Uncertainty related to Brexit continues to loom over the outlooks of multinational companies operating in Europe, and other geopolitical issues are making their presence known on global markets as well.
By Kris Rosemann
The British pound hit five-week highs against the dollar on the morning of September 11 as EU chief negotiator Michel Barnier said it was “realistic” to think the United Kingdom and European Union will reach a Brexit (EWU) deal within two months. The UK is scheduled to leave the EU on March 29, 2019, and Barnier’s comments have helped ease some concerns that the UK would leave the bloc without a formal trading agreement. President Trump’s silence regarding tariffs on the region has also fostered some cautious optimism, but a change of course from the US cannot be ruled out.
Nevertheless, multinational corporations are preparing for worst case scenarios. For example, Mondelez International (MDLZ) is reportedly stocking up on important ingredients in the event a hard Brexit takes place and products do not flow freely in and out of the UK. Unilever (UN, UL) has announced its intention to simplify its corporate structure, though no direct indication was made regarding its connection to Brexit. The company will move from two UK and Dutch legal entities into one holding company incorporated in the Netherlands. One share of New Unilever NV will be issued for each existing ordinary share of Unilever NV and Unilever PLC, and shares of New Unilever NV will be listed in London, Amsterdam, and New York, the latter via American depository shares.
Despite relative levels of optimism surrounding Brexit, global trade worries continue to weigh on equity markets around the world. US-China (FXI) relations show no sign of thawing as President Trump warned he would be ready to place tariffs on nearly all Chinese imports to the US, and China reportedly will ask the World Trade Organization for permission to impose sanctions on the US for its non-compliance with a ruling regarding US dumping duties across several industries that combine for an annual export value of ~$8.4 billion.
Such potential for increasingly restrictive global trade policies is helping keep a lid on emerging market expectations, alongside a strong US dollar and potentially higher interest rates in the US. Emerging market observers have grown more cautious on the potential for pain in countries such as Turkey (TUR) and Argentina (ARGT) to become more commonplace, and oil prices (OIL, USO) finding support from pending US sanctions on Iran could spell increasing trouble for emerging economies if the price of the black liquid rises rapidly should Iranian supply taken out of the market prove to be too significant.
The US is working to reduce imports of Iranian oil among its allies without pushing oil prices much higher, but it must get other OPEC nations and Russia (RSX) to maintain high levels of production. Meanwhile, China has curtailed orders of US crude since trade tensions began escalating, which has helped cause the WTI-Brent Crude discount to widen to ~$10 per barrel despite South Korean and Japanese imports of US crude hitting record highs in September as the Middle East market tightens.
Despite the ongoing trade concerns, Boeing (BA) is confident in its long-term outlook in China as it recently raised its 20-year aircraft demand forecast for the country to 7,690 from 7,240, which represents a monetary value of more than $1.2 trillion. The company expects single-aisle planes to account for 75% of new deliveries, but the 1,620 increase in widebody aircraft represents a tripling of the country’s current fleet. Large aircraft have been left off of China’s retaliatory tariff list thus far in the trade dispute, but should the situation continue to escalate, the country may very well turn to rival Airbus (EADSY), which delivered 176 aircraft to China in 2017 compared to 202 from Boeing.
Related ETFs: MCHI, UUP, USDU, UDN, FXB, DGBP, UGBP, EEM
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.