Closing summary
So stock markets are down today amid heightened trade tensions between the US and China, as new tariffs kicked in.
It’s been a better day for the pound, which has risen 0.6% against the dollar to $1.3148 after Brexit secretary Dominic Raab expressed confidence that a deal with the EU could eventually be reached – although investors remain wary. Sterling tumbled two cents against the dollar on Friday, its biggest daily drop this year to a low of $1.3053, after Theresa May admitted talks had reached an impasse after the EU summit in Salzburg.
This has put her leadership under mounting pressure ahead of the Tories’ annual conference, which starts on Sunday in Birmingham.
Oil prices have jumped today, after the Opec oil cartel resisted calls from Donald Trump to increase output to get prices down at the weekend. Looming US sanctions against Iran in November will restrict supply further. Brent crude is up 2.4% at $80.70 a barrel.
Good-bye – we will be back tomorrow.
Kate Swaine, partner at international law firm Gowling WLG says about the deal:
It is interesting to witness the marriage of such distinct brands in order to create another multinational luxury goods conglomerate. Although Michael Kors already owns Jimmy Choo, the addition of Versace is a major expansion for the group. They are not yet on the scale of LVMH or Kering but clearly have ambitions to expand their reach in the luxury goods sector.
As reported earlier, Versace, the Italian fashion house founded by Gianni Versace 40 years ago, has been sold to US handbag and clothing brand Michael Kors for $2bn (£1.5bn), according to the Italian newspaper Corriere della Sera.
Donatella Versace, the brand’s vice-president and artistic director, has called an all-staff meeting for Tuesday to announce the deal.
Neil Saunders, managing director of GlobalData Retail, says:
That Michael Kors should court Versace is no great surprise. The American company has long desired to transform itself into a house of luxury brands, a process it started with last year’s acquisition of Jimmy Choo. Versace comes with a much bigger price tag of $2.35 billion, almost double the $1.2bn price that Michael Kors paid for Jimmy Choo. However, it would also put a big-hitting brand with true global status into Michael Kors’ stable.
Other than the desire to become a bigger conglomerate, the rationale for buying another luxury label is perhaps less sound. In our view, while progress has been made, Michael Kors has not rebuilt its core brand to the same extent as other players like Coach: its offer is still confused and is nowhere near as rounded nor polished as many other luxury players. This shows up in the company’s sales figures where growth has been driven by an upswing in US consumer sentiment and spending, rather than because the brand is generating much better traction.
The choice of Versace is interesting. If the deal goes through it would certainly push the group into the big league in terms of its profile in the luxury space. It also means that the company would be a player in many different categories from fragrance to home to pets, thereby giving the group a true lifestyle position. However, it is also the case that despite its profile, Versace has struggled to grow sales. As such, Michael Kors is not buying a perfectly performing brand, it is buying a brand that needs work and some repositioning.
As much as we believe Michael Kors past experience with its own brand will help it make the changes required, these shifts will cause short-term disruption and might mean that the true benefits from the acquisition will take a number of years to deliver through. We also believe that some of the work required on Versace, which includes toning down some of the brasher elements of the brand which are now out of step with the more subtle tone preferred by modern consumers, are precisely the issues with which Michael Kors has struggled and is yet to satisfactorily resolve.
Wall Street has just opened. The Nasdaq is down 0.6% and the Dow Jones is 0.3% lower.
Back to the US-China trade dispute, which has moved closer to becoming a global trade war with the implementation of the latest tariffs today.
Geoffrey Yu, head of UK investment office at UBS Wealth Management, said:
Today marks the latest step in the simmering US-China trade spat, as we see the Trump administration’s new tariffs on an additional $200bn of Chinese exports take effect. This clearly represents a further escalation of the threat to China and its economy, and, especially considering that China has scrapped plans for further trade talks, we expect things will get worse before it gets better. As we inch further towards the precipice of a fully-fledged global trade war, financial markets will no doubt react swiftly, looking for further downside.
However, the narrow focus on Sino-US relations is obscuring consideration of how an emerging trade tariff war could stimulate a fiscal drive from China. With a reasoned domestic response, what currently seems a damning situation could actually spark a re-orientation of China’s economic model. Granted, the leadership will have to accept short-term sufferance, but over the medium- to long-term, we see the potential for positive surprises.
Sterling has risen as much as 0.9% against the dollar to $1.3161, and 0.4% against the euro to 89.42p.
Sterling rises 0.6% on Brexit deal hopes
Sterling has bounced 0.6% against the dollar today after Friday’s sell-off, lifted by upbeat comments from Brexit secretary Dominic Raab. It’s trading at $1.3158 at the moment, and is up 0.4% at 89.42 pence against the euro.
