Europe
In Europe today it’s a fairly positive session with the DAX managing to shrug off a huge decline in Volkswagen (XETRA:VOWG) shares, after it emerged that the company had been cheating on US air pollution tests for years. As a result the company will have to recall nearly 500m affected cars which will cost it in the millions of US dollars, and that’s even before the damage to its brand and potential fines starts to get factored in.
Company CEO Martin Winterkorn’s decision to get out in front of the allegations appears to be an attempt to mitigate any long term reputational and financial damage as the company looks at potential fines of $18bn. Earlier this year the shares were trading above €250, and were already under pressure, closing at the end of last week at €162, down 35%, largely over concerns about falling sales in the US and China.
This morning’s news will only reinforce those concerns and has sent the shares down below its 2014 lows, and down another 18% in a scandal that is likely to pose some very awkward questions for senior management, in the context of who knew what, and whether similar practices were being employed in Europe.
In the London market RSA Insurance Group PLC (LONDON:RSA)’s shares dropped like a stone after Zurich Insurance Group AG (SIX:ZURN), which only last month put in a bid of $5.6bn bid for the UK insurance group, unexpectedly dropped its bid leaving its prospective partner in the lurch and a lot of disappointed investors stranded at the altar, so to speak. Zurich cited a more difficult trading environment in the US as well, losses of $275m as a result of the Tianjin port blast in China.
Asia focussed British bank Standard Chartered PLC (LONDON:STAN)’s fortunes still appear hostage to legacy issues from its run-ins with US regulators over its dealings with Iran. New reports surrounding breaches of US sanctions have weighed on the share price today as concerns about further litigation, as well as the removal of its US licence to clear US dollars, have seen the share price struggle to pull away from multi year lows.
US
US markets opened the new trading week in positive territory shrugging off Friday’s heavy declines, as St. Louis Fed President James Bullard stated that he would have voted for a rise in interest rates if he had been a voting member on the FOMC committee.
He went on to state that an October rate rise was still possible, but it’s difficult to see how the Fed could do this without completely blowing its credibility. With no press conference scheduled for that meeting the ability to communicate a move would be severely compromised if the FOMC suddenly decided to schedule one.
Given that little is likely to have changed on the economic front between now and October, the case for a shift in policy is likely to be a tenuous one at best, and Bullard’s record on voting for rate rises isn’t exactly a compelling one given he was pushing for a rise in rates in 2013, before changing his mind.
This narrative could well develop along similar lines this week with Atlanta Fed President Dennis Lockhart due to speak later today, and his views are likely to be particularly salient in the context of why the Fed didn’t raise rates last week given his comments in early August that the bar to not acting on rates was quite high. Given he didn’t dissent at last week’s meeting his change of heart is likely to be particularly noteworthy.
Stocks in the news include Apple (NASDAQ:AAPL) after the company announced it was cleaning up its app store to remove iPhone and iPad programs that may have been compromised by a counterfeit software program.
US existing home sales for August came in worse than expected, declining 4.8%, and well in excess of the 1.6 fall which was expected, once again underscoring the continued mixed data outlook in the US economy.
FX
The US Dollar has bounced back strongly in the aftermath of last week’s Fed decision, and is now higher than it was prior toThursday’s meeting. Its biggest gains have come against the New Zealand dollar and the euro, with the euro slipping back sharply on expectations that the ECB could well be forced to double down on its current QE program.
Any hope that ECB President Draghi might have that the Federal Reserve could push the euro back down have been scuppered by last week’s Fed hold, and has raised expectations that the ECB President could take the opportunity to jawbone the currency lower later this week.
The Canadian dollar, on the other hand is finding it easier to hold its own against the greenback, particularly since oil prices appear to be struggling to fall further.
Commodities
The inability of oil prices to sustain downward momentum is prompting a gradual reassessment of the downside risk to prices in the short term, and with reports of supply disruptions in North America we’ve seen US prices start to edge higher again, after Friday’s sharp falls.
The failure to retest the August lows could still prompt a move back towards the recent peaks particularly since rig counts continue to fall in the US to their lowest levels in over four years.
Gold prices have slipped back a touch after three days of gains saw prices reach a two week high, however comments from Fed officials that the recent rate decision was a close call has seen prices pull back somewhat. Despite comments from St. Louis Fed President James Bullard that an October rate rise remains a possibility, the fact is he doesn’t have a vote until next year, and markets are priced for a 20% probability of such an outcome, meaning it remains unlikely.
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