- ECB hints at rate cut, more stimulus in December
- Travis Perkins (L:TPK) lowers forecast
- McDonalds (SA:MCDC34), eBay (O:EBAY) beat
- Euro sinks on Draghi chatter
- Commodities rebound with risk-on sentiment
UK & Europe
A planned ‘re-examination’ of stimulus at the next ECB meeting in December sent the euro sharply lower on Thursday. This triggered a rally European stock markets where companies derive an export advantage from a lower exchange rate.
According to President Mario Draghi, the ECB governing council is not in a “wait and see” but instead a “work and assess” mode by waiting for the next meeting in December to make a decision on policy when staff economic projections are available. Mr Draghi was keen to stress that that ECB policy makers are open to a whole menu of instruments for adjusting policy, a hint that different assets could be bought.
There was an especially sharp downside reaction in the euro to Mr Draghi’s surprise change of heart towards lowering the deposit rate. Having not been on the agenda at previous ECB meetings, lowering the deposit rate was discussed this time. Mr Draghi had previously said that interest rates were near their lower bound.
Mr Draghi said that the QE program is slated to run until Sept 2016 and beyond if needed. As far as the economic outlook, Mr Draghi said that the risks remain to the downside mainly because of a possible impact from emerging markets on global growth, demand for Euro area exports and a market shock that could impact Euro area domestic consumption. However the ECB maintains that the level of inflation will soon being to pick up because of a ‘base effect’ from the oil price impact in late 2014.
If the ECB were to cut interest rates or expand quantitative easing at its next meeting on December 3rd, that could remove some of the market-risk from the Federal Reserve hiking rates at its December 16 meeting.
Eurozone stimulus is more of an indirect benefit to UK markets. The rally in the FTSE 100 after ECB president Draghi’s press conference was a bit more pint-sized .
Telecoms was the best performing sector on the FTSE with Sky still winning investor favour following its strong earnings report on Wednesday. Industrials propped up the UK benchmark stock index after poorly-received results from Wickes-owner Travis Perkins weighed on sector peers.
Travis Perkins (L:TPK) shares plummeted to nine-month lows after warning full-year profits will be at the lower end of the spectrum. The owner of DIY-store Wickes reported 2.6% like-for-like sales growth in the third quarter, well down from the 5.7% rise in the first half of the year.
US
US markets soared in early trading, boosted by remarks from ECB president Mario Draghi and a better set of earnings reports with McDonalds and eBay both surging over 5% at the open.
McDonald’s shares leaped after the company beat profit and revenue expectations while US same-store sales rose for the first time in two years. Profits rose but revenues missed expectations thanks to the currency effect of a stronger dollar.
Ebay shares jumped on the open after the ecommerce company beat third quarter earnings expectations. The strength of the dollar played its part again as trading volumes rose 6% on the year but currency effects led to a 2.4% fall in revenue since half of ebay’s business is outside of the United States.
The performance of Valeant Pharmaceuticals International (N:VRX) had less bearing on the overall market after it dragged the healthcare sector lower on Wednesday. A report suggested the company had been “channel stuffing,” a technique used to fabricate sales which the company subsequently denied.
Caterpillar (N:CAT) was a notable laggard as the bellwether Dow-heavyweight missed expectations following another quarter of lower sales.
FX
The US dollar acted as the major counterparty to euro-selling following the ECB press conference, helping it higher against most major currencies.
EUR/USD dropped back below 1.12 on the prospect of additional ECB stimulus. The chance of at least one of either a rate cut or an expansion of QE in December have substantially increased.
The British pound surged after UK retail sales beat expectations, rising 6.5% year over year and 1.9% month over month. Excluding fuel, retail sales are up 5.9% over the year. EUR/GBP dived 100 pips to below its 200 DMA and a one month low.
Commodities
Crude oil limped into positive territory following a return to risk-on sentiment in equity markets but gains were limited by over-supply concerns following Wednesday’s surprisingly large US crude inventory build.
The rising possibility of further monetary debasement from a global central bank increases the attractiveness of precious metals which hold their value over time. Gold and silver traded higher after Draghi’s dovish rhetoric but gains were limited from the negligible threat of a rate hike next week from the Federal Reserve.
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