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LONDON MARKET CLOSE: China's Rare Earth Export Ban Threat Sinks Stocks

Wed, 29th May 2019 18:08

LONDON (Alliance News) - Worries about a further escalation of the US-China trade dispute saw stocks across the globe sold off on Wednesday, amid concerns China may seek to weaponise its dominance in rare earth minerals.

Markets were spooked as the protracted trade war between the world's two largest economies leave investors worried global economic growth will slow down.

Forex.com analyst Fawad Razaqzada commented: "Risk has been generally off the menu since the start of May and there's little sign of the bulls coming back in just yet now that we are heading towards month-end. Undoubtedly, it is all to do with the global economic slowdown fears and more so with the escalation of trade tensions between the US and China. Investors, who bought the optimism during the first quarter, have been left frustrated. After building it up so much, leaders of the world’s largest economies failed to reach a trade agreement last month."

"Since then, both sides have raised tariffs on each other and warned about more protectionist measures. It has been reported in the Chinese media that Beijing is ready to use rare earths export ban to strike back in the trade war. Should China go down that route, things will surely turn very ugly indeed. We doubt that would be the case, however. Both sides still want to secure a deal at some point down the line, but right now they appear very far from achieving that."

In geology, rare earths refers to a group of 17 chemical elements in the periodic table that are renowned for unique magnetic and electrochemical properties. These include elements such as gadolinium, lanthanum, cerium and promethium among others.

Reports suggest China is considering restricting the export of rare earth minerals, which are crucial for the production of cancer treatment drugs, smartphones and renewable energy. China accounts for around 70% of global rare earth production.

The latest developments on the trade front have added fuel to investor fears that the dispute between the US and China could escalate into an all-out trade war.

"Commentary in Chinese media included a Chinese phrase translating to 'don't say we didn't warn you' - which is significant because it was used before the China-India and China-Vietnam conflicts. These threats have been lingering for a while, though, and there are ways that restricting rare earth exports could backfire on China. Overall, we still remain optimistic that a trade agreement will come soon, even if the talks hit speedbumps along the way," said analysts at LPL Financial Research.

Trade war worries have increased the appeal of safe havens such as US treasuries, resulting in a sharp decline in bond yields. The slump in bond yields has in turn fuelled concerns that the US could be headed for a recession or at least a notable slowdown in the pace of economic growth.

The FTSE 100 index closed down 83.65 points, or 1.2%, at 7,185.30.

The FTSE 250 ended down 258.82 points, or 1.4%, at 18,946.11, and the AIM All-Share closed down 8.54 points, or 0.9%, at 956.79.

The Cboe UK 100 ended down 1.2% at 12,171.08, the Cboe UK 250 closed down 1.3% at 17,045.53, and the Cboe Small Companies ended down 0.2% at 11,814.51.

Stocks in New York were lower at the London equities close, as the Dow hit its lowest intraday level in well over three months, while the Nasdaq and S&P 500 fell to more than two-month lows.

The DJIA was down 0.7%, while the S&P 500 index and the Nasdaq Composite both down 0.6%.

In European equities, the CAC 40 in Paris ended down 1.7%, while the DAX 30 in Frankfurt ended down 1.6%.

In the FTSE 100, Fresnillo closed up 0.5%, with the Mexican gold miner tracking spot gold prices higher. Gold was quoted at USD1,281.50 an ounce at the London equities close against USD1,278.69 late Tuesday, as demand for safe haven assets increased.

Defensive stocks, including Severn Trent and United Utilities, closed up 0.6% and 0.4%, respectively. Utilities are considered less risky at times of political and economic uncertainty.

At the other end of the large cap index, supermarket chain Tesco closed down 5.2% following the latest grocery market share data from Kantar Worldpanel.

Among the big four UK retailers, Tesco saw flat sales in the period and its market share slipped to 27.3% from 27.7%. J Sainsbury recorded a 1.7% drop in sales and its market share shrunk to 15.2% from 15.7%.

Wm Morrison Supermarkets sales fell 0.4% in the 12 week period, while its market share declined to 10.4% from 10.5%. Sainsbury's closed down 0.2% and Morrisons ended 1.4% lower.