Raab expressed confidence that a Brexit deal could be struck – but analysts said the comments were unlikely to support the pound for long.
On Friday, sterling posted its biggest daily drop this year, falling as low as $1.3053, after Theresa May admitted that Brexit talks had reached an impasse, after a humiliating EU summit in Salzburg.
Updated
Back to the CBI survey. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says it suggests that the “modest stimulus to growth in production from sterling’s depreciation is fading”.
The drop in the total orders balance was driven partly by a decline in the export orders balance to an 11-month low of +5, from +9 in July. Admittedly, growth in total orders is weakening from a high rate; the overall balance still is consistent with year-over-year growth in manufacturing output of about 2%.
But the official manufacturing data has been much weaker than the surveys this year, with output falling by 0.1% quarter-on-quarter in Q1 and by a further 0.9% in Q2. In addition, growth in export orders usually lags movements in sterling by about one year; the exchange rate’s relative stability over the last year, therefore, has started to take the edge off growth in exports.
Past form suggests that the export orders balance will fall to about -5 by the end of this year. Meanwhile, the chance that overseas customers re-jig their supply chains increases with every day that passes without a Brexit deal. As a result, we doubt that the manufacturing sector’s recovery is about to get back on track.
Versace to be sold to Michael Kors – reports
The Italian fashion house Versace could be sold “within hours” to Michael Kors, the US fashion group, according to Italian newspaper Corriere della Sera.
The deal is expected to value Versace at $2bn. Blackstone, which owns a 20% stake, is selling its entire holding while the Versace family, which owns the rest of the company, will stay involved, Reuters reported. The fashion house was founded by Gianni Versace in 1978.
In Germany, manufacturers have also become more gloomy, worrying over the US-Chinese trade tensions and the impasse in the Brexit negotiations. The Ifo survey, also out this morning, showed that business sentiment improved in all sectors apart from manufacturing. You can read the survey here.
Ifo economist Klaus Wohlrabe said:
Despite the good mood, uncertainty is gradually growing among companies.
The CBI industrial trends survey, of 409 firms, revealed that output growth slowed in the three months to September, but remained above the long-term average.
Output expanded in 10 out of 17 sub-sectors, with growth driven mainly by the mechanical engineering, food, drink & tobacco, plastic products, and metal products sectors. Despite the fall in orders, manufacturers expect output growth to pick up over the next three months.
Leach added:
Efforts on all sides must be geared towards securing the Withdrawal Agreement and - crucially - the transition period. This will provide temporary but essential relief for businesses of all sizes and sectors.
Looking ahead to the Autumn Budget, business rate reform, coupled with movement on capital allowances, could help encourage productive investment against this uncertain backdrop.
UK factory orders weaken in September – CBI blames no-deal fears
After the smaller-than-expected dip in German business morale, which analysts say points to solid economic growth in the third quarter, here in the UK factory orders weakened in September, according to an industry survey.
The CBI’s monthly factory orders balance fell to a four-month low of -1 from +7 in August, and its gauge of export orders hit its lowest level since last October.
Anna Leach, the CBI’s head of economic intelligence, says:
While manufacturing order books remain strong and output is still growing, Brexit uncertainty continues to cloud the outlook.
Heightened fears of a ‘no deal’ Brexit scenario have prompted some firms to move publicly from contingency planning to action.
Russ Mould, investment director at stockbroker AJ Bell, is also not impressed with the deal, describing it as an “odd move with a potential culture clash and a poor outcome for UK investors who don’t want to hold overseas-listed shares”.
Randgold is an entrepreneurial business with a highly-respected boss in Mark Bristow. It has a track record of being able to succeed in difficult parts of the world and generating value for shareholders.
The miner has never rushed into making acquisitions until they could clearly add value; it has always tried to generate additional value through exploration and has maintained a tight focus on cost control.
Barrick is the exact opposite – it is a big corporate machine which has paid the price for making bold moves at the top of the commodities cycle, resulting in significant impairment charges on acquisitions and large debt levels.
It has previously come under fire for excessive executive pay and shareholders have seen their value of their investment slowly dwindle away as the company failed to deliver strong returns from its asset base.
UK shareholders are arguably being dealt a poor hand with the merger.
It’s also bad news for the London stock market, Mould argues.
The London stock market listing is being cancelled and Barrick isn’t paying any premium to combine the two companies. The London market overall is also being punished as it will lose its largest gold miner, leaving only one company of scale on the exchange, being silver and gold producer Fresnillo.
