Europe
European markets have enjoyed a broadly positive day today, helped by a weaker pound and euro sending the German DAX to new record highs, while the FTSE100 is once again closing in on the 7,550 level which it has continued to flirt with over the last five days. The FTSE 250 also looks on course to make a record close, while Spanish markets have underperformed ahead of tomorrow’s Catalan deadline, as speculation grows that the Spanish government could trigger article 155 before the end of the week.
It’s been a positive day for most sectors today with education publisher Pearson (LON:PSON) one of the standout performers, for the second day in a row. The share price has risen after a couple of upward price revisions from Morgan Stanley (NYSE:MS) and JP Morgan Chase (NYSE:JPM) building on yesterday’s gains which saw the company announce a better than expected outlook for the rest of the fiscal year.
The basic resource sector has slid back no doubt as a result of some negative headlines as well as profit taking ahead of tomorrow’s China Q3 GDP numbers.
Rio Tinto (LON:RIO) has underperformed on the back of reports that it had been hit with a fine of £27.4m by the FCA for failings in its reporting processes around a mining asset in Mozambique. This may not be the end of the matter either with the US SEC alleging that the episode was tantamount to corporate fraud, and filing charges against the company to that end.
Sector peer BHP (LON:BLT) has also struggled to make gains after it reported a drop in quarterly iron ore output, though the company insisted it remained on target to meet its full year production estimates.
Merlin Entertainments (LON:MERL) has remained under pressure, sliding further in the wake of yesterday’s disappointing earnings update, falling to fresh 18 month lows.
Earlier this year consumer goods giant Reckitt Benckiser (LON:RB) warned on profits and this morning’s second warning is likely to have shareholders reaching for the Nurofen as management warned on another soft quarter in its latest Q3 update. A cyberattack in the summer caused supply issues for their Nurofen pain killer product in Russia and in conjunction with restructuring costs, the company has revised down its revenue forecast as the company looks to complete the process of splitting itself out into two divisions in the aftermath of its Mead Johnson acquisition.
US
In what is becoming an almost daily occurrence US markets have once again opened at record highs, with the Dow above 23,000 and the S&P500 getting ever closer to the 2,600 level, as another day of positive earnings helps to propel markets further up the “wall of worry”.
This is precisely what this rally has been like with a lot of investors obsessing about the prospect of a correction to the point that the more it is talked about the more of an issue it becomes.
Looking back at previous instances of stretched valuations one of the common denominators on a historical basis has been a feeling of euphoria, a sentiment which is largely absent at this point in time. That’s not to say investors are complacent, some undoubtedly are but when we’ve had substantial corrections on previous occasions the rotation of capital has always had an alternative destination to go to in terms of government bonds.
These are nowhere near as attractive now, interest rates, and bond yields were much higher in 2007, 1997 and 1987, while today they are anchored to the floor, which limits investor options in terms of returns.
IBM (NYSE:IBM) is expected to be in focus after the company reported another decline in revenues for Q3 but the number was slightly better than expected, coming in at $19.5bn, above an expected $18.6bn.
After the bell eBay and American Express (NYSE:AXP) are set to release their latest numbers with American Express hoping to improve on its Q2 performance when it saw profits decline 33% as a result of paying out on customer incentive programs in order to maintain its market share.
eBay will also be hoping its fortunes pick up after seeing its profits fall 94% in Q2 as it ramped up marketing spend in an effort to keep up with Amazon (NASDAQ:AMZN) Marketplace.
FX
The US dollar has continued to make gains as speculation about the identity of the next Fed chair continues to attract speculation, with the odds shifting constantly on the various front runners.
The latest speculation is that the current incumbent, Janet Yellen, might be persuaded to stay on, though why she would want to is anyone’s guess. Her legacy as it is will have been to start the rate hiking cycle as well as firing the starting gun on balance sheet reduction. The wise course of action would be to leave while things are looking good and leave before the next storm hits.
The pound has managed to hold up fairly well despite wages data for August coming in at 2.1%, slightly down from a revised July figure of 2.2%, thus increasing the income squeeze on the UK consumer.
On the plus side it’s encouraging that the labour market has continued to add jobs with another 94k added in the three months to August, and while there is concern about rising inflation, this particular problem wasn’t helped by last year’s Bank of England policy response.
Ultimately while there is a sense of prevailing gloom about the state of the UK economy, the employment participation rate still remains at a record high, and while the prospect of a rate rise may be difficult to justify given how much wages are lagging, it is important to remember that the Bank of England’s mandate is to target inflation, and not wages, which means that despite yesterday’s doubts about a rate hike we still remain on course for a rise before year end, with markets assigning an 83.3% probability of a move in November.
Commodities
Metals prices have continued their slightly softer tone of the last day or so with both copper prices and palladium prices continuing to remain susceptible to profit taking after this week’s multiyear peaks.
Crude oil prices have continued to edge higher buoyed by a slide in US inventories of 7.1m barrels, according to API estimates, as well as continued tensions in Northern Iraq as Kurdish and Iraqi forces continue to face off against each other. Uncertainty over possible Iranian sanctions is also helping underpin prices.
Disclaimer: CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.