London Quick Take – 3 June - Soft China Manufacturing Data and OECD Warning Weigh on Sentiment

• Stocks steady as investors weight tariffs, geopolitics
• OECD downgrades growth outlook
• US steel stocks surge, UK mining stocks hit by weak China data
• UK Defence name Chemring continues strong sales momentum

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Big picture: Gold up, stocks up – dislocations in markets continue to evidence a sense of uncertainty. But global M2 money supply from central banks hit a fresh record – things are looser than they look even if bond yields are higher, with the US 30yr Treasury yield again touching 5% yesterday and the 30yr real rate at 2.8%, its highest since the Global Financial Crisis. Little wonder gold is on track for its largest ever inflow this year. Meanwhile we are witnessing the dollar rapidly weakening again, with the dollar index sub-99, approximately 10% lower YTD and still 15% overvalued, according to Goldman Sachs.

Can you grow your way out of trouble? Watch the debt trail in the US. Some Republicans are seeking to make tax cuts permanent, which would deepen the deficit and so run up against opposition from fiscal hawks. On this subject – the whole plan with tax cuts is to lower the deficit with a combination of tariff revenues and growth – to grow the US economy out of the unsustainable debt spiral...but the OECD is warning today that US and global growth is set to slow. The OECD cites trade barriers and policy uncertainty – the hallmarks of the White House for some. The slowdown it says will be concentrated in those most exposed to tariffs – the US, Mexico, Canada and China. One thing to note – the UK outlook doesn’t look that bad in comparison to most of the G7.

Wall Street shrugged off trade uncertainty – amid a fresh war of words between China and the US that we mentioned yesterday – to finish modestly higher for the first day of June trading. The S&P 500 gained 0.4% and the Nasdaq rallied 0.67% after a strong month of May signalled investors remain pretty sanguine about the tariff situation. Steel stocks surged—Cleveland-Cliffs +23%, Nucor +10%, Steel Dynamics +10%—on news of 50% US steel/aluminum tariffs. Automakers fell: Ford and GM -3.8% after weak EU sales data. Tech rallied. TS Lombard notes that foreign investors are buying US stocks again, after a steep period of selling that was the ‘US repudiation’ phase of the Trump tariff story. And GS notes that hedge funds bought tech stocks last week at the fastest pace in at least a decade.

On tariffs, the 90-day exemption is looming in just over a month. A report on Reuters says the White House has asked countries to provide their best offer on trade by Wednesday. Meanwhile, there are still hopes that Trump and China’s Xi will talk this week.

Soft manufacturing data out of China dragged a bit on sentiment in London as miners were caught in the read-through from the data. China's manufacturing PMI fell to 48.3 in May, its lowest since Sept 2022, due to US tariffs. Iron ore futures fell 1.5% to $93.85 a ton, with copper, aluminium, and zinc also down. This comes after US factory activity contracted in May for the third month, with the ISM manufacturing index dropping to 48.5. Imports hit a 16-year low, and exports fell to a five-year low, possibly due to retaliatory tariffs. The report highlighted uncertainty from uneven and changing tariffs, complicating supply sourcing.

China figures and warnings from the OECD seemed to take the shine of things in London. Having rallied about a quarter of a percent early doors on Tuesday after finishing flat on Monday, once again testing the 8,800 handle, weakness in miners like Rio Tinto, Glencore and Antofagasta helped shift the needle to the downside.

Companies

Chemring reported strong first half results including a record order intake of £488mn and an order book of £1.3bn, its biggest ever. Revenues rose 5% in line with expectations, chiefly on a 20% gain for its key countermeasures business, and margins rose to 11.6% from 11.2%. Chemring is a major UK defence play and has seen a big jump in its shares this year as the mood sweetened on the sector due to Europe and British defence commitments rising. It looks like the 50% rally YTD is justified with underlying momentum from last year staying strong.

British American Tobacco said its on track to meet expectations with revenues slightly ahead of previous guidance. The lifted FY revenue growth forecast to 1-2%. Transition to ‘smokeless’ may be underappreciated.

German defence firm Rheinmetall was down some 7.5% yesterday before recovering some of losses following an article by German Spiegel suggesting that extra profits could be taxed to avoid government spending going to pockets of shareholders.

Tesla reported a huge jump in sales in Norway after the revamp of its Model Y, bucking a European-wide decline this year.