Stockholm (Ekonamik) – On the heels of the chaos that accompanied the G7 in Biarritz with the fires in Brazil and the escalation of the trade war that preceded it, news coverage during the 35th week of 2019 was dominated by Brexit, the announcement of the Phillip Morris-Altria Merger and continued instability in financial markets.
Boris Prorogues Parliament
Boris Johnson, the recently appointed leader of the Conservative Party and Prime Minister of the UK, requested that the Queen prorogue parliament until the middle of October, effectively stopping parliamentary business on Brexit by a month.
The prorogation, approved by the Queen, means the opposition to no-deal may try to hold a vote of no-confidence in the government, which would require Conservative support. This remains unlikely but is probably also part of Mr Johnson’s calculation that a resulting general election would return him to power with more authority than his currently razor thin majority. Mr Johnson will attend the next EU Council meeting on October 17-18, at which he hopes to strike a new Brexit deal that he would then ram through parliament.
Iceland Cuts Rate for the Second Time
This week, the central banks of Iceland, Israel, Hungary and South Korea held their monetary policy meetings to decide on the path of interest rates. Of the four banks, only the Icelandic monetary policy committee decided to cut rates to 3.5%.
The central bank was entirely focused on domestic conditions, which experienced an abrupt downturn at the end of March after tourism fell and, most importantly, after an extensive search by fishermen and researchers found no Capelin (Mallotus villosus) in Icelandic waters. According to Arctic Portal, “Capelin is considered the second most ecologically and economically important fish in Icelandic waters, with the yearly catch sometimes reaching over 1 million tonnes”. This led the central bank to cut rates from 4.5% to 4% at its May 2019 meeting and again to 3.75% in June.
Mixed News for European and US Economies
Data releases proved better for Europe than for the USA. The euro area seasonally-adjusted unemployment rate was 7.5% in July 2019, the lowest level recorded in the euro area since July 2008, stable compared with June 2019 and down from 8.1% in July 2018. Less encouragingly, inflation was stable at 1%.
In the USA, the Chicago Fed National Activity Index suggested slower economic growth in July. However, manufacturing surveys by the Dallas and Richmond Fed suggested regional improvements.
Philip Morris – Altria Merger
On August 27, Philip Morris International Inc. (NYSE: PM) confirmed discussions with Altria Group Inc. (NYSE: MO) regarding a potential all-stock merger of equals. A little more than a decade ago, tobacco giant Altria span off its non-American business, Philip Morris International, in an attempt to clear the international tobacco business from the legal and regulatory constraints faced in the United States. But last week, the two companies said they were in talks to merge. Before the announcement, the combined market value of the two entities selling Marlboro, the world’s top-selling cigarette brand, was $210 billion.
The merger makes sense given the present “global arms race for reduced risk products,” according to Wells Fargo analyst Bonnie Herzog. Last year, Altria spent $12.8 billion for a 35% stake in Juul Labs, a maker of popular high-nicotine vaporizers. Philip Morris International has invested heavily in developing its smoke-free IQOS product portfolio, which includes heat-not-burn and nicotine-containing vapour products. The smoke-free device which heats tobacco is expected to account for 40% of its sales by 2025, up from 14% last year. However, the announcement confirming the merger talks also emphasized that “there can be no assurance that any agreement or transaction will result from these discussions,” adding that “there can be no assurance that if an agreement is reached, that a transaction will be completed.”
Best Buy, Tiffany and Guess Report Second-Quarter Earnings
As of August 30, almost all companies in the S&P 500 reported their financial results for the second quarter. Around 75% of them reported a positive earnings-per-share surprise and 56% of them reported a positive revenue surprise. According to FactSet, the earnings decline for the S&P 500 in the second quarter was 0.4%, marking a second consecutive quarter of year-over-year declines in earnings. The revenue growth rate for the quarter was 4%, the lowest revenue growth rate for the index since the third quarter of 2016.
