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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

IMF warns that Europe's economy is weak, as US productivity slides – business live

German Chancellor Angela Merkel visits Volkswagen’s car factory in Zwickau, eastern Germany, as it starts production of the new Volkswagen electric car, the ID.3 model.
German Chancellor Angela Merkel admiring Volkswagen’s new electric car, the ID.3 model, at its car factory in Zwickau, eastern Germany. Photograph: Ronny Hartmann/AFP via Getty Images

Finally, a rather uneventful day’s trading is over in the City.

The FTSE 100 closed just 8 points higher at 7,396.

Growth across the world’s companies has hit its lowest level in nearly four years.

That’s according to October’s PMI surveys, released over the last few days:

IMF: European economies are slowing

The International Monetary Fund has issued a fresh warning that Europe’s economy has weakened this year.

In its new Regional Economic Outlook for Europe, the IMF points out that growth has slowed this year.

That’s mainly due to weaker trade (thanks to the US-China tariffs), and a slowdown in factories this year. But there are now signs that the weakness is spreading...

The IMF says:

For most of the region, the slowdown remains externally driven. However, some signs of softer domestic demand have started to appear, especially in investment. Services and domestic consumption have been buoyant so far, but their resilience is tightly linked to labor market conditions, which, despite some easing, remain robust. Expansionary fiscal policy in many countries and looser financial conditions have also supported domestic demand.

On balance, Europe’s growth is projected to decline from 2.3% in 2018 to 1.% in 2019. A modest recovery is forecast for 2020, with growth reaching 1.8%, as global trade is expected to pick up and some economies recover from past stresses.

This echoes the message from the IMF’s Autumn Meeting last month, when it clashed growth forecasts for some European economies.

It only expects the eurozone to grow by 1.2% in 2019 (down from 1.3% previously), and by 1.4% in 2020 and 2021 (down from 1.5%).

The Fund also warns European leaders to prepare for the next crisis, and boost spending where they can, saying:

Countries with ample fiscal space should take measures to boost potential output, while countries with elevated debt and deficit levels should generally proceed with fiscal consolidation. This would also help address external imbalances.

Given elevated downside risks, contingency plans should be at the ready for implementation in case these risks materialize, not least because the scope for effective monetary policy action has diminished.

Just in: America stockpiled a lot more crude oil than expected last month.

Stocks of refined hydrocarbon products, such as gasoline, fell.

That suggests that US refiners reined in their activity last week; perhaps a sign of slowing demand?

City news: Jupiter has named fund management veteran Nichola Pease as its new chairman -- despite her husband, Crispin Odey, betting against the company.

Pease is an experienced financial executive, having run JO Hambro Capital Management and served on the board of Schroders, one of Jupiter’s rivals, since 2012.

She says:

“Jupiter is an exceptional firm with a high-quality team and an ambitious strategy to build the business over the next five years. I look forward to joining the Board at a very exciting time for the business.”

But does Crispin agree? Earlier this week his hedge fund held a 0.66% short position in Jupiter’s shares, which would be profitable if they fell in value....

The FT’s heard that Odey has now closed the short position. Very wise, if only for domestic harmony....

Shares in ride-sharing firm Uber have hit a fresh record low today, as some company insiders get the chance to sell.

It’s six months since Uber floated, meaning the lock-up period preventing some insiders and early investors from cashing in has just expired.

This puts fresh pressure on Uber’s stock, which has already fallen by a third since it floated at $45/share in May.

The shares are down 3% today at $27.15.

CNN thinks the impact from the lockup expiration could be ‘muted’, as Uber’s share price is now below the price some insiders bought in at.

HP shares surge on Xerox takeover talk

Ding ding! Shares in Hewlett-Packard have surged by 17% at the start of trading in New York.

Traders are enthused by the prospect of a takeover move from smaller rival Xerox (see earlier post).

However, it’s not clear how a merger of these two makers of increasingly legacy tech would be financed, points out Daniel Howley of Yahoo Finance.

The broader market is quiet, though, with the Dow down 27 points at 27,465 (-0.1%).

US productivity falls unexpectedly

Eek! US productivity has suffered its biggest decline in four years.

