In what looks set to be a quiet European session ahead of today’s US payrolls report for June the economic backdrop continues to look troubled.
Markets in Europe have opened flat with little in the way of corporate news to drive interest, though Deutsche Bank (DE:DBKGn) in Germany is back in the headlines with its latest turnaround plan, while economic data out of Germany has also disappointed.
This morning’s German factory orders data for May has shown that economic activity in Europe’s powerhouse is continuing to struggle, with new orders also falling sharply. A much bigger than expected monthly decline of 2.2%, reinforces the likelihood that the European Central Bank could well cut rates deeper into negative territory when they next meet.
In further bad news for the German economy, Deutsche Bank (LON:0H7D) looks set to cull over 20,000 jobs as it looks to take further measures to turn the ailing business around. This would be the latest plan, and we could get more details on it over the weekend, or later this month when they post their latest numbers.
There have been many plans since the record loss posted in 2016, and this one probably won’t be the last.
The big question is whether it will be any more likely to work than all the other previous plans that have foundered since 2016. Since 2016 the bank hasn’t made any money at all, apart from earlier this year when it posted a modest gain.
It has had to fend off a waterfall of lawsuits, scandals and compliance failures, over the past few years, and is still being investigated by various authorities for a number of legacy issues.
The biggest concern about this latest plan, the details of which appears to be leaking out incrementally, firstly with the €50bn bad bank plan, is that it is two years too late. In comparison to its peers it still remains way overstaffed, particularly on a domestic level, and with rates in Germany set to go even more negative the pressure on margins is only like to increase.
Any cuts to its international business may well be long overdue, but the bank doesn’t really make that much money anywhere else, which is probably why there has been some chatter about a tie up with UBS, on the asset and wealth management side.
From the UBS (NYSE:UBS) point of view this would make very little sense, having come out the other side of its own very painful restructuring plan, and is already very strong in this area. Furthermore wealth and asset management is one area where Deutsche Bank is increasing its revenue, and adding headcount. If it really wants to turn the business around, diluting its ability to create profits wouldn’t make an awful lot of sense.
Mining stocks have slipped back a little on the back of reports that one of China’s biggest producers called for an inquiry into the recent rally in iron ore prices. This call also prompted prices to slide over 6%, from a 5 year high and has seen Rio Tinto (LON:RIO), Anglo American (LON:AAL) and Antofagasta (LON:ANTO) amongst others slip back.
Norwegian Air (LON:0FGH) is also an early gainer, despite IAG (LON:ICAG) rejecting reports that it was still interested in the airline.
The main focus for today will be the June payrolls report which has the potential to bake in even further the prospect of a rate cut by the Federal Reserve at the end of the month. Wages as well as the headline number will be the key arbiters, though in terms of expectation the markets have already got a rate cut priced in which means that a good number could prompt a sharp sell off if investors perceive that a rate cut has become less likely. Expectations are for a 165k headline number and wages to come in at 3.2%.
We should also be careful as any moves could well be more choppy than normal as US markets may well be thinner than normal as people enjoy a long weekend for US Independence Day celebrations.
Having closed at record highs on Wednesday US markets look set to open slightly softer with the S&P500 closing just shy of the big 3,000 level which is likely to be a key psychological barrier.
Dow Jones is expected to open 18 points lower at 26,948
S&P500 is expected to open 1 point lower at 2,995
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