their fortunes. After all, given their well-publicised difficulties customers would be forgiven for not booking their future holiday with the travel company. If you are booking a holiday, then you want to be sure that the operator will still be in business next year.
Since the 2008 market crash interest rates have been at all-time lows and, coupled with quantitative easing, (which essentially pumps money from the central banks into the banking system) it has allowed businesses to borrow more money at a lower rate of interest. Of course, senior management always believe that they can deliver exponential growth when borrowing money, but when the winds inevitably change direction, then they are always caught out. So, when assessing companies, it has never been more important to pay attention to the fundamentals.
Trade worries mount as Trump targets Mexico
US trade policy continued to dominate investors thoughts last week as the conflict with China escalated and new tariffs at Mexico we added to the mix. President Trump stated that the US and China are nowhere near agreeing a deal whilst the Chinese revealed that it is considering restricting the export of crucial rare minerals to the US. With regards to Mexico, the US President stated that a 5.0% tariff on all goods coming across the border would be tariffed unless the Mexican government stops the flow of unauthorised migrants heading north. The tariff would gradually increase to 25.0% if progress isn’t made. Global equity markets closed out Friday on shaky ground with each of the major indices recording a loss for the week.
Domestically, the large cap orientated FTSE100 fell by -1.6% whilst the FTSE250 dropped by a more modest -0.8%. On the Continent, French and German equities declined by -2.1% and -2.4% respectively with each of them recording sharp losses on Friday. US markets endured a difficult week, capping off their worst month of trading this year. The S&P declined by -2.6% with mid and small-caps performing even worse, despite them typically being viewed as less sensitive to trade disruption. In Japan, the Nikkei fell by -2.4%
Unsurprisingly given the ramp up in tension, sovereign bond yields continued to creep lower. 10-year gilt yields dropped to just 0.89% after a 7 basis points (bps) weekly fall with the US equivalent treasury yield 19bps lower at 2.14%. Meanwhile, German 10-year bond yields dropped to their lowest ever level, falling by 3bps on Friday alone to -0.21%. More than €3.7tn of bonds across the Eurozone are now carrying sub-zero yields.
In the commodity markets, oil continued to retreat from its recent high with Brent declining by -6.1% to $64.49 a barrel. US trade policy coupled with general concerns regarding the outlook for the global economy has led traders to negatively revise their future demand expectations. Elsewhere, Gold rallied by +1.3% with the precious metal closing the week at $1,300 an ounce.
The week ahead
This week sees the release of the latest Purchasing Manager Indices (PMI) for the UK economy with this morning’s disappointing manufacturing number the first of three expected. Tomorrow’s retail sales data from the British Retail Consortium is also worth keeping an eye on. In the US, Friday’s labour market report will see updated unemployment, job creation and wage growth statistics all released. The Institute for Supply Management also releases its PMI equivalents, starting with the manufacturing sector later on today. Federal Reserve Chairman Jerome Powell is speaking at an even in Chicago with his speech likely to be heavily scrutinised for clues regarding the future path for the US Central Bank’s monetary policy.
In the Eurozone, the ECB hosts its monthly policy meeting on Thursday with no changes expected on this occasion. CPI inflation for May is the standout data release of the week with other headline data including unemployment, final PMI’s and retail sales. Official Chinese data is limited although media agency Caixin releases its own version of PMI data covering the smaller, private entities in the economy. There are no major releases in Japan on this occasion.
Past performance is not a guide to future performance.
Data sources - Datastream and Forex Factory - Accessed 03.06.2019
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