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In this week’s update, we discuss the markets during a turbulent time for the global economy, Argentina’s currency controls, the Opioid epidemic, the biggest tech business in the UK and BP’s withdrawal from Alaska.
August was a rocky month for the markets, as the escalating trade war between China and America, Brexit worries and slow growth in key economies took their toll on investor confidence. The FTSE 100 fell 5% across the month, making it the worst month for around a year. The week is set to be volatile as MPs head back to the House of Commons tomorrow after the summer recess. New PM, Boris Johnson, is set to suspend Parliament for four weeks from next week, a move many believe is politically motivated to stop MPs fully challenging Britain leaving the EU by the end of October. However, a cross-party group of MPs suggest they are aiming to stifle his plans and ensure Britain can’t leave without a deal with the EU. As uncertainty builds, the markets are likely to react as everything unfolds, especially if it looks like Britain is heading for another general election. In the last week, the pound dropped against the US dollar to $1.22, as Johnson announced the suspension of Parliament.
In Europe and America, weak economic data is likely to result in interest rate cuts to stimulate the economy. Inflation rates across Europe were at 1% in August - half the target rate of 2%. When the government cuts interest rates, money becomes cheaper to borrow, so spending tends to increase. In turn, this will increase the inflation rate. In America, the latest tariffs on Chinese goods kicked in on Sunday, which sent markets in America and Asia down. Data in China shows that growth in their manufacturing sector took another hit and this further tariff on $110 billion in Chinese imports isn’t going to improve the situation.
September tends to be a weak month for the markets, especially in America. With the threat of recession in many big economies, the Brexit deadline looming and decisions to be made over interest rates, it could be another turbulent month for markets across the globe.
Questions to ask yourself... What should be the biggest worry for the global economy - the China-America trade war or Brexit? Is the UK about to have a general election to break the Brexit deadlock?
The global look
In the global look this week, we’re going to look at Argentina whose government has imposed currency controls to support the economy. This means that the purchase of foreign currencies will be restricted, so firms and individuals can’t sell off peso without prior consent from the government. This will prevent an en-masse sell-off of peso, which could crash its value and further derail the economy. The country is in a deep recession, which hasn’t been helped by the prospect of the current business-minded President, Macri, losing his position in elections in October. The economy contracted 5.8% in the first quarter of 2019 and also inflation was up at 22% during that time.
The Argentine government has also asked for creditors last week for more time to pay back the $101 billion of foreign money they owe, some of which is from the IMF. There is pressure on the IMF as many people have questioned the decision to lend so much money to a turnaround programme which isn’t working. This isn’t a new position for Argentina - many times over the past 70 years they’ve found themselves in an economic crisis.
Question to ask yourself... Should the IMF continue to spend money to bail out Argentina?
Companies to watch
Johnson & Johnson
In a landmark case, a judge in Oklahoma has ordered pharmaceutical firm, Johnson & Johnson, to pay $572 million for their role in the Opioid epidemic. In a 42 page report, it concluded that the company ran dangerous sales campaigns which fuelled addiction and ultimately led to the deaths of a number of people. It claims that sales reps encouraged doctors to prescribe the drug, saying that they carried little risk of addiction. Opioids are a class of drugs that includes heroin, but also a number of legally prescribed pain relievers, including Oxycodone, Codeine and Morphine. The judge said that Johnson & Johnson influenced the oversupply of Opioid and an increase in prescribing, which led to addiction.
According to the state’s lawyers, 6,000 people in Oklahoma have died from opioid-related overdoses, which only makes up a small number of the related deaths across America. Earlier this year, Oklahoma settled with Purdue Pharma (producer of OxyContin) and Teva Pharmaceutical, leaving Johnson & Johnson to fight it in the courts. The company has said they will appeal the decision, which could turn out to be a landmark case. Opioid addiction has been responsible for a number of deaths across America in recent years.
The UK’s largest UK-based technology company, Micro Focus, had 30% wiped off its share price last week after they issued a profit warning. The firm listed on the FTSE 100 has said that profits will be between 6% and 8% lower than last year. Micro Focus sells software and consulting services to a global market and bought Hewlett Packard’s software business in 2017. Many commentators suggest the inability to integrate the company effectively is causing some of the problems for Micro Focus. When this deal was complete, the business tripled in size and has struggled to manage this transition. The CEO also blamed spending cuts on technology within Europe, which has stopped their customers buying upgrades to their software.
Micro Focus are planning a strategic review of operations across the firm, but this didn’t fill shareholders with much hope as the share price plummeted as much as 30%.
Global oil and gas company, BP, has ended its operations in Alaska after selling their remaining business there to a private company, Hilcorp, for £4.5 billion. Given its location and remoteness, it’s expensive to drill oil in the region and BP has said it is looking to pursue opportunities elsewhere. This is part of a wider plan to sell around £8.5 billion worth of assets in the next two years to shore up their balance sheet.
BP started working in Alaska in 1959 and were a key part of Prudhoe Bay oilfield, which has produced more oil than any other field in the US - 13 billion barrels of oil. It is predicted that the oilfield can produce 1 billion barrels more, but Alaska as a whole isn’t as vital to US oil production as it used to be.
Questions to ask yourself... What more can be done to ensure potentially harmful medication isn't so readily prescribed? What are the key challenges when acquiring a business?
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