UK & Europe
The fading prospect of enlarged stimulus in the Eurozone weighed on stocks after the European Central Bank released data showing credit conditions have loosened. The willingness of banks to extend credit to businesses during the third quarter, despite a wobble in global markets will be excuse enough for the ECB to save extending QE for a rainier day.
Hopes of further ECB policy stimulus and higher commodity prices both played into the rally in stocks off the September lows. Both expectations are gradually being reduced but indecision over the Fed meeting next week may keep losses to a minimum.
The FTSE 100 sunk fractionally into the red on Tuesday with well-received earnings from Intercontinental Hotels and Whitbread (L:WTB) not enough to undo weakness in basic resource shares and further evidence of declining sales at Tesco (L:TSCO).
Investors have been evaluating the costs and benefits of any deals struck during trade talks between British PM David Cameron and China’s President Xi Jinping.
China is the home of a massive pool of centralised investment capital and Mr Cameron’s goal is to have as much of that as possible put to work in the UK. China-financed investment into UK infrastructure will create jobs and a better setting for UK companies to prosper. China, for its part wants a good deal on its investments but moreover will use the investments to increase the country’s power and influence in the UK.
The UK’s steel industry is potentially one of a number of big losers from closer ties with China. The risk is that the more China invests into the UK, the bigger the incentive for Mr Cameron’s government to tacitly permit anti-competitive behaviour such as subsidies for Chinese steel companies that enable them to sell below market prices, undercutting UK competition.
Intercontinental Hotels Group (L:IHG) was top riser on the FTSE, gaining as much as 5% after stronger revenues in Europe offset a slight decline in China. The group is successfully transitioning from hotel owner to manager with the sale of flagship sites in Hong Kong and London. Strong earnings and pressure to merge with another big hotel rival from activist hedge fund Marcato Capital Management keeps IHS shares interesting.
Whitbread shares rose to near the top of the UK’s benchmark after strong sales at Costa Coffee helped boost the company’s half year profits.
Tesco (L:TSCO)was a top faller after the latest Kantar data revealed a 1.7% decline in the supermarket’s sales in the past twelve weeks over the year ago period. The decline is especially worrisome for Tesco given the 1.1% rise in sales seen at rival Sainsbury’s, in which shares were almost unchanged.
US
A revenue miss from industrial titan IBM (N:IBM) set the tone for a weaker start to US stocks on Tuesday but an rise in housing starts that signalled strength in the US economy was enough to edge the Dow and S&P 500 back into the positive in the first hour of trading.
IBM announced a fall in revenue of -13.9% afterhours, missing forecasts and lowering guidance for the year. Big Blue’s core IT infrastructure business continues to sag as companies’ computing needs shift to the cloud.
Yum! Brands (N:YUM) has succumb to activist investor pressure and hived off its China business. Investors are cheering the move since it allows the company’s international business to not be tarnished by the scandal in China. In a way though, all these stock splits are kind of accounting tricks. The KFC China scandal has been worrying investors so they just spun the ‘worrying’ bit off.
FX
The US Dollar was mostly lower on Tuesday as investors continue to weigh up the prospect of a Fed rate rise this year.
Having fallen after the election result, the Canadian dollar rose slightly on Tuesday. USD/CAD has rebounded from three month lows and currently sits around the 1.30 round number.
The Japanese yen gained in spite of mostly weaker than expected economic data from Japan amidst some small safe-haven flows as equities languished. USD/JPY is back in the middle of its recent trading range just short of 120.
The euro gained after an ECB bank report suggested credit conditions eased at European banks during the third quarter. Easier credit conditions lends credence to the idea that QE as it stands is having a positive influence on the European economy and doesn’t warrant being increased.
If you take the ECB’s Noyer as having a consensus opinion amongst European rate setters, his describing the current QE program as “well calibrated” makes expanded asset purchases in October looks like a long-shot.
Commodities
The price of oil slipped again on Tuesday ahead of ADP inventories data with Brent seeing the brunt of the losses as Kuwait undercuts Saudi Arabia on the price of crude sales to Asia.
Gold rose slightly on Tuesday after closing Monday above its August 24 peak as investors waited on further data from the United states that can offer some hint over the timing of the next Fed rate rise.
Base metals copper and Aluminium were soft on Tuesday. Investors continue to digest China’s lowest GDP print in six years coupled with a very weak industrial production figure and impact that is likely to have on demand.
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