Midweek update
April 11th 2018

Apr 11, 2018 Written by Gavin Pannu, MSTA, CFTe

Investors look towards Company Earnings

Markets start the second quarter of the year in dramatic style. Shares mostly remaining unclear as investors abandoned technology stocks. Triggered by a deepening in bearish sentiment towards the price of major technology stocks as well as fears over global trade war.

Trump used Twitter to voice his concern of Amazon, stating they are taking away millions from the US postal service. Tesla’s quarterly production of its model 3 sedan falling short of 2500 per week target and with the recent crash involving autopilot technology. Intel could potentially lose Apple as a client as the latter wants to bring chip making in-house from 2020.

Donald Trump’s looming trade war with China has continued to intensify. China retaliates by imposing tariffs of 25% on over 128 US imports with a focus on farming with Soybean and manufacturing with Boeing. China states this is to safeguard their interests and the losses caused by Trumps higher tariffs. This move will affect $100bn of US imports and targeting the most substantial US exports.

Spotify becomes the first well-known brand to choose their route to market with a direct listing instead of the traditional initial public offering (IPO). Spotify began trading at $165.90, a 34% increase on its initial set reference price. The opening puts the company’s value at $30bn but since has fallen. This approach could be followed by other well-known brands looking to list in the public markets.

The pound started the prior week on a positive due to the latest IHS Markit manufacturing survey which showed the sector maintained a steady pace of growth in March. The UK’s purchasing managers index (PMI) inched up from 55 in Feb to 55.1 in March. But both IHS Markit construction survey and services survey was below the forecast leading to weakness in the pound towards the end of the week. Weather conditions from what has been called the beast from the east early March had dampened overall activity and stretched delivery times. This is seen as a blip in the surveys and expectations of a rise in growth will lead to strength in PMI data for the long term.

FTSE had been bullish despite global trade worries as investors money flowed out of the technology sector and into defensive stocks. Investors will be looking to re-weight their portfolios rather than holding cash. In addition the UK and European stock market is seen as undervalued compared to the US stock market with a lower price to earnings ratio and a large difference in return on investment spread.

Rhetoric from Trumps administration, economic advisor Larry Kudlow stating the US are negotiating with China rather than in a trade war provided further mixed signals and a continued uncertain view. Activity in US equity options was minimal as expectations for strong corporate earnings stopped investors loading up on contracts that benefit from a surge in market volatility as the Volatility Index (VIX) moves lower.

The latest US jobs data was worse than expected due to trade war concerns and market volatility reported by the US Department of Labor. The jobs report has previously been healthy with numbers beating expectations. This could potentially be the first sign of an economic slowdown.

Overall investors are becoming less concerned with the trade war as the tic for tac protectionism becomes discounted into price with each attempt having less of an impact on prices. But if a mandate is provided this could lead to a larger sell off. Investors are now looking towards the earning season which starts this week for validation of the economic condition.