In the FTSE 250, Stobart Group ended the best performer, up 6.0% after the aviation, support services and logistics company said revenue rose sharply in its most recent financial year, but swung to a loss as a result of investment, legal costs, and non-cash items.

Revenue from continued operations for the year ended February 28 totalled GBP146.9 million, up 39% from GBP105.4 million, as Aviation division revenue jumped 53% to GBP39.4 million from GBP25.8 million.

Stobart proposed a 3.0 pence per share final dividend, down from 4.5p per share in financial 2018. This halves the total dividend per share for the year to 9.0p from 18.0p. For Stobart's 2020 financial year it decided to rebase its dividend, shifting to equal payment of 3p per share paid twice per year for 6p total, in order to fund its growth plan.

Looking ahead, Stobart is focused on developing London Southend Airport - which it owns, as well as an energy business with long-term contracts for two million tonnes of biomass fuel per annum.

"The company is being rewarded for thinking in the long term, with shareholders seemingly prepared to take the pain associated with a cut to the full year dividend in order to reap the benefits of investment in the business later on," said AJ Bell's Russ Mould.

On AIM, rare earth concentrate producer Rainbow Rare Earths closed up 33% amid the fresh trade threats.

The pound was quoted at USD1.2616 at the London equities close, lower than USD1.2675 at the close Tuesday.

Meanwhile, Boris Johnson could face trial over claims he was lying when he said the UK gave the EU GBP350 million a week during the 2016 referendum.

The bookmaker's favourite in the Conservative Party leadership race was accused of misconduct in public office after making the claim during the campaign, following a private prosecution by campaigner Marcus Ball.

A date has not yet been set for a court hearing, but could come after the Tory leadership contest has concluded, meaning Johnson - should he emerge victorious - may face trial as prime minister. His first appearance at magistrates' court could occur during the contest.

"This comes at an obviously inopportune moment for the MP, with bookies instilling him as the favourite to take over from Theresa May. However, with the pound continuing to fall, the prospect of a weaker hand from a key Brexiteer is not enough to instil confidence that the future will be sterling positive. With cable closing in on the lows seen prior to May's resignation, her removal from office does little to drive more optimistic expectations of how Brexit will play out," said IG Group's Josh Mahony.

The euro stood at USD1.1127 at the European equities close, down from USD1.1178 late Tuesday, as the European Central Bank sounded the alarm over rising financial stability risks as trade tensions rise.

Uncertainty surrounding the global economic growth outlook have led to "bouts of high volatility in financial markets", the central bank said as it released its latest Financial Stability Review report.

Slower than expected growth and a possible worsening of trade tensions could trigger further falls in asset prices, the report warned.

"If downside risks to the growth outlook were to materialise, risks to financial stability may arise," ECB Vice-President Luis de Guindos said. "The growth outlook is central to all the main risks to financial stability."

In economic news from the continent, Germany's unemployment climbed sharply in May for the first time in nearly two years, figures from the Federal Employment Agency showed.

The number of unemployed rose by 60,000 month-on-month, while economists had expected a decline of 7,000. In April, there was a fall of 12,000.

The jobless rate climbed to 5.0% in May, equalling the rate seen in February. Economists had expected the rate to remain unchanged at the record low of 4.9% logged in each of the previous two months.

Brent oil was quoted at USD68.88 a barrel at the equities close, lower than USD69.80 at the close Tuesday, as investors flee riskier assets amid trade war fears intensifying.

"Concerns of an economic downturn amid the escalating US-Sino trade war has oil traders fretting over future demand. Up until now, tight supply has dominated oil’s direction, whilst demand concerns took a back seat. OPEC's continued output production cuts, middle eastern tensions and sanctions on Venezuela have all helped keep supply tight and lift oil around 30% since the start of the year. However, as it becomes clearer that the US-Sino trade dispute looks set to ramp up investors are reassessing the equation," said City Index analyst Fiona Cincotta.

The economic events calendar on Thursday has Spain inflation readings at 0800 BST and US first-quarter GDP figures at 1330 BST.

The UK corporate calendar on Thursday has annual results from speciality chemicals company Johnson Matthey, transport operator FirstGroup and water company Pennon Group.

By Arvind Bhunjun; arvindbhunjun@alliancenews.com

Copyright 2019 Alliance News Limited. All Rights Reserved.

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