China economy on course to suffer its worst quarter since Tiananmen Square

18 February 2020

The Weekly Note is brought to you by the ALPHA: r² discretionary service team.

Market news

European equity markets are suffering today after downbeat overnight reactions in the US and Asia to the latest details of the coronavirus' impact. Apple's admission that it no longer expects to meet its sales guidance due to the virus was the first of its kind from a major US company.

China's death toll has risen to over 1,800, the latest figures show. Despite Beijing launching a stimulus package to curb the economic cost - a key medium-term interest rate has been cut this week - the Chinese economy is on course to suffer its worst quarter since the Tiananmen Square protests in 1989, according to some economists.

President Moon of South Korea has said that his country's economy is in a state of emergency amid pressure from the virus, while the Japanese government has also expressed their concern. Japan's economy shrank at the fastest pace in nearly six years in the final quarter of last year, which preceded the outbreak, sparking fears that it could now drift into recession. GDP contracted 6.3% compared to the same quarter last year, hampered by a tax rise and Typhoon Hagibis.

The UK's chief Brexit negotiator, David Frost, has said that signing up to EU standards would defeat the point of the whole project. In a speech last night, Frost also repeated the Prime Minister's pledge not to extend the transition period and added that the UK was not asking for a bespoke deal, citing Canada's trade relationship. The EU has repeatedly said that the time frame is too short and that “high quality” market access cannot be provided if the UK diverges from EU standards.

Finally, UK employment figures from the Office for National Statistics, released this morning, painted a mixed picture. The number of people in work increased and unemployment is at its joint lowest rate since the 1970s, but productivity only improved by 0.3% in the fourth quarter and wage growth fell short of expectations. Excluding bonuses, salaries grew by 3.2% in nominal terms.

Stock focus

HSBC plans to cut around 15% of its workforce, as revealed when it announced its full-year results this morning. Profits before tax at Europe's biggest bank fell to $13.35bn, well below City expectations of $20bn. A radical restructuring will see HSBC merge its retail banking and wealth management division with its global private banking arm.

Glencore has also been a drag on the FTSE 100 this morning, having reported a net loss of $404m for the 2019 calendar year. The world's biggest commodity trader had to write down the value of a number of mines and noted that its performance reflected “prolonged and uncertain trade deal negotiations, generally weaker prices for our key commodities and some operational challenges”.

Jupiter Fund Management has agreed to buy Merian Global Investors for as much as £419m, creating Britain's second biggest manager of retail funds, with a combined £65.2bn of assets. When Merian spun out of Old Mutual in 2018, it was valued at around £600m, but heavy investor outflows have shrunk its assets under management from £34.6bn to £22.8bn in that period.

Royal Dutch Shell is investing in a Chinese-backed project that is building what is claimed to be Europe's largest battery in Wiltshire. The 100-megawatt battery will provide energy to the national grid when wind and solar power volumes dip. Shell, an oil and gas company at its core, is spending up to $2bn a year on its “new energies” division as it tries to evolve into a greener business.

Finally, the EU has rejected Facebook's ideas for how the social media company should be policed. A document presented by Mark Zuckerberg suggested that companies like Facebook should not face traditional publishing liability due to the “scale of the internet”. An EU official is quoted as saying, “it's not for us to adapt to this company, it's for this company to adapt to us”. 

Subscribe to the Weekly Note!

Subscribe today and email [email protected] to register your interest, and receive the full Weekly Note in your inbox every Tuesday.