Financial market research and analysis

Catalonia resolve sees Spanish stocks dive

Stocks in Europe were mixed in early trading on Wednesday. Spanish politics is acting as a drag on the positive read-across from the record highs on Wall Street. The resolve of regional officials in Catalonia to announce independence from Spain has caught markets off guard. Spain’s IBEX dropped over 1% in morning trade with Spanish banks seeing the biggest declines. Given their turbulent history and strong ties to the economy, short-sellers will target Spanish banks during any political instability involving Catalonia.

FTSE approaches 2-month high

Stocks in the UK rebounded from a soft open as Tesco reported strong earnings. The FTSE is sitting near the 7-week highs reached yesterday. The recent slide in oil prices is hurting the performance of the energy sector while homebuilders continue to underperform following the weak September construction data.

Tesco resumes dividend

Tesco shares have jumped 2% on the open after reporting a rise in first-half results and the resumption of its dividend. Resuming the divi means more money in the hands of shareholders and a symbolic return to form three years after the accounting scandal. The jump in profits is thanks to fewer one-off costs and continuing sales growth as customers respond to price cuts made in recent years. Sales did slow to 2.1% q/q in the second quarter, down from 2.3% in the first. We would expect higher food inflation to mean falling sales persist. Higher prices mean customers will be buying less. Higher inflation can work to Tesco’s advantage. There are already signs that Tesco can attract more grocery shoppers by using its dominant market position to convince suppliers to keep prices lower than the competition.

From Morning Call…

Asian investors have taken a downgrade to 2018 growth forecasts from the World Bank in their stride. A cut in China’s reserve requirements this week underscores why investors might not be so worried. Any growth slowdown is expected to be shield by the Chinese government.

Wall Street powers on despite tech company issues

Futures point to a higher open on Wall Street despite problems at two of America’s tech giants, Amazon and Yahoo (now owned by Verizon). It has been reported the European Commission will require Luxemburg to collect back-taxes from Amazon. Yahoo has announced all 3bn of its accounts were affected by the 2013 data breach. Right on the heels of the problems at Equifax, Yahoo’s admission is another blow to consumer confidence in the security of their data held at big tech companies.

EU fight with Luxemburg damaging to Amazon

It’s very reminiscent of the situation with Apple and Ireland. It will probably pan out the same way with denials and years of litigation. Ultimately there will probably not be any admission to illegal state support or tax evasion. Once the dust has settled, multinational companies will just choose to avoid the bad PR and legal tussles by paying a fairer rate of tax. The days of sweetheart deals like Amazon’s James Bond-esque ‘Goldcrest project’ with Luxemburg will soon be over.

For Amazon specifically, the ruling could be very damaging. The amounts involved are lot less than with Apple, but as a proportion of earnings, what the EU is asking of Amazon is much higher. Figures from the FT indicate 4bn in profit was funnelled into a non-taxable entity in Luxemburg, 1bn of which was sent to the US and taxed.  If the remaining 3bn was taxed by Luxemburg at 30%, that would be around half of Amazon’s 2016 full-year earnings. Amazon has a near $500bn market cap because investors tolerate its low profits for revenue growth and market domination. It’s less certain that investors would tolerate no profits or losses. Should Amazon’s share price come under pressure, it would be forced to reduce its heavy investment spending, capping its future growth potential.

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