Labor Department figures show that the economic output per hour of US workers fell by 0.3% in July-September, the largest drop since late 2015.

Over the last year, US productivity is only 1.4% higher, despite president Trump’s tax cuts and deregulation push which was meant to make the economy more productive.

It’s a blow to the White House, as the Associated Press explains:

The Trump administration promoted its 2017 corporate tax cut as a policy that would raise productivity by encouraging businesses to invest in more computers, machinery and other equipment.

Productivity did pick up in the first half of this year after growing modestly in 2018, but it now appears to be dropping back to the slow growth that has occurred since the Great Recession ended.

German government cools talk of deposit insurance scheme

Over in Berlin, the government is trying to cool suggestions that it supports a deposit insurance scheme to protect eurozone savers from a bank collapse.

Yesterday, finance minister Olaf Scholz appeared to back the idea of a common scheme to protect savers’ deposits.

Writing in the Financial Times, Scholz argued that Europe must complete the process of banking union.

“The need to deepen and complete European banking union is undeniable. After years of discussion, the deadlock has to end.

Significantly, Scholz said such integration must include a European deposit protection, so that national governments could honour their legal obligation to protect deposits of up to €100,000.

Such a move was deposit insurance “no small step for a German finance minister”, Scholz wrote, acknowledging Berlin’s reluctance to pick up the bill for bank problems abroad.

However, Angela Merkel’s administration may not be convinced yet!

German government spokesman Steffen Seibert has told reporters that Scholz was merely contributing to the debate, rather than announcing a change of policy.....

Scholz certainly wasn’t offering a blank cheque. In return for a deposit insurance scheme, he also wants to beef up bank supervision rules, harmonise bankruptcy law, and tackle bad debts in the system.

The US president wants to take the credit for the stock market rally:

It could be a quiet day on Wall Street, judging by these opening calls:

Back in London, shares in communications group BT have slumped after it lost a key contract.

Virgin Media has dropped BT as its mobile network provider in favour of Vodafone, and is promising new services such as super-fast mobile broadband.

Ru Bhikha, mobiles expert at uSwitch.com, says the move could benefit Virgin’s three million customers.

“In theory, customers shouldn’t see any disruption when they are moved over from late 2021, and users won’t need to change their SIM cards.

“The agreement means that Virgin Media customers will get to enjoy Vodafone’s 5G network, which launched more than three months ahead of BT’s 5G technology.

“Vodafone has been offering its customers tariffs based on unlimited data, so any similar offering by Virgin Media could be a huge draw for new users.

BT are the biggest faller on the FTSE 100, down 4.5%, while Vodafone are up 1.5%. According to the BBC, the contract was worth around £200m to BT.

The Hewlett-Packard (HP) logo

Over in New York, shares in tech firm Hewlett-Packard have surged almost 9% as print rival Xerox ponders an audacious takeover.

Xerox’s board considered whether to bid for its larger rival this week, according to the Wall Street Journal reported.

Such a deal would unite two faded tech giants; a few decades ago, Xerox’s printers and copiers and HP’s workstations, laptops and peripherals helped both firms dominate the IT space.

But it would be a stretch for Xerox -- it’s worth $8bn, compared to HP’s $27bn.

The WSJ says:

Xerox is considering making a cash-and-stock offer for HP, which has a market value of about $27 billion, according to people familiar with the matter. The copier maker’s board discussed the possibility Tuesday, the people said.

There is no guarantee Xerox will follow through with an offer or that one would succeed. HP, which installed a new chief executive just last week, is more than three times the size of Xerox and any bid would be at a premium to its current stock price, the people said.

The London Stock Exchange Group offices in the City of London.
The London Stock Exchange Group offices in the City of London. Photograph: Toby Melville/Reuters

Although markets are quiet today, the mood has changed in recent days.

Rightly or wrongly, many investors are more optimistic about the global outlook, and hopeful that the US and China will declare a trade war truce soon.

This has pushed equities higher, with the blue-chip FTSE 100 gaining over 4% since the start of ~Octobe.r

Neil MacKinnon, Global Macro Strategist at VTB Capital, explains:

Investors want to believe good news – especially equity market investors. Subject to the ever-erratic newsflow on a “phase one” deal in the Sino-American trade dispute, such a deal would obviously remove a short-term “downside risk” for the global economy.

