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Equities drift on mixed earnings
27 Oct 2016
Earnings season, oil and the US dollar - Video Update
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 Thursday 27 October 2016

Equities drift on mixed earnings

 

 

Indices Update

There’s a weaker tone to European equity markets this morning following a mixed close on Wall Street last night. Corporate earnings continue to move markets and yesterday some better results from Boeing helped to offset disappointment from Apple. First thing this morning we had the latest updates from Deutsche Bank and Barclays. Deutsche surprised the market when it posted net income of $303 million on $8.17 billion of revenues. Analysts had been expecting a loss. However, there was some concern after the German banking giant only increased its legal provisions by a fraction taking it up to $6.5 billion. This may be considered a bit light considering the unresolved $14 billion penalty from the US Department of Justice hanging over the bank.  Meanwhile, Barclays got a boost from its investment banking division and posted better-than-expected third quarter profits. Despite this, the shares were little-changed in early trade.

Investors are now preparing for the first look at the UK’s third quarter GDP which is released at 09:30 BST.

European indices and US stock index futures were mostly weaker yesterday morning. Equities were under pressure from the start thanks to ongoing dollar strength, an early pull-back in oil prices and disappointing sales numbers from Apple. However, the major European and US indices recovered later in the afternoon following the release of US crude oil inventory data from the Energy Information Administration (EIA) for the week ending 21st October. The data showed unexpectedly large stockpile builds across all oil products. This led to a sharp recovery in oil prices which fed through to a recovery in equity markets.

The dollar has been pushing higher since the beginning of the month after a succession of polls showed that Hillary Clinton had taken a substantial lead over Donald Trump ahead of the US Presidential Election. A Clinton win is viewed as the most “market-positive” outcome as it is essentially a continuation of the status quo. This makes a December rate hike from the Fed more likely whereas a Trump win is expected to lead to market disruption. Meanwhile, lower oil prices are currently viewed as negative for equities as they make it more difficult for energy companies to service and repay the debt taken on when crude was trading around $100. This could have serious implications for the US banking sector. There was also widespread disappointment yesterday morning following the release of Apple’s quarterly results. Earnings per share were a touch better than market expectations. However, the world’s largest corporation by market capitalisation missed on revenues, registering its first year-on-year decline in sales since 2001.

The FTSE 100 index closed down 59.6 points, or 0.9%, at 6,958.1

The German DAX lost 47.6 points or 0.4% to end the day at 10,709.7

The US30 closed up 30 points to finish at 18,199.3. The S&P 500 ended 0.2% lower at 2,139.4 while the Nasdaq 100 ended down 0.6% at 4,860.6

  

Equities

Shares in Lloyds Banking Group (LLOY) gapped lower on the open yesterday. The slump followed the release of quarterly earnings which were pretty much unchanged from this time last year. Underlying pre-tax profits were £1.9 billion compared with £1.97 billion twelve months ago. Lloyds is the first UK bank to release results which fully capture the period following the Brexit vote. It is also the UK’s biggest mortgage lender so its results were keenly anticipated. Overall, the bank has managed to weather the situation in the immediate aftermath of the referendum. This is despite an additional squeeze on margins caused by the Bank of England’s 25 basis point interest rate cut. On the negative side, the bank announced a larger-than-expected £1 billion charge for PPI miss-selling. The stock bounced back later in the session to close up 0.96% at 55.88 pence.

  
Commodities Update

Crude oil fell sharply in early trade yesterday. Both WTI and Brent dropped back below $50 per barrel as investors reacted to the latest update on US inventories from the American Petroleum Institute (API). The data showed an unexpectedly large rise in inventories of 4.8 million barrels against a forecast of a 1.7 million barrel increase. However, both contracts erased all their early losses following the release of official inventory data from the Energy Information Administration (EIA) yesterday afternoon. In contrast to the API numbers this showed a drawdown in crude stockpiles of 600,000 barrels for the week ending 21st October. The consensus expectation was for a build of around 700,000 barrels. In addition, there was a 2 million barrel decline in gasoline stockpiles, a 3.4 million barrel drawdown in distillates and a decline of 2.1 million barrels in propane/propylene inventories. Total commercial petroleum inventories decreased by 8.7 million barrels last week.

Despite the recovery in oil prices yesterday afternoon, crude is still some way below its June highs. Both WTI and Brent have been unable to break and close convincingly above the highs made back in early June, around $51.60 and $52.80 respectively.

Gold and silver continued to consolidate in early trade yesterday, and was helped to some extent by a modest pull-back in the US dollar. However, both metals suddenly turned lower mid-afternoon. There was no obvious trigger for the move. The US Flash Services PMI was stronger than expected, and it could be argued that this was yet another argument in favour of a December rate hike from the Fed. Investors typically shun gold and silver on the prospect of tighter monetary policy. Higher interest rates mean that owning non-yielding assets (such as gold and silver) is less appealing for investors looking for a return on their funds. However, it’s fair to say that a December rate hike is pretty well factored in to the markets. In addition, the better-than-expected Services data was quickly followed by a poor New Home Sales release which included a nasty downward revision to the prior month’s number.

Yesterday’s price reversal looked like little more than profit-taking following a good run for both precious metals. Gold appears to have found support around $1,260 while silver has managed to steady and consolidate over the last few weeks trading between $17 and $18.

Forex Update

The US dollar pulled back a touch yesterday after hitting multi-month highs earlier in the week. On Tuesday the Dollar Index broke above 99.00 to hit its highest level since the beginning of February. Meanwhile the EURUSD fell further below 1.0900 to trade at its lowest level in over six months. The dollar has soared since the beginning of this month. From the end of September to its low point in Tuesday the EURUSD lost over 3.5%. The Dollar Index rose 3.8% over the same period. Investors piled back into the US dollar as the likelihood of a December rate hike from the Federal Reserve increased.  Much of this was driven by polls which indicated a strong lead for Hillary Clinton ahead of the Presidential Election on 8th November. Clinton is the establishment candidate who should ensure the status quo making it more likely that the Fed will tighten monetary policy before the year-end.  In contrast, a win for Donald Trump could delay a rate hike as it would result in considerable market uncertainty.

However, a poll yesterday showed a slight lead for Trump in Florida – a key “must win” battleground state. This suggested a turnaround in Trump’s campaign from its recent low point. As a consequence, investors took the opportunity to book some profits on dollar trades, particularly as data from the futures markets suggest very high levels of long-side positioning.

Yesterday morning brought a surprisingly strong Australian CPI reading. Headline CPI rose 0.7% in the 3rd quarter. This was well above last month’s +0.4% reading and the market expectation of a 0.5% rise, and brought the year-on-year figure to +1.3%. This is still a long way below the Reserve Bank of Australia's (RBA) target level of 2% to 3%, but is still heading in the right direction. A pick-up in inflation generally feeds through to rising economic growth and this should keep interest rates from falling further. This led to a sharp bounce in the Australian dollar although the gains evaporated later in yesterday’s session.


Upcoming events

Today’s significant economic events include the release of the Spanish Unemployment Rate, Euro zone M3 Money Supply and Private Loans. From the UK we have Preliminary 3rd quarter GDP and CBI Realised Sales. From the US we have Durable Goods and Pending Home Sales.


 
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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Category: AM Bulletin


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