The week ahead: UK data, China trade balance, US banks results

Chief Market Analyst, Michael Hewson, provides his thoughts and analysis on this week's market events.

Ocado half-year results 
Tuesday: It’s been a turbo-charged few months for the online retail and technology platform Ocado, having performed well after its recent deal with US grocery chain Kroger, who recently upped its stake to 6.1% from an initial 5%. Ocado has made great progress with its international expansion plans in the last 12 months, penning deals with French supermarket group Casino to build a robotic warehouse, followed by a deal with Canadian supermarket group Sobeys at the beginning of the year. The shares are up over 160% in 2018 so far, also helped by the company’s elevation into the FTSE 100, as investors buy into the narrative of what some brokers are now calling the ‘Microsoft of retail’. In its last trading update, the company took a £1.5m profit hit from the ‘Beast from the east’, and warned that profit in 2018 could suffer as it invests in improving its UK logistics capability and future growth opportunities. The outlook for Ocado is a lot more positive than it was a couple of years ago, though the sharp rise in the share price does raise the question: has it moved ahead of the hype?  

China CPI and trade balance
Tuesday & Friday: Concerns about the Chinese economy have grown in the last few weeks against a backdrop of rising trade tension, and sharply declining Chinese stock markets. A fall off in global economic activity hasn’t affected Chinese exports or the broader global economy yet; however, with the implementation of US tariffs last month, we could see the first effects filter down into this week’s June trade numbers, if the latest CPI data reflects the recent rise in commodity price inflation.  

Bank of Canada rate decision
Wednesday: With trade tensions rising weekly and the Canadian government imposing its own tariffs on Chinese steel, as well as a range of US products, the underlying economy in Canada appears to be holding up fairly well. Rising oil prices are certainly helping, despite inflation concerns, but deadlock over the North American Free Trade Agreement (NAFTA) appears to be acting as a drag on sentiment overall. In spite of the uncertainty over NAFTA, the central bank has indicated that the outlook remains positive, with little in the way of spare capacity and inflation broadly on target. After the US Federal Reserve hiked rates at its June meeting, the Bank of Canada might feel it’s time to close the rate gap. It could move rates to 1.5% given that the Fed has increased rates twice since the last move to 1.25% in January.  

Micro Focus half-year results 
Wednesday: It’s not been a particularly good period for Micro Focus shareholders in the last 12 months, having struggled to integrate Hewlett Packard Enterprise’s software assets. Revenue was disappointing when investors were updated at the beginning of this year. The departure of its CEO in March, combined with another profit warning as revenue expectations were guided down further, saw its shares plunge 56%. Micro has since undergone a modest recovery, but shares are still down over 40% this year. In an attempt to deal with some of the problems from the HP acquisition, the company sold off a $2.5bn stake in Suse last week. This week’s trading update should give investors a clearer picture of how the company is faring, and whether the decline in revenue has been arrested. The hope is that there won’t be any further profit warnings, and that the recent recovery in the share price is maintained.

US banks Q2 results (JP Morgan, Citigroup & Wells Fargo)
Friday: As we head into the second part of the year, the US economy appears to be going from strength to strength. The recent Federal Reserve bank stress tests saw Wells Fargo and Citigroup perform best out of the US banks. JP Morgan also fared pretty well after receiving sign off from the US central bank on its latest capital plans. The recent tax cuts have also given banks a significant boost, with the hope that increased consumer spending and a tight labour market will encourage more turnover when it comes to lending. The latest quarter has certainly seen US consumers start to open their wallets, and this should be reflected in the latest numbers. On the downside, there are concerns that a flattening yield curve will weigh on banks’ profitability in other areas, though recent market volatility elsewhere should compensate for that.  

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