Investors also are looking at incoming economic data and hoping that the global economic downturn is bottoming out.”

Marks & Spencer’s CEO Steve Rowe has faced the press (by phone) to explain why profits have slumped 17%, with yet another drop in clothing sales.

Rowe, who was appointed in 2016, has admitted that the company failed to execute its strategy well enough (as with the ‘Jeansgate’ debacle, when it didn’t stock enough pairs of trousers worn by TV presenter Holly Willoughby)

European stock markets are very subdued this morning.

Despite the pick-up in German factory orders, the Frankfurt markets is slightly lower this morning.

In London, the FTSE 100 has shed 10 points or 0.15%. Property firms British Land and Land Securities are among the top fallers, following Intu’s warning that its rental income is falling.

European stock markets
European stock markets Photograph: Refinitiv

Asia-Pacific markets have closed, with China’s CSI300 and Australia’s S&P/ASX both dropping 0.5%.

Shopping centre firm INTU hit by wave of CVAs

Intu’s Properties Plc’s Lakeside Shopping Centre.
Intu’s Lakeside Shopping Centre. Photograph: Bloomberg/Bloomberg via Getty Images

UJ shopping centre owner Intu has sent shivers through the property sector, by warning that it expects rental income to fall sharply this year.

Intu blamed a surge in UK companies using administration agreements (or CVAs) to shed underperforming stores, which hit its income in recent months.

It also cited political uncertainty (such as Brexit) for deterring potential customers.

Intu told the City:

Although new lettings and rent reviews are still positive overall, CVAs in the period were slightly worse than expected and the political and economic uncertainty is causing customers to delay new lettings, with letting activity in the third quarter slower than forecast and at a lower level than 2018.

We anticipate that like-for-like net rental income for 2019 will be down by around 9 per cent, with more than half the reduction coming from the impact of CVAs such as Arcadia and Monsoon.

Intu’s CEO Matthew Roberts says the “number one priority” is to fix the firm’s balance sheet before it faces significant debt repayments in 2021. Options include selling assets and issuing fresh equity, he says.

Intu’s shares have tumbled 16% this morning, to a two-month low.

Updated

More from Ofcom:

Just in: Eurozone retail sales are a little stronger than expected in September:

New Ofcom CEO chosen

Newsflash: Ofcom has chosen Melanie Dawes, one of the UK’s most senior civil servants, as its next CEO.

My colleague Mark Sweney has the scoop:

The 53-year-old, the most senior female in the civil service, is currently permanent secretary at the ministry of housing, communities and local government, which she took over from Bob Kerslake in 2015.

The UK media and telecoms regulator’s selection panel, led by the Ofcom chairman Lord Burns, is ready to appoint Dawes who is understood to be keen to take up one of the biggest regulatory jobs in Britain.

However, the announcement of a successor to Sharon White is not likely to be officially confirmed until after the general election, which could - but is unlikely - to have an impact on her appointment. The chancellor, Sajid Javid, has abandoned plans to announce his choice to be the next governor of the Bank of England until after the election.

Dawes will succeed Sharon White, who is becoming the new chairman of John Lewis.

Here’s Mark’s story:

Updated

Eurozone economy near stagnation as factories struggle

The eurozone economy continues to be dragged back by manufacturing gloom.

Data firm Markit reports that the eurozone’s private sector barely grew last month (despite the pick-up in German factory orders reported this morning).

Markit says:

Weakness was centred on the manufacturing economy, where another marked fall in new orders was recorded, whilst there was also a sharp reduction in foreign demand.

Overall exports were down for a thirteenth successive month, with the rate of decline amongst the sharpest in the series history.

Its Eurozone Composite PMI index has come in at 50.6, up from 50.1 in September, but still close to stagnation.

Although France posted stronger growth, Germany’s private sector contracted.

Markit says:

There remained a divergence between the manufacturing and service sectors during October. Whereas manufacturing firms recorded a ninth successive month of declining production, service sector companies indicated further growth, albeit at the second-weakest rate since January.

