Manufacturers call for Brexit strategy rethink

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FTSE-100 1 Year Chart

Today’s edition features:

  • Hutchison China MediTech (HCM.L)

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"Despite recovering the worst of their early losses, US stocks closed lower on Monday with downward pressure still evident on tech stocks. Since all three major averages recorded new record intraday highs on Friday, traders decided to cash in some of their significant gains of past weeks in anticipation of the Federal Reserve’s scheduled monetary policy announcement on Wednesday and on further reflection of the UK’s shock election result. With futures suggesting a 90% expectation of the Discount Rate being hiked by 25bp despite a recent succession of poor inflation readings, the Fed’s failure to deliver could result in quite a sharp market correction although an update on its approach to ‘normalisation’ of monetary policy, possibly proposing the phasing out reinvestment of proceeds of maturing securities, is a far more probable outcome. Against this background, the tech-heavy Nasdaq recovered only part of its steep opening losses, being led down by Apple as most other highly valued semiconductors, hardware and software stocks also found sellers, while elsewhere a sharp hit on airlines was somewhat compensated through buying in oil services and trucking. Treasuries meanwhile climbed back to just about unchanged after seeing early weakness, taking the benchmark ten-year closing yield off by less than a basis point to 2.213%. Staging a reasonably convincing rebound this morning, however, Asian stocks were led by Korea, whose benchmark Kospi index rose 0.4%, aided by solid gains for Hyundai Motor, recovering from the biggest decline in three months it suffered on Monday . The S&P/ASX 200 was also boosted by a recovery in its oversold banking sector, while the two main Chinese indices held onto modest gains, leaving only the Nikkei to close roughly unchanged as the US$:Yen rebounded. The major European markets remained under a cloud yesterday as investors contemplated whether the UK’s deeply divided and hung parliament might indeed self-destruct before Brexit negotiations get properly underway. The highly international FTSE-100 Index edged down by 0.2%, while the more domestically focussed FTSE-250 fell twice as much. The Pound tumbled to a seven-month low against the Euro as the IOD reported a crash in business confidence and Moody’s warned Corbyn’s strong showing is ‘credit negative’ for the UK. Not in the mood to celebrate Macron’s widely anticipated gains in this weekend’s parliamentary vote, the French CAC 40 Index plunged by 1.1% while the German DAX slumped by a similar amount, as their tech stocks took their lead from the US and Asian markets to push the STOXX 600 Technology Index down 3%. The UK is due to release a good batch of macro data today, including May’s RPI, PPI and CPI, for which consensus expectations are predicting an unchanged 2.7%, as well as its DCLG House Price Index. The EU publishes its ZEW Economic Sentiment Survey for June, while the US is also due to provide its PPI for May, its weekly Redbook Index and NFIB Business Optimism Index. UK corporates due to release earnings or trading updates include Merlin Entertainments (MERL.L), Crest Nicholson (CRST.L), Capita (CPI.L), Ted Baker (TBK.L), Telecom Plus (TEP.L), Evgen Pharma (EVG.L), Ashtead Group (AHT.L) and Park Group (PKG.L). With continuing backbench pressure on Theresa May to soften the Government’s approach to Brexit providing obvious conflict with the harder line stance adopted by a number of her ministers, Sterling will remain the obvious casualty as speculation regarding the shortening of the PM’s tenure intensifies. Although the longer-term damage potentially wreaked on the UK economy and its international reputation will become obvious in due course, for today’s opening the focus is more likely to be on the better than expected overnight closings and the translational benefits presently being accrued by the UK international earners. The FTSE-100 is seen rising over 30 points in today’s early trade, although the market will still remain touch-sensitive to news from Westminster."
– Barry Gibb, Research Analyst


The FTSE-100 finished yesterday’s session 0.20% lower at 7,511.87 whilst the FTSE AIM All-Share index was down 1.16% at 966.72. In continental Europe, the CAC-40 finished down 1.12% at 5,240.59 whilst the DAX finished 0.98% lower at 12,690.44.

Wall Street
In New York last night, the Dow Jones fell 0.17% to 21,235.67, the S&P-500 faded 0.1% to 2,429.39 and the Nasdaq eased 0.52% to stand at 6,175.47.

