UK & Europe
European stock markets dropped on Thursday, taking them lower for the week after a hawkish statement from the US Federal Reserve that put a December rate rise firmly back on the table.
The Fed took the unexpected step of strengthening the wording in its statement in the face of deteriorating economic data, which was reinforced by a bigger than expected slide in third quarter GDP growth reported on Thursday.
Europe’s technology sector was one of the best performing on Thursday after a double buyback announcement from Samsung (L:0593xq) as well as Nokia (HE:NOKIA) which reported a smaller than expected drop in profits in the third quarter.
The FTSE 100 was lower after a slump in the shares of some of its most heavily-weighted sectors including banks, miners and oil companies.
The repeal of China’s gruesome one-child policy is a long-term positive for humankind, Chinese demographics and likely economic growth. In the short-term though, it was no consolation for UK mining company shares which slumped alongside commodities on the threat of emerging market instability if the Fed hikes rates this year.
Barclays (L:BARC) was top faller on the UK benchmark with shares dropping by over 6% to nearly nine-month lows after third quarter results failed to meet expectations. Profits dropped because of worse losses in non-core businesses the bank is trying to spin-off as well as more provisions for legal settlements. If new CEO Jes Staley can sell non-core assets, improve Barclays’ core business and reduce provisions the shares have a chance, but they are some big ifs.
Shares of Royal Dutch Shell (L:RDSa) were lower by 2% after reporting another quarterly drop in profits. Although the drop represents disappointment in the earnings, it’s a fairly typical price daily swing given the current volatility in oil prices. A huge write-down on cancelled projects in Canada and the Artic Shell hit profits at Royal Dutch Shell with its upstream business actually turning in a loss but better margins in its downstream business helped cushion the blow.
French rival Total fared slightly better beating earnings expectations and revised higher its production target. The big oil companies are all slashing capex to enable breakeven operations at around $60 per barrel. The idea is that in the medium term oil prices will average $60 per barrel. This allows big oil to keep dividends in tact by using low interest rates to run up debt levels in the short term
It was another kitchen sink quarter at Deutsche bank. Germany’s largest bank has scrapped its dividend for 2 years, exit from 10 countries and will now axe a grand total of 35,000 jobs. There’s a big retrenchment going on under new co-chief executive John Cryan, which is necessary to upheave the culture and turn the bank around, but doing so inevitably loose investors looking for profit growth in the near-term.
US
US stocks fell on Thursday as investors re-assessed the likelihood and implications of a US rate rise in 2015.
Allergan confirmed it has received an approach by the US’s second largest pharmaceutical company Pfizer for a merger. Both Allergan and Pfizer’s shares rose on the prospect of the year’s biggest merger that would create the world’s largest drugmaker.
Both companies have already been involved in lot of mostly unsuccessful M&A propositions in the last twelve months, making a deal perhaps less likely than under normal circumstances. Allergan, which was bought by Actavis also fended off a bid from recently-embattled Valeant. Pfizer had a failed attempt at buying AstraZeneca and was rumoured to be interested in Shire which had a failed deal with AbbVie. Needless to say the sector has been a flurry of M&A activity. The questions will be raised over whether the merger is tax-motivated, particularly if there’s talk of headquarters moving out of the United States to Ireland.
FX
The US dollar was mixed on Thursday, falling against most European currencies, flat against the yen and up against Australasian currencies. US GDP and core PCE price inflation both fell more than expected but hawkishness from the Fed limited losses for the dollar.
The Australian and New Zealand dollar fell alongside commodities after the Federal Reserve threatened to raise rates this year but news of the end of the one-child policy in China capped the losses.
A surprise rise in euro-area confidence lifted the euro after its post-Fed sell-off. EUR/USD found support at 1.09.
The pound got a small lift from data showing rising house prices and increasing consumer credit. GBP/USD remained below 1.53.
The Japanese yen was unchanged ahead of the BOJ policy meeting in which there is still an outside chance that further stimulus will be introduced.
Commodities
Commodities continued to drift lower on Thursday after a big initial slump following the more hawkish than expected Fed meeting.
The price of gold saw a $30 swing on Wednesday, rising initially on expectations of no rate rise but then crashing back to earth on the more hawkish than expected Fed statement. The price made a new two-week low on Thursday but settled in around $1,150 per oz.
Crude oil has gone against the grain of the rest of the commodity complex post-Fed. It’s largely a fear of trading against the huge short-squeeze on Wednesday after the smaller than forecasted build in weekly oil inventories.
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