Barrick to buy Randgold to create world's biggest gold company
Meanwhile, Canada’s Barrick Gold has agreed to buy FTSE 100-listed Randgold Resources in a $18.3bn deal to create the world’s largest gold company.
Shares in Randgold are up 6% on the news to £52.15, making it the second-biggest riser on the FTSE 100 after broadcaster Sky. The new company will be listed in New York and Toronto and will be run by Randgold boss Mark Bristow, while Barrick chairman John Thornton will chair the merged business.
He said:
Randgold has the agility and swift-footedness of a younger and smaller company, much like Barrick in its early years, While Barrick has the infrastructure and global reach of a large corporate company.
However, some analysts were sceptical. Kieron Hodgson at Panmure said:
Our opinion is that the proposed merger, instead of being based on merit, strength and strategic integration, is more akin to the proverbial ‘two drunks supporting each other at closing time’.
The all-share deal values Randgold at £4.58bn or £48.5 a share, according to Thomson Reuters data.
Paul Mumford at Cavendish Asset Management says the 2% plus rise in oil prices is good news for smaller UK oil and gas companies.
Should Brent crude continue to trade in a range between $70/barrel and $80/barrel the outcome looks good for smaller UK oil and gas companies. It will prove a boon for cash flows and forecasts as every extra dollar at that point goes straight through to cash flow. As well as taking the pressure off highly-geared companies, this would boost the value of reserves making it easier to obtain finance for exploration and development.
However, even if Brent crude falls below this ideal and into the $60/barrel, many of these smaller companies will still remain quite profitable. The situation in the sector is very different to what it was during the last oil spike; companies have worked hard to get operational costs way down, and many have taken advantage of the sustained high price to lock-in a price for the immediate future. Whereas these companies were previously trading on razor margins and vulnerable to small falls, they are now far more resilient and can comfortably stomach falls all the way down to $60/barrel.
Should Brent crude go south of $60/barrel, then we start to enter trouble and worry territory (although many will still remain profitable down to $50barrel). Conversely, should the price continue to rise above $80/barrel could be counterproductive in that it could cause an overcorrection, triggering volatility. All in all, however, so long as we are able to keep the price above $70/barrel, the outlook is very rosy.
Updated
The trade tensions between the US and China are weighing on European stock markets. The Chinese, south Korean and Japanese markets are all closed for public holidays today, so Hong Kong’s Hang Seng index and the Australian stock market were the biggest losers in Asia. These are the latest moves in Europe:
- UK’s FTSE 100 index down 0.2%
- Germany’s Dax down 0.4%
- France’s CAC down 0.2%
- Italy’s FTSE MiB down 0.6%
- Spain’s Ibex down 0.4%
Oil prices hit 4-year high after Opec rejects Trump's call for action
Oil prices have hit a four-year high after Opec declined to boost production at the weekend, despite Donald Trump’s call for action. Brent crude, the global benchmark, hit their highest level since November 2014 this morning, rising more than $2, or 2.7%, to $80.94 a barrel. It is still up 2.4% at $80.70 a barrel.
This has prompted some to forecast a spike to $90 or even $100 around the turn of the year.
"The likelihood of an oil spike and crash scenario akin to the one observed in 2008 has increased."--BAML as oil hits $80
— Sarah Kent (@SarahKentWSJ) September 24, 2018
Oliver Rakau, chief German economist at Oxford Economics, has taken a closer look at the German Ifo business confidence numbers. He noted that while the index dipped slightly in September, it remained well above its recent lows, although it is still some way off last year’s highs.
It is especially encouraging that firms’ expectations only edged down to 101.0 from 101.2 after surging in August as we had worried that it might have been a one off. But it looks like the 6-month outlook has indeed brightened somewhat. At the same time, the assessment of the current situation was stable at 106.4, somewhat above the Q2 average meaning that the economy may have picked up a little as we head into Q4.
The sector breakdown shows the diverging fortunes of the external and domestic economy. The manufacturing ifo fell moderately but stayed above its recent lows. That may be connected to Trump ratcheting up his trade skirmish with China and supports our view that slowing global trade will be a headwind in H2, but manufacturer’s expectations rising may indicate that the headwind from last year’s euro appreciation may begin to fade.
Moreover, services and construction sentiment rose further, which is a sign of rising wages finding their way into increased consumer spending. Moreover, builders continue to benefit from an ultra-tight supply-side, that may curtail their growth pace, but it will pro-long their long-running boom.