Eurozone composite PMI
Eurozone composite PMI Photograph: IHS Markit

But encouragingly, German, France and Italy all reported stronger service sector PMIs than predicted this morning.

This lifted the eurozone’s Service Sector PMI to 52.2 in October, up from September’s 51.6. That shows faster growth, but is also the second-lowest reading since January.

Service sector companies reported a small rise in new business volumes was signalled during October, although exports fell for the 14th month in a row.

Backlogs of work fell for a third successive month, keeping employment growth at an eight-month low.

Back in the UK, Marks & Spencer has admitted it is “making up for lost time” after yet another poor performance in clothing sales (down 5.5% in the last six months)

M&S suffered some serious supply chain problems this year, leading to empty shelves and racks (and the sacking of fashion boss Jill McDonald). Today, CEO Steve Rowe has insisted it is seeing “a positive response” from shoppers, and suggested clothing sales are turning around.

Here’s the full story:

M&S shares are up 4.4% this morning, as traders take heart from Rowe’s upbeat comments.

To Masayoshi Son’s credit, he isn’t ducking the WeWork issue.

Speaking to journalists in Tokyo, SoftBank’s CEO admits that he blundered by pumping so much money into the office rental company, which had to be bailed out last month.

Son says:

“The perception is that SoftBank is being dragged down into the quagmire of WeWork.”

“I am looking back with true regret about the mistaken investment moves that I have made.”

But Son also insisted that WeWork, which leases offices and desk space, can have a bright future.

Associated Press has the details:

In a presentation, Son said WeWork was losing money from initial construction and design costs but, with time, property will become profitable.

A reporter asked how WeWork was an internet company when it was real estate, a question that has been on many minds on WeWork. But Son said internet technology is incorporated into WeWork’s concept. WeWork focuses on offering office space to startups.

Son also argued that it’s common for new companies to start out with losses, including those considered successes such as Amazon and Facebook, and they were able to eventually grow.

SoftBank has said it has ample cash to handle the WeWork woes.

“There is no storm, and things are under control,” he said, although he smiled when the crowd responded with giggles.

Today’s huuuge loss is actually SoftBank’s first quarterly loss in 14 years.

It’s a day of reckoning for SoftBank, as Bloomberg puts it:

Masayoshi Son is finally disclosing the damage from SoftBank Group Corp.’s bets on WeWork and Uber Technologies Inc.

The Japanese investment powerhouse on Wednesday reported its first quarterly operating loss in 14 years -- about $6.5 billion --after writing down the value of a string of marquee investments. It swallowed a charge of 497.7 billion yen ($4.6 billion) for WeWork, whose spectacular implosion turned the once high-flying shared-office startup into a Silicon Valley punchline.

Updated

SoftBank suffers huge losses after WeWork and Uber disappointment

SoftBank founder and Chief Executive Officer Masayoshi Son
SoftBank founder and Chief Executive Officer Masayoshi Son Photograph: Eugene Hoshiko/AP

SoftBank Group, the Japanese tech investor, has slumped to a massive quarterly loss after the valuations of US companies WeWork and Uber plunged, my colleague Jasper Jolly writes.

The company, run by billionaire investor Masayoshi Son, made an operating loss of 704bn yen (£5bn) in the three months to the end of September, in results published on Wednesday.

The loss comes after a dreadful quarter for the tech companies backed by Son’s venture capital funds, the $100bn Vision Fund and the smaller Delta Fund.

SoftBank’s operating loss was due to the “decrease in the fair values of investments including Uber and WeWork and its three affiliates” held by SoftBank’s Vision Fund and Delta Fund, it said. The two funds together made a quarterly loss of 970bn yen.

Son acknowledged his judgement around the $10.3bn investment in WeWork was not right, and admitted his faith in WeWork founder Adam Neumann was misplaced, in a presentation to investors on Wednesday.

Son said he turned a blind eye to Neumann’s bad side over issues such as corporate governance and that he had learned a harsh lesson, according to Reuters. He added that WeWork was not a sinking boat, despite a need to cut spending.

