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European Shares Slide Back As China data And ZEW Disappoint

Published 13/10/2015, 15:46
Updated 03/08/2021, 16:15

Europe

It’s been another disappointing session for European markets as the feel good factor of last week gives way to renewed concern about the Chinese economy and a sharper than expected deterioration in German ZEW investor expectations in October, to their lowest levels in a year.

We saw a bigger than expected fall in Chinese imports of 20.4% in US dollar terms as domestic demand continued to remain worryingly weak. There was a bright spot, if you can call it that, in that the decline in exports was slightly less than expected, but this was probably as a result of the decline in the yuan against the euro and the Japanese yen. This is likely down to the fact that both currencies have strengthened against the US dollar in the last few weeks.

As would be expected mining stocks have come under pressure with Glencore (L:GLEN) the biggest faller, while Burberry shares have also been hit heavily due to its exposure to Chinese markets.

While the Chinese data was not well received neither was the latest reading from the German ZEW which turned out to be even more disappointing than expected. The fallout from the VW defeat device scandal appears to be having a chilling effect on investor sentiment in Germany with the economic expectations index dropping to its lowest level in a year, and casting a cloud over German growth expectations into the end of 2015.

In a latest attempt to shore up its cash position Volkswagen (DE:VOWG) management announced a reduction of €1bn a year in its investment spending program, while placing more resources into hybrid cars.

Also on the slide Royal Mail (L:RMG) shares have dropped sharply after the UK government disposed of its remaining 14% stake in the company at 455p.

On the plus side SABMiller (L:SAB) shares have jumped sharply after the company came to a tentative agreement with long term suitor AB InBev at £44 per share in a deal worth £68bn, a 50% premium to the share price on 14th September prior to the bid.

While we now have a tentative agreement and a deal extension to the 28th October with a £3bn break clause, payable by Anheuser-Busch Inbev SA (L:0O1Z) if the deal doesn't proceed, the combined company will still have to overcome a host of regulatory obstacles which is likely to prompt a number of disposals in China and the US.

Less than twenty four hours after Tesco (L:TSCO) announced its new price match guarantee its share price has slid sharply in the wake of this morning’s UK inflation numbers, along with the rest of the sector, as the prospect of lower prices will inevitably hurt their ability to maintain their profit margins at a time when Aldi and Lidl continue to erode their market share.

Banks are also in focus after Barclays (L:BARC) announced it was looking to appoint an ex JP Morgan investment banker, Jes Staley as its new CEO. Given Mr Staley’s background this would appear to suggest a significant deviation from the last few years when Antony Jenkins sought to steer the bank away from its more risky investment banking model. It also throws up some uncertainty as to what direction the bank is looking to position itself.

US

Since the September rate meeting which saw the US Federal Reserve keep rates on hold, various members of the FOMC have sought to keep alive the prospect of a rate rise at some point this year.

Various comments from Fed vice chairman Stanley Fischer at the weekend, as well as FOMC members Lockhart and Bullard seem to be at pains to keep the option available, though Chicago Fed President Charles Evans has been consistent in stating his preference for a move sometime next year at the earliest.

As such last night’s comments from permanent voting member Lael Brainard were a significant departure from the usual rhetoric when she urged the FOMC to be patient when it came to deciding when to raise rates. Given her previous experience as an international policy advisor to President Obama her comments highlight her more outward looking perspective relative to the more hawkish comments from policymakers like James Bullard, who seem blinded to external factors when determining lift off timing.

She has also put herself at odds with those policymakers who continue to keep the prospect of a 2015 rate rise on the table.

On the earnings front Johnson & Johnson (N:JNJ) pre-empted their better than expected Q3 earnings numbers of $1.49c a share by announcing a $10bn share buyback as once again companies return cash to shareholders in the absence of being able to do anything else with it.

On the buyback theme Hewlett-Packard (N:HPQ) also announced that it had approved a $3bn share buyback program in an SEC filing.

All eyes after the bell will be on the latest earnings announcement from JP Morgan Chase (N:JPM) as it gets set to announce its latest Q3 numbers after the closing bell later today. Given the bank is one of the US's largest mortgage providers the trend in this area will be important in the context of the health of the US economy along with its credit card business.

FX

Amongst the worst performers today have been the Australian dollar and the pound with the Aussie sliding back on the back of the weaker China data, while sterling has come under pressure after the latest UK CPI numbers showed the economy slipping back into disinflation for the second time this year, largely as a result of lower fuel and clothing prices. This continued weakness is likely to put back expectations further into next year on when to expect a rise in UK base rates from the Bank of England.

The Swiss franc and Japanese yen have been the best performers today on the back of some risk aversion.

Commodities

Commodity prices have held up quite well despite sharp falls yesterday despite this morning’s disappointing China data.

After their big rise last week oil prices hit a one week low earlier today but have rebounded since despite the IEA predicting that the global surplus in supply would continue well into 2016, which could well keep the pressure on the downside, despite today’s rebound.

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