Overall, it really shouldn’t surprise anyone that the German manufacturing ifo falls on the day that new US tariffs on China take effect. However, a robust domestic economy is reflected in increased services confidence. That continues to support our (and the ECB’s) optimism regarding the resilience of domestic demand. So, even if growth won’t be as buoyant as 2017, it should remain strong enough to keep the ECB on track to normalise its monetary policy.
Sterling is still trading above $1.31, lifted by comments from Brexit secretary Dominic Raab. Brushing off the prime minister’s humiliating experience at last week’s EU summit in Salzburg, he told Talk Radio:
We keep on negotiating in good faith, we try and get the best deal we can, but we are ready for all eventualities. We’ll keep negotiating in good faith. I’m confident we’ll get there.
Theresa May’s Chequers deal was rejected by EU leaders in Salzburg, but Raab said:
These blips in the road, they’re blown a little bit out of proportion, but we double down, we don’t throw our toys out of the pram, hold our nerve, keep our cool.
But at the same time, we need to be ready for the possibility... that the ambitions that we are bringing to these negotiations to try and get a win-win deal isn’t matched by the other side and it does take two to tango.
Updated
German Ifo business morale better than expected
The German Ifo survey was better than expected. The closely watched business climate index dipped to 103.7 in September from a revised 103.9 in August – but better than the 103.2 expected by economists.
It suggests that German businesses are not overly worried about the deepening trade conflict between the US and China. The latest tariffs kicked in today.
As #Germany’s Ifo index, drops only slightly to 103.7, is it time to send a “thank you note” to Brussels asks @carstenbrzeski https://t.co/oZ5VY0mCHH
— ING Economics (@ING_Economics) September 24, 2018
Updated
Oil prices rise 2%; some warn of spike to $100 a barrel
Oil prices are up 2% as the market tightens. Brent crude has gained $1.6 to $80.42 a barrel. Earlier, it hit $80.47 a barrel, its highest level since May. US light crude is 1.75% higher at $72.02 a barrel.
Looming US sanctions will restrict Iran’s oil exports, leading to less global supply. Despite this, the Opec oil cartel kept oil output limits in place a meeting in Algiers on Sunday – defying Donald Trump’s call for action. He tweeted last week that Opec “must get prices down now!” Some traders are forecasting that crude could spike to $100 a barrel next year.
US commercial oil inventories are at their lowest level since early 2015, although US oiil production is near a record high of 11m barrels a day.
Commodity traders Trafigura and Mercuria reckon Brent crude could rise to $90 a barrel by Christmas and break through $100 early next year, with US sanctions against Iran due to be fully implemented in November.
JPMorgan said in its latest market outlook that a “spike to $90 per barrel is likely” in light of the sanctions.
Updated
The FTSE 100 index has opened lower, trading down 0.26% (nearly 20 points) at 7470.16.
Shares in broadcaster Sky have jumped 9% to £17.22. US cable-TV giant Comcast won the auction for Europe’s biggest pay-TV group at the weekend, outbidding Rupert Murdoch’s Twenty-First Century Fox with a £17.28 a share offer.
Our media editor Jim Waterson writes:
Rupert Murdoch’s dream of taking full control of Sky dissolved on Saturday night as he was outbid by the US firm Comcast. But anyone celebrating a setback for the mogul should be warned. The most divisive figure in Britain’s media may still have the last laugh.
However, for now the pound is up, trading above $1.31 (up nearly 0.3%) after Brexit secretary Dominic Raab expressed confidence that the government will get to a Brexit deal in the end, although he also said it was ready and prepared to deal with the risks of a no-deal outcome.
Updated
Hussein Sayed, chief market strategist at online broker FXTM, has sent us his thoughts on trade and sterling:
Politics and trade tensions are expected to be the key market drivers this week. While [the tariffs] seem to be already priced in, investors are becoming increasingly worried that the trade war may enter phase III. With Beijing cancelling planned trade talks on Saturday and the US State Department imposing sanctions against China’s defence agency, relations between the two largest economies in the world may further deteriorate.
While markets in mainland China, Japan, and South Korea are shut for a public holiday, investor skepticism was reflected in Hong Kong stocks and commodity currencies which fell in early Monday trade. Whether the pain will begin reflecting in Wall Street depends on what happens next. If President Trump follows through on his promises to impose further tariffs on the remaining $267 billion of Chinese imports, investors may consider it as a signal to move out of US equities.
Sterling has recovered a bit this morning, trading up 0.2% at $1.3106 against the dollar.
