Europe
There was cautious trading today as the three E’s: Earnings, Ebola and Europe took their toll thanks to disappointing German industrial production data and an Ebola case in Spain which put markets on the back foot ahead of the beginning of US third-quarter earnings season.
German industrial production saw its biggest monthly drop since 2009 declining -4.0% against expectations of a lesser decline of -1.5%.
The German DAX had been benefiting from positive follow-through from US jobs data last Friday but turned lower by the end of yesterday’s session and continued declines today after both factory orders and industrial production slipped.
Germany’s Economy Ministry said industrial production in August was exacerbated by holiday effects but months of declining business sentiment and weakening purchasing manager surveys suggest there is a stronger trend at hand.
Europe’s economy has been able to splutter along thanks to an unprecedented period of monetary easing both in the US and in Europe but before tightening even begins in the US, there are now some strong signals Europe is heading back into recession.
UK markets were the best of a bad bunch thanks to the confirmation by Rio Tinto (LONDON:RIO) of a rejected bid from smaller rival Glencore Xstrata Plc (LONDON:GLEN) in August; the companies have had no further contact since.
Glencore Xstrata Plc (LONDON:GLEN) clearly used the drop in iron ore prices as an opportunity to pounce on Rio Tinto (LONDON:RIO) and create the world’s largest mining company. The mining sector as a whole including Anglo American (LONDON:AAL) and Antofagasta (LONDON:ANTO) took a boost from the prospect of further deals in the sector.
Glencore have since come out and said they are no longer ‘actively’ seeking a deal, but one suspects they are probably still inactively thinking about it. Rio Tinto shares are still well up on the day and another offer may be just around the corner.
The prospect of problems stemming from the Ebola virus just got real for Europe on the news of a Spanish nurse contracting the disease. Much like in Texas, disease control procedures by authorities seem non-existent. With the patient having apparently taken public exams, there now seems to be a good chance the virus will spread.
Easyjet (LONDON:EZJ), International Airlines Group (LONDON:ICAG) as well as most of the travel and leisure sector were knocked back by the news of Ebola inside Europe over the prospect of closed flights. Logically a ban on flights from the infected countries must be imminent with perhaps some facility to let Europeans inside the countries back into Europe but under quarantine; sadly logic and health authorities don’t always sit at the same table.
The longer term picture for airlines may be shaped more by the trend in Crude Oil prices, their biggest input cost but a flight ban thanks to Ebola may mean more declines on the way.
US
With Fed minutes and earnings from Alcoa tomorrow to kick off Q3 earnings season, US markets were largely tracking the bad news from Europe with fears that international trade with US corporations may have been impacted by the weakness.
The bout of strength in the dollar has some wondering which companies can benefit with multinationals possibly set to lose out thanks to lower foreign earnings while more domestically-orientated companies could benefit from lower input costs.
As well as earnings trepidation, US markets are going through a ‘Taper Tantrum 2.0’ over the expected end of the Federal Reserve’s quantitative easing program this month.
The end of QE has been signalled a long way off but it has started to cause some volatility in markets with some investors losing their nerve and selling out while others use the resulting sell-offs as buying opportunities confident about the broader outlook.
Amazon.com Inc (NASDAQ:AMZN) was trading down with authorities investigating its tax deal with Luxembourg as well as bid rumours surfacing around online fashion retailer Asos (LONDON:ASOS).
FX
The US dollar was mostly stronger today but was down against the Australian dollar and Japanese yen in the unusual circumstance that the central bank meetings resulted in the respective currencies strengthening.
USD/JPY at 110 had prompted some Japanese officials to murmur about the speed of recent declines and that went into the next gear when last night governor Kuroda talked about both the negative and positive impact of a weak yen. The BOJ governor’s yen-doublespeak has undone some speculation of an imminent new round of central bank stimulus which could have devalued the yen further.
AUD/USD has bounced off its 2014 lows around 0.87 and looks like making a double bottom reversal pattern should prices close through 0.8830 over the prospect the RBA will remain in ‘pause mode’ over interest rates for some time to come despite describing the currency as still historically overvalued.
Commodities
Gold bugs are stepping in just ahead of the 2013 lows at $1180 per oz, the move is so far a dead-cat bounce but the importance of the level, having now been tested three times in a year and a half could extend gains well beyond $1200.
WTI Crude Oil extended recent declines below the $90 round number, while Brent is not far behind at $91 per barrel. The declines in oil are starting to take the form of the 2008 move that saw prices collapse from above $140 to below $40.
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