Europe
Shares in Europe were trading positively but this time not from rumours of stimulus but rather more promising fundamental data from China and Germany with purchasing managers indicating a pickup in manufacturing in October.
UK stocks fell in early trading after disappointing earnings from Tesco (LONDON:TSCO), Tullow Oil Plc (LONDON:TLW), Unilever (LONDON:ULVR) and Foxtons (LONDON:FOXT) but rallied back up again on strong German manufacturing data before stalling out for a second day at fortnightly highs.
China’s HSBC manufacturing PMI came in at 50.4, slightly better than expected. The slowdown in China is very much still happening but today’s PMI alongside the better than expected third quarter GDP growth has raised faith in the central government’s ability to guide the economy towards a soft landing with a series of ‘mini’ stimulus efforts.
Rating agency Standard and Poor’s have warned that the Eurozone crisis is entering a “stubborn phase of subdued growth” and looking at the latest PMIs from France it’s hard to disagree. The situation in France is looking fairly abysmal after today’s PMI numbers as well as the very real prospect that its budget will be disallowed by the EU.
As the largest economy and the widely considered powerhouse of the Eurozone, it was Germany’s PMI numbers that truly counted . Such is the importance of Germany’s economy; the Eurozone composite PMI to expanded in October despite declines in France.
All of the grocers were under pressure after Tesco (LONDON:TSCO) announced a bigger than expected profit misstatement of £163bn and very disappointing sales numbers for the first half. Chairman Richard Broadbent will step down once the new management team is in place and new CEO Dave Lewis has said all options are on the table in the company’s strategic review.
Lewis appears to be throwing all the bad news together into this report in the hopes things can only get better from here. Auditors appear to have determined that profit statements in previous years do not need restating so with a new CEO and CFO and soon a new Chairman investors could well draw a line under the misstatement. The wider issue is how to turn around such a huge business; a leaner less diversified business would be easier to fix so asset sales seem likely.
Peripheral business ventures including overseas stores, the online video streaming service Blinkbox as well as Dunnhumby, which runs the supermarket’s club card marketing business should get the chop if they are not generating sufficient margins. That extra cash can be a buffer against future dividend cuts.
Foxtons shares dropped off a cliff after announcing a profit warning due to cooling London House prices. Foxtons’ London-focus mean the estate agent benefited the most on the way up in house prices but stands to lose the most on the way down.
The rise in UK house prices has been very much supportive of the UK recovery especially for job growth in construction and real estate; the Foxtons profit warning could also be a warning for the UK economy.
US
Earnings in the US were much more promising today led by a stellar report from Caterpillar Inc (NYSE:CAT) while General Motors Company (NYSE:GM) and Eli Lilly and Company (NYSE:LLY) impressed as the unemployment picture continued to improve after this week’s jobless claims.
Caterpillar beat revenue and EPS estimates, it earned $1.72 per share against estimates of 1.35 and shares are up 6%. Arguably a large part of the explanation for the impressive profits is the company's aggressive share-buyback program that reduces the number of shares and increases the profits per share. But on face value the company is a bellwether for the global economy and bodes well for growth going into Q4.
The four week average of jobless claims hit a fourteen year low indicating further improvement in the US labour market.
FX
The US Dollar rallied across the board after the strong unemployment data.
USD/JPY cruised back above 108 as equities including the Japanese Nikkei rallied and treasury yields rose.
GBP/USD is almost back at 1.60 after disappointing UK retail sales that fell below expectations and probably added to evidence that the growth problem in Europe is crossing over to the UK with negative implications for interest rates.
Commodities
Crude Oil prices saw a strong turnaround today on the news Saudi Arabia cut its crude supply to the market in September and signs from China and Germany that the global growth situation maybe not as gloomy as expected.
Copper is holding above $3 per lb on evidence the Chinese mini stimulus measures are translating into the broader China economy with the industrial sector seemingly turning a corner.
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