Stocks drop on trade fears; GBP dips as Brexit talks continue

Summary:

• US stocks drop on renewed trade fears

• DE30: Legal provision weighs on BMW earnings

• GBP pulls back as cross-party Brexit talks resume

• Aussie rallies after RBA decision

• Top charts for the week

The week had gotten off on the wrong foot for US stocks after Trump’s tweet on Sunday, but the large gap lower proved a buying opportunity for the US session as the US indices rallied throughout and ended the day not that far from where they finished Friday. However, a large part of this recovery was wiped out in little time on Lighthizer’s comments, which show that there is substance behind Trump’s post and that we could well be set for a further escalation in the US-China trade war by the end of this week. The US500 has revisited Monday’s low of 2883 this afternoon, but this has attracted buyers and seen price bounce once more.

It’s a similar story closer to home with European equities sliding across the board. BMW (BMW.DE), one of the biggest carmakers in the world, reported earnings for the first quarter of 2019 today. Company’s net profit declined over 70% YoY to €561 million. EBIT at €589 million was 78% lower than in Q1 2018. However, BMW explained that it took a €1.4 billion legal charge relating to European collusion proceedings. Spare for this one-off item EBIT would be slightly shy of expected €1.7 billion. The company also generated revenue of €22.462 billion, what was more or less in line with expectations and showed a flat growth year over year. The stock may find itself under pressure in the days to come. BMW, like some other carmakers, made significant investment in China in order to set up vehicles there and export them to other parts of the world. As the Chinese government tries to make China leader in the EV field, electric vehicles may become the focus of the US in case trade war continues to escalate. Such a development could derail any forecasts of BMW management and turn 2019 in to a really weak year.

The pound ended last week with a flourish on raised hopes of a cross-party Brexit breakthrough, but the currency is pulling back a little in recent trade and the coming days could well prove pivotal, both on this and also the trade tensions front. The results of last week’s local elections were nothing short of disastrous for not only the Tories but also Labour with the leading parties receiving a drubbing at the ballot box. The contrast between this and 2017 is even more stark with the two parties accounting for over 80% of the vote at the last General Election and not much more than half this time around. While it is true that local elections often see poor performance for the government and a greater proportion of votes for smaller parties, this is still a clear rejection of both the Tory and Labour approach to Brexit. With this in mind, the cross-party talks that have been carried out for several weeks will now have a greater impetus with both sides eagerly searching for a much needed victory.

Today’s RBA rate decision was a toss-up with market expectations almost evenly distributed between a cut and an increase in interest rates. Meanwhile, the RBA decided to keep rates unchanged with the main rated staying at 1.5%. The Aussie jumped to its highest level since the beginning of May in the aftermath. The central bank wrote that there was still some spare capacity left in the economy, hence a further improvement in the labour market could be needed for inflation to be consistent with the objective. Therefore, from this point of view it is clear that data coming from this part of the Antipodean economy should be treated with the highest priority for investors. There has been a lack of follow through to the upside for the Aussie however, with AUD paring earlier gains as the day has worn on.

Our top charts this week focus on the US500, USDTRY and Oil and can be viewed in detail here.