Live Markets: Rare earths: the next shoe to drop in the trade war

China Rare Earth Holdings

30/05/2019 11:08

* STOXX 600 up 0.4%
    * Media, oil & gas stocks drive gains
    * Axel Springer surges up 20% on potential private equity bid
    * De La Rue plunges 27% after profit warning, CEO leaves

    May 30 - Welcome to the home for real-time coverage of European equity markets brought to
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    RARE EARTHS: THE NEXT SHOE TO DROP IN THE TRADE WAR (1008 GMT)
    Rare earths look like they're becoming the next frontier in the U.S.-China trade war. 
    The Chinese commerce ministry said this morning it would be unacceptable that countries
using Chinese rare earths would suppress China, in a barely veiled barb at the U.S. without
however identifying any country by name.  urn:newsml:reuters.com:*:nB9N22702P
    "If China were to decide to restrict rare earth exports to the U.S., the effect would be
significant, in our view," Goldman Sachs analysts write. 
    This isn't the first time rare earths have been used as leverage in a trade dispute: in 2010
China announced restrictions to rare earth production and exports, driving prices more than 500%
higher. 
    Since then and partly because of that episode, other countries ramped up their production
and China's share of global rare earths production fell from 98% in 2010 to 71% in 2018, GS
says.
    So the impact on prices is likely to be slightly less this time round, particularly as
China's threat - if it leads to concrete action - only relates to rare earths exported to the
U.S., and not globally.
    However, it's already had a significant impact on shares in rare earth producers which have
soared on the prospect of restricted supply of the minerals (see below).
    The new threats from China also more broadly signal a deepening of tensions.
    "Investors probably would expect further retaliations from the U.S. and risk assets such as
copper could face even more headwinds," conclude GS analysts. Indeed, copper prices are hovering
near a five-month low.
    Here's our explainer on why rare earths could be a crucial bargaining chip for China:
 urn:newsml:reuters.com:*:nL8N23606C
 
 
    (Helen Reid)
    *****
    
    NO APPETITE FOR EUROPEAN EQUITIES? (0923 GMT)
    As Europe remains hostage to trade uncertainty and "messy politics", Barclays says
investors' exposure to European equities is falling precipitously.
    Internal client flow data at UBS suggests the same and the Swiss bank says investors sold
cyclicals "aggressively" in May.
    By geography, Switzerland a "traditional defensive haven" has seen the most inflows, as per
UBS, while Germany had the biggest net selling since November. (chart below)
    "... for Germany to consistently outperform we need to see some form of de-escalation of the
trade wars."
    Despite the persistent outflows, European equities rallied this year and are up 10% --
Barclays sees this divergence as 'stunning', but not unusual.
    Barclays: "Flows typically lag performance and a similar situation to the current one
happened in 2016, when equities troughed in Q1 while flows only rebounded in Q4."    
 
   (Thyagaraju Adinarayan)
   *****
    
    WHERE NEXT AFTER A WIDELY-HATED RALLY? (0825 GMT)
    There's a distinct sense of apathy in markets after a strong start to the year scuppered by
a renewed flare-up in the trade war. With European stocks back at early March levels but still
up 10% for 2019, the question is "where to from here?"
    This year's rally has almost universally frustrated investors - and perhaps they were right
to doubt its longevity.
    Simply put, Goldman Sachs says, "Support from easier monetary policy is seldom a reason for
a sustained pick-up in risk appetite if a pick-up in growth does not follow."  
    Signs of such a pick-up are few and far between. In fact, quite the opposite: GS' current
activity indicator "innovations" - which track macro surprises relative to statistical forecasts
- have fallen sharply, as you can see below. 
    With risk appetite likely to stay muted until growth picks up, GS stays neutral on equities
over three months. 
    That's a good call if the prediction in our latest poll is correct: investors see the STOXX
600 inching up to 380 points, just 1% above the level it ended last week, by end-2019.
 urn:newsml:reuters.com:*:nL8N2352K1
 
 
    (Helen Reid)
    *****
    
    OPENING SNAPSHOT: AXEL SPRINGER SOARS, DE LA RUE IN FREE-FALL (0729 GMT)
    European indices are jumping 0.3% to 0.5% as oil & gas stocks stage a comeback after a sharp
sell-off and the media sector is boosted by Axel Springer M&A news and Daily Mail results. 
    With stock markets in Norway, Denmark, Finland, Sweden, and Switzerland all closed today for
a holiday, liquidity is thinner than usual. 
    Axel Springer's shares are soaring 20%, poised for their best day in more than 20 years
after news KKR is considering a bid to take Axel Springer private. Germany's ProSiebenSat.1
continues to rally after Mediaset stake buy.
    Shares of Britain's Daily Mail are up 10% after it reported a 19% rise in first-half
adjusted pretax profit.
    The STOXX media index is set for its best single-day performance since April 26, up 1%.
    Shares of De La Rue, which last year lost the contract for Britain's new post-Brexit blue
passports, are plunging 22% after a profit warning and CEO resignation.
 
