Europe
Stocks in Europe took a tumble today as investors soon discounted a dovish FOMC and focused on banking problems in Europe led by suspended trading for Portugal’s Banco Espirito Santo (LISBON:BES) ahead of earnings from US bank Wells Fargo (NYSE:WFC) tomorrow.
The financial sector is leading declines with almost every FTSE 100 financial stock in the red barring some of the REITs as uncorrelated safe havens.
Banks stocks across Europe took a dive as counterparty risk surged after shares in Portugal’s Banco Espirito were suspended on Lisbon’s PSI 20 Index due to problems at parent company ESI (PARIS:ESIG).
Banks in particular are under massive scrutiny with European banks being targeted by the US regulators while banks in the US and Europe face tougher capital requirements as part of bank stress tests.
With tougher capital requirements, it means banks need to keep more money in reserve and can’t lend it out and make returns. This problem is exacerbated in Europe where weak economies are not generating demand for banks loans in the first place.
The fines just keep on coming and despite structural reorganisations it’s hard to see how lower private and corporate lending and the loss of trading revenues from investment divisions can be turned around for banks in the near future.
Barclays (LONDON:BARC) was leading declines on the FTSE 100, the company currently gives the impression they’re at forefront of all the market manipulation stories, the latest one being the ‘Dark pool’ fiasco, investors are just not appreciating the uncertainty when you never know what scandal is around the corner.
The bank of England was a distant afterthought today after the monetary policy committee left policy unchanged on the asset purchase facility and interest rates, the bank also gave no statement. More clarity will likely come from minutes later in the month to shed some light on the voting tendencies of the two new members.
First Germany, then the UK yesterday, now France and Italy today have all seen declines well under -1% in industrial production in May. With unease about high stock market valuations amidst poor economic performance in Europe, stocks were always susceptible to some downside until earnings growth can justify current price levels.
Associated British Foods (LONDON:ABF) has raised full year guidance and reported a 2% drop in revenue from the same period last year as a result of strength in the British pound, constant currency earnings would have been 2% higher. Primark, its discount fashion label continues to drive revenue growth while low sugar prices are causing revenues losses for Silver Spoon, its sugar brand.
ABF has been on a tear in the last 3 years. Since 2011 the stock has risen 200% from £10 to over £30 today. This week has seen some selling going into earnings as price failed to hold above £31 and despite an initial surge prices are now down on the day. Price weakness despite the company raising annual guidance potentially doesn't bode well.
Burberry (LONDON:BRBY) also reported positive earnings again but for the Nth time suggested FX swings will impact future earnings.
US
In a turn of events not seen in a big way since the European crisis, US stocks took their lead from problems in Europe today.
After largely staying the cause and maintaining a dovish stance the FOMC gave US stocks a chance at a recovery rally yesterday. Today valuations concerns re-emerge and investors are using yesterday’s rally as a chance to sell stocks en masse into earnings season.
With the Dow 30 having hit 17,000 just ahead of earnings season, companies now need to justify all time high stock prices; a reiteration of the same from the Fed hasn’t proved enough to dispel concerns as the S&P 500 undid yesterday’s gains and fell below 1,960, the lows on Tuesday.
The general consensus is that there will be an improvement in earnings over the first quarter based on company outlooks and apparent improvement in economic conditions since the contraction in the first quarter.
From an investing standpoint, when the major benchmark hits a big number, investors may be feeling it makes some sense to hold on, take some stocks off the table or even sell short until earnings offer some confirmation on valuations.
In the light of recent regulatory problems for banks, earnings from Wells Fargo (NYSE:WFC) tomorrow will be a potential tipping point.
FX
The US dollar and Japanese yen saw widespread safe-haven buying today alongside steep declines in stock markets.
Sterling yen has dived 110 pips today adding to declines since hitting a 2014 high, it is now back below 173.70 the top of the old range
Commodities
Naturally on a risk-off day gold and silver outperformed with gold making 3 ½ month highs pushing into $1,340 per oz. With the Fed also continuing to dismiss potential dangers from rising inflation, precious metals had another wind in their sail.
Copper dropped on the weak Chinese import data after again stuttering below $3.30. The move is so far just a correction of the last month’s uptrend that has been supported by improved economic data out of China and the US for the second quarter.
As the world's largest t importer of copper, the performance of copper going forward will likely continue to be largely impacted by improvements or lack thereof in China’s economic data which so far appear to be improving this year after a mini stimulus from the Chinese government
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