WeWork’s parent, the We Company, was forced to abandon an initial public offering of its shares on US stock markets at the end of September after investors queried the massive valuation given to the office space rental company. SoftBank then led a $9.5bn bailout of WeWork, and founder Adam Neumann was forced out. The debacle wiped $7.8bn from WeWork’s valuation, SoftBank said.

Shares in Uber, which listed in May, fell to a new record low on Tuesday as it posted yet another loss, despite beating revenues estimates. Some investors in its stock market float will on Wednesday be able to sell their shares for the first time, when a lock-up period expires.

Son’s net worth has plunged by about $6bn since July, when it peaked at about $20bn, according to the Bloomberg Billionaires Index, which tracks billionaires’ wealth. That left Son with $13.8bn on Tuesday.

The difficult quarter could complicate Son’s efforts to raise a second Vision fund if investors question his high-risk strategy of making significant bets on big-spending, young companies. Preparations for a “full-scale launch” are still underway, SoftBank said.

Economists are hailing today’s rise in German factory orders.

Oliver Rakau of Oxford Economics says the 1.3% monthly increase is ‘solid’, but may not prevent the economy falling into recession.

Viraj Patel, strategist at Arkera, says it’s an encouraging sign for the eurozone economy.

Bloomberg’s Yuko Takeo says Germany’s factory sector is showing welcome signs of life:

A rebound in German factory orders is adding to signs that the euro-area economy has passed the worst of its recent troubles.

Demand rose 1.3% in September, far exceeding estimates of a 0.1% gain. The first increase in three months was driven by a solid pickup in investment and consumer goods, with demand from outside the euro area providing a particular boost.

The euro rose after the report and traded at $1.1076 at 8:54 a.m. Frankfurt time.

Introduction: German factory orders are up!

The flag of Germany.

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Is Germany turning a corner? After many months of gloom, Europe’s largest economy may finally be bottoming out.

German factory orders jumped by 1.3% month-on-month in September, comfortably beating expectations of a 0.1% rise.

That follows a 0.6% decline in August, and is one of the best months for German manufacturing this year (although that’s not difficult!)

The pick-up in demand was driven by orders within Germany, and from countries outside the eurozone.

Destatis, the statistics body, explains:

Domestic orders increased by 1.6% and foreign orders rose 1.1% in September 2019 on the previous month. New orders from the euro area were down 1.8%, new orders from other countries increased 3.0% compared to August 2019.

Encouragingly, orders for expensive, heavy-duty machinery and equipment rose strongly.

Destatis says:

In September 2019 the manufacturers of intermediate goods saw new orders decrease by 1.5% compared with August 2019. The manufacturers of capital goods showed increases of 3.1% on the previous month. For consumer goods, a rise in new orders of 0.8% was recorded.

Encouraging stuff. But on an annual basis, sales were still 5.4% lower than in September 2018.

German factory orders
German factory orders Photograph: Destatis

This may not prevent Germany falling into recession, but it does offer hope that growth could pick up again soon.

Also coming up today

Over in Japan, technology investor Softbank has just posted a whopping operating loss of ¥700bn for the last quarter (almost £5bn), due to disappointing bets on companies such as WeWork and Uber.

That’s a stark reversal on the ¥706bn profit in July-September 2018, and much worse than the ¥48bn loss which analysts expected.

SoftBank chief Masayoshi Son is presenting the report now, and admitting that “we are in a rough sea”...

The latest surveys of eurozone purchasing managers are expected to show that Europe’s services sector continued to grow last month. But with manufacturing shrinking, the euro economy remains subdued.

After a few days of gains, stocks are dipping today. Equity indices in Asia have dropped back, and a weakish open is expected in Europe.

Traders are now questioning whether a US-China trade pact is achievable, with Beijing pushing Washington

On the corporate front, UK retailer Marks & Spencer has just posted a 17% drop in profits as clothing sales continue to slide - down another 5.5%! BMW and Adidas are also reporting financial results (more shortly...)

The agenda

  • 9am GMT: Eurozone service sector PMI for October
  • 10am GMT: Eurozone retail sales for September
  • 3.30pm GMT: US crude oil inventory figures

Updated

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