 
    (Thyagaraju Adinarayan)
    *****
    
    EUROPEAN FUTURES RISE; AXEL SPRINGER, DE LA RUE, FIRSTGROUP IN FOCUS (0652 GMT)
    Futures across the euro zone and UK are rising 0.3% to 0.6%, a small relief after
yesterday's massive sell-off (-1.4%). The STOXX 600's losses for May now stand at 5% with more
than half-a-trillion euros in value wiped off since U.S. President Donald Trump's tweet on May
3, which rekindled fears of a trade war between the world's two biggest economies.
    The latest "naked economic terrorism" comment from China's Vice Foreign Minster Zhang Hanhui
doesn't help the situation as it heightens the risk of a prolonged trade war.
    Citing the current market environment, Danish drug merchant Abacus Medicine postpones its
IPO. In stark contrast with that, Britain's Watches of Switzerland is set to go public today
despite rising trade war and no-deal Brexit risks.
    German M&A is heating up: Axel Springer is seen rising 17% after group says KKR could make a
takeover bid. The news comes a day after Mediaset  MS.MI  bought a 9.6% stake in Germany's
ProSiebenSat  PSMGn.DE .
    Banknote and passports maker De La Rue's CEO is to step down and the company warns FY20
profit will be "somewhat" lower than current year. Its shares are seen down 10-20%.
    UK rail and bus operator FirstGroup  FGP.L  says it is looking to sell its U.S. coach
service Greyhound and is also looking at ways to separate its UK First Bus operations from the
group. Shares are seen 5% higher.    
    UK headlines:
    Watches of Switzerland prices IPO at 270 pence per share  urn:newsml:reuters.com:*:nFWN2350VZ
    Johnson Matthey's profit jumps on emission control device growth  urn:newsml:reuters.com:*:nL4N2361MM
    Daily Mail publisher report 19% rise in first-half profit  urn:newsml:reuters.com:*:nASP0012AX
    Greyhound-owner FirstGroup says looking to sell  urn:newsml:reuters.com:*:nL4N2361M5
    Western Link expects return to service in early June  urn:newsml:reuters.com:*:nS8N22T04X
    Imperial Brands says U.S. cigarette volume down 6.4%   urn:newsml:reuters.com:*:nL4N2353VV
    Banknote, passports maker De La Rue's CEO to step down  urn:newsml:reuters.com:*:nL4N2361NF
    Southwest Water owner Pennon's profit rises on waste recycling  urn:newsml:reuters.com:*:nL4N2361MR
    Brexit shutdowns hammer UK car production in April - industry group  urn:newsml:reuters.com:*:nL8N2357C4
 
 
    (Thyagaraju Adinarayan)
    *****
    
    "NAKED ECONOMIC TERRORISM" (0557 GMT)
    Fears of a full blown trade war rise as war of words between Beijing and Washington reach
new heights. 
    "This kind of deliberately provoking trade disputes is naked economic terrorism, economic
chauvinism, economic bullying," China's Vice Foreign Minster Zhang Hanhui said.
    Reports that Beijing could use rare earths to strike back at Washington hit global stocks on
Wednesday.
    "Few hiding places for European equity investors yesterday as the trade war fears persisted
and intensified, with China's warning that the supply of rare earth elements may be restricted
was the latest salvo," Peel Hunt's Ian Williams says.
    In corporate news, Axel Springer's  SPRGn.DE  negotiations with KKR for potential investment
make big headlines today. Shares jump 17.6% in pre-market trade. 
    Bloomberg reported that the Springer family and KKR were considering a bid to take Axel
Springer private. 
    Please note: Sweden, Denmark, Norway, Finland and Swiss markets are closed today.
    
    Some key headlines:
    Axel Springer in negotiations with KKR for potential investment  urn:newsml:reuters.com:*:nL8N2356GG
    Nissan CEO sees no big downside to FCA-Renault merger  urn:newsml:reuters.com:*:nL4N23605Q
    Engie tells Brazil court it raised $3 billion for suspended deal  urn:newsml:reuters.com:*:nL2N23519F
    China's rare earth supplies could be vital bargaining chip in U.S. trade war  urn:newsml:reuters.com:*:nL8N23606C
    European drug wholesaler Abacus postpones IPO  urn:newsml:reuters.com:*:nL4N2354N0
    
    (Thyagaraju Adinarayan)
    *****
         
    EUROPEAN STOCKS: FLAT AS PANCAKE (0520 GMT)
    After two straight sessions of losses, European stocks are expected to open flat as fears of
a prolonged trade war kept investors on the sidelines.
    Financial spreadbetters IG expect London's FTSE to open 2 points higher at 7,188,
Frankfurt's DAX to open 36 points higher at 11,874, and Paris' CAC to open 14 points higher at
5,236.
    European shares have lost about 5% or half-a-trillion euros in value since U.S. President
Donald Trump's tweet on May 3, which rekindled fears of a trade war between the world's two
biggest economies.
    Danish drug merchant Abacus Medicine is one of the latest companies to be hit by the
uncertain environment as it postponed its IPO plan citing an "unfavourable market environment".
 urn:newsml:reuters.com:*:nL4N2354N0
    Is it a favourable environment for acquisitions due to depressed valuations?
    More M&A in Germany: German publishing house Axel Springer  SPRGn.DE  is in talks with
private equity firm KKR and Friede Springer of the Springer family for a potential strategic
investment of KKR in the company.  urn:newsml:reuters.com:*:nL8N2356GG
    The news comes a day after Italian broadcaster Mediaset  MS.MI  bought a 9.6% stake in
Germany's ProSiebenSat  PSMGn.DE .
            
    (Thyagaraju Adinarayan)
    *****

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
FUTURES MAY 30    https://tmsnrt.rs/2I6s8h9
SNAPSHOT MAY 30    https://tmsnrt.rs/2WfLutW
current activity indicator May 29    https://tmsnrt.rs/2I7Gaix
Swiss defense    https://tmsnrt.rs/2Il4Y6T
Rare earths graphic May 30    https://tmsnrt.rs/2WedIWa
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 (Reporting by Danilo Masoni, Helen Reid, Josephine Mason and Thyagaraju Adinarayan)