In Asian markets this morning, the Nikkei 225 had shed 0.07% to stand at 19,894.87, while the Hang Seng firmed 0.52% to finish the session at 25,841.87.

In early trade today, WTI crude was up 0.41% to $46.27/bbl and Brent was up 0.43% to $48.50/bbl.


Manufacturers call for Brexit strategy rethink
The government should rethink its Brexit strategy, following last week’s election, according to the engineering industry organisation, the EEF. It said without a more pro-business stance, the resulting political instability may force more firms to alter their plans “away from the UK”. The EEF is the latest business organisation to call for a rethink of the government’s Brexit plans. It wants access to the single market to be at the heart of Brexit negotiations. The EEF said even before the election firms were already altering or thinking about changing their business plans because of the Brexit vote. Terry Scuoler, EEF chief executive, said the government had already “wasted a year” and needed to “move away from its previous rhetoric and start repairing relations with EU partners”. For the EEF that meant putting access to the single market and staying in a customs union at the centre of the government’s negotiations and involving business groups in the talks over trade. It is also calling for a “suitable” transition period to be “firmly back on the table” as part of the Brexit talks.

Source: BBC News

Company news

Hutchison China MediTech (HCM.L, 3,117.50p) – Buy
Hutchison China MediTech (‘Chi-Med’), the China-based healthcare group, yesterday announced that it has submitted New Drug Application (‘NDA’) for fruquitinib for the treatment of patients with advanced colorectal cancer to the China Food and Drug Administration (‘CFDA’). The filing of NDA follows positive top-line results demonstrating statistically significant increase in overall survival (‘OS’) and progression-free survival (‘PFS’), compared to placebo, while there was no new or unexpected safety issues identified. Fruquintinib is currently under joint development in China by Chi-Med and its partner Eli Lilly and Company. As such, yesterday’s NDA submission has triggered a milestone payment of RMB30.8m (US$4.5m) from Eli Lilly to Chi-Med.

Our View: Fruquitinib (for colorectal cancer) is a first ever successful pivotal Phase III clinical trial in the Group’s history, which is targeting a launch in 2018. Colorectal cancer is the second most common type of cancer in China, with approximately 380,000 new patients per year (National Central Cancer Registry of China), while there currently has no drugs available in third-line colorectal cancer in China. Globally, there was c.1.5 million new patients in 2015, which are estimated to increase to c.1.7 million patients per year by 2020, according to Frost & Sullivan. Upon NDA approval, the fruquintinib drug has potential to significantly enhance the patients’ quality of life, which should reflect to Chi-Med’s financials in coming years. Chi-Med currently estimates the potential deliverable peak sale of US$110-160m which as per the agreement with Eli Lilly, net income attributable to Chi-Med amount to US$20-35m. At its FY2016 results announced in March, the Group has provided guidance for FY2017 where revenue is expected in a range of US$225-240m, administrative expenses, interest & tax at US$18-19m and net loss of US$13-28m. Net loss was forecasted for FY2017 as a result of increased adjusted R&D expenses (US$85-90m), and lower one-time property gains of US$14-16m (FY2016: US$40.4m). This guidance remains, of course, subject to licencing deals and other factors (e.g. Eli Lilly may decide to exercise its global rights on fruquintinib). The Group’s R&D pipeline remain rich with currently 8 oncology drug candidates in 30 active clinical trials (FY2015: 19) globally with 4 pivotal Phase III trials underway, while staying on course to initiate 4 additional Phase III studies during 2017. Chi-Med’s strong balance sheet with cash resources of US$173.7m at the end-FY2016, boosted by proceeds from its NASDAQ listing, means the Group is expected to be sufficient to cover development needs “well into 2019”, which should enable it to secure better deal from future partnership. Given the Group progressing in line with expectation, Beaufort reiterates its Buy rating on the Shares.


To read Beaufort’s full research archive click here

Compiled by:
Barry Gibb, Kazunaga Senga, Sheldon Modeland, Charles Long & Ben Maitland
(t) +44 (0) 207 382 8384

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