Sayed says:
Markets thought that we might finally be seeing a Brexit breakthrough at the Salzburg Summit on Friday. Instead, the summit increased the chance of a no-deal Brexit as EU leaders slammed Theresa May’s Chequers Brexit proposal with the Irish border remaining a key barrier to a deal. With no tier one economic data on the calendar, expect GBPUSD to weaken further this week with a possible test below $1.3.
Thomas Cook warns on profit after heatwave hit bookings
It feels quite autumnal this morning, but Thomas Cook is still suffering the effects of the heatwave across northern Europe. The travel giant has issued a profit warning, cutting its 2018 profit outlook by 13%. It has blamed the heatwave for more discounting and tougher competition.
The company’s shares crashed 18% when the stock market opened.
The long run of hot weather (Britain’s joint-longest heatwave on record) encouraged more people in Britain, Germany and Scandinavia to stay at home or holiday in their own country, rather than head to warmer countries in southern Europe. The warm weather is also affecting bookings for winter holidays.
Thomas Cook said:
The slowdown in customer bookings during June and July extended into August, leading to higher than normal levels of promotional activity.
The tour operator now expects underlying operating profits to come in at £280m rather than the previously estimated £323m to £355m in the 12 months to 30 September. Rival Tui has stuck to its forecasts.
Updated
While the Labour party is meeting in Liverpool, Theresa May faces a tense meeting in Downing Street today, amid intense pressure from leading Brexiters in her party to change course and seek a simpler, less ambitious deal. Key elements of the prime minister’s Chequers deal were rejected by EU leaders at last week’s humiliating summit in Salzburg.
Big Brexit day in westminster - May has to face Cabinet after Salzburg mess and IEA right wing think tank putting forward another plan (quite a lot of it is familiar stuff)
— Laura Kuenssberg (@bbclaurak) September 24, 2018
Introduction: China accuses US of 'trade bullyism'
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The new tariffs imposed by the US and China on each other’s goods went into effect on Monday, as the bitter trade dispute deepened. Soon after, Beijing accused Washington of engaging in “trade bullyism,” the official Xinhua news agency reported.
But Beijing also said it was willing to restart trade negotiations with Washington if the talks are “based on mutual respect and equality”.
The US tariffs on $200bn of Chinese goods and China’s retaliatory tariffs on $60bn of US imports took effect at midday in Asia (5am BST), although the level was not as high as feared earlier. The US opted for 10% tariffs (initially - they go up to 25% by the end of the year) while China’s duties vary between 5% and 10%. The trade dispute started in the early summer when trade talks broke down and the world’s two biggest economies slapped duties on $50bn of each other’s goods in July.
Economists have been warning about the impact on growth not just in the US and China, but the wider global economy.
The US tariffs spare some gadgets such as smartwatches and speakers, while home modems, routers and internet gateways are included.
Reuters reports:
The move will effectively create a two-tiered tariff structure for consumer internet, with many products, such as Fitbit fitness trackers, Apple’s watch and Amazon.com’s Echo smart speaker being favored over routers and internet gateways from Arris International, Netgear, D-Link and others.
“We’re operating under the assumption that the tens of millions of devices that deliver high-speed internet into consumers’ homes will be impacted by these tariffs,” said Jim Brennan, Arris’ senior vice president of supply chain, quality and operations.
“It feels anti-consumer because our devices are what enables the core of consumer tech,” Brennan told Reuters.
The pound also remains in focus, with the party conference season in full swing. Michael Hewson, chief market analyst at CMC Markets UK, says:
The pound had a dreadful week last week despite hitting a two-month high against the US dollar. The breakdown in relations between the UK and EU leaders in Salzburg last week, and Prime Minister Theresa May’s punchy statement on Friday could well be described as the usual political theatre that we’ve all become accustomed to in the past couple of years, however markets appear to be deciding that with the March 2019 deadline looming, the room for political manoeuvre appears to be getting smaller.
This has led to the not unreasonable conclusion that the risks of a political, as well economic dislocation have increased, particularly since both the UK government, and so-called opposition parties appear to be more concerned about their own internal squabbles, than actually doing what is best for the people they claim to represent.
With party conference season now in full swing there is likely to be little of consequence that is likely to be construed as positive for sterling, as both Labour this week, and the Conservative’s next week look to shore up their base support, with equally economically incoherent policies.
Pound under a bit of pressure this morning but GBPUSD still holding for now above Friday's low around 1.3050, set after the plunge: pic.twitter.com/SoSIkb3Ta1
— David Jones (@JonesTheMarkets) September 24, 2018
The Agenda
- 9am BST German Ifo business climate survey
- 11am BST CBI Industrial Trends survey
Updated