On August 29, Best Buy Co. Inc. (NYSE: BBY) released its financial results for the second quarter that ended August 3 and reported comparable sales growth of 1.6% on top of a solid 6.2% last year. Best Buy narrowed its prior top-line range and raised the bottom-line range to reflect the “impact of recent announcements regarding tariffs on goods from China,” better-than-expected earnings for the first half of the fiscal year ending February 1, 2020, and “general uncertainty related to overall customer buying behavior in the back half of the year.” The leading consumer electronics and technology products retailer in the United States now predicts an increase of 0.7% to 1.7% in comparable sales growth for the fiscal year, which compares to the prior guidance of 0.5% to 2.5%. Best Buy expects diluted earnings per share of $5.60 to $5.75, which compares with the previous guidance of $5.45 to $5.65. Shares in the company fell around 8% on Thursday.
On August 28, luxury jeweller Tiffany & Co. (NYSE: TIF) reported its financial results for the second quarter that ended July 31, posting a decline of 3% in worldwide net sales to $1.0 billion. The decline reflected “a continued sharp decline in sales to both Chinese and all other tourists,” chief executive Alessandro Bogliolo said on the earnings call on Wednesday. The company’s second-quarter earnings of $136 million were 6% lower than last year’s $145 million. In the Americas, net sales decreased 4% year-over-year to $455 million, with the management attributing that “decline to lower spending by foreign tourists and, to a lesser extent, local customers.” Despite the disappointing results, Tiffany maintained its guidance for fiscal 2019, which includes net sales increasing by a low-single-digit percentage and net earnings per diluted share by a low-to-mid-single-digit percentage.
On the same day, apparel retailer Guess? Inc. (NYSE: GES) reported financial results for its second quarter that ended August 3. Total net revenue for the quarter increased 5.8% year-over-year to $683.2 million, whereas net revenue increased by 8.8% year-over-year in constant currency. Earnings from operations increased 44.2% to $46 million, reflecting high initial markups in Europe and Americas retail, lower logistics costs and leveraging of expenses in Europe. Commenting on the results, Carlos Alberini, Chief Executive Officer, said he was “very pleased with our second-quarter financial performance, which delivered strong operating profit growth,” further adding that “this performance exceeded our expectations and was driven by a solid top-line increase, strong margin performance and effective expense management.” The shares the company rose by over 20% on August 29, as the company revised its outlook upward for the fiscal year based on the performance, and expectations for the Fall and Holiday seasons.
Equity Markets Fall
Last week, equity markets were dominated by the trade battle between the United States and China, and speculation on central bank policy. The S&P 500 was down 1.4% last week, whereas the Dow Jones Industrial Average fell 1.0%.
European equity market indices performed slightly better than U.S. indices. The FTSE 100 Index of the United Kingdom declined by 0.3% last week, whereas the export-heavy German DAX gained 0.4%. Italy’s FTSE MIB was up 0.7%, and Spain’s IBEX 35 was down 0.2%.
Japanese and Chinese equities posted gains last week. Japan’s TOPIX Index advanced 1.1% last week, while the Shanghai Composite Index gained 2.6%. The Hang Seng Index, tracking the largest companies of the Hong Kong stock market, was up 1.7%.
Despite falling sharply on Friday, both U.S. and U.K. crude posted their largest weekly gains in more than a month and a half over renewed optimism stemming from the ease of the trade battle between the United States and China. West Texas Intermediate crude oil fell 1.1% on Friday, trimming the weekly gain to 1.8%. The Brent crude oil plunged 2.8% on Friday but gained 1.7% for the week.
The price of gold fell 0.5% last week, but the precious metal managed to book a 6.3% gain in August. This marks gold’s fourth consecutive monthly gain. The CBOE Volatility Index, known as the VIX or the fear gauge in stock markets, closed around 19 on Friday, logging a weekly decline of 4.5% and a monthly gain of 17.7%.
