Europe
Thursday’s positive carry through continued for European markets on Friday, helped by a positive US employment report which showed 255k new jobs added in July, on top of the 292k added in June. Friday’s gains have been pretty much broad based with the FTSE250 breaking through 17,400 and its pre Brexit peaks and posting its best levels this year, while the FTSE100 hit 6,800 for the first time since July last year.
Hikma Pharmaceuticals (LON:HIK) was the best performer after falling sharply Thursday in the wake of its latest trading update.
Also having a good day were house builders after FTSE250 listed Bellway Homes (LON:BWY) said it expected to see a 27% rise in sales when it reports its full year results in October. Persimmon (LON:PSN), Berkeley Group (LON:BKGH) and Barratt Developments (LON:BDEV) are all up on the day. The new, lower-for-longer interest rate environment is also likely to be helping, though that latest Halifax house price data has showed a little bit of a slowdown.
On the downside Royal Bank of Scotland (LON:RBS) is back in the news again, and for all the wrong reasons as the bailed out bank racks up yet another loss, of £2.04bn, pushing total losses well above the £50bn market since 2008.
Once again legacy issues, PPI provisions and restructuring costs have been the main culprits.
On the plus side RBS management has ditched plans to separate the Williams and Glyns branch network from the rest of the bank, a sensible decision given that it was costing the bank about £50m a month. Putting all of these external factors to one side the banks underlying core business did manage to post a £1.1bn operating profit, but that still remains below the levels seen in Q1.
It is becoming clear that lower interest rate margins are hurting bank profitability, though it did manage to improve that slightly from a year ago to 2.18%, from 2.14%. It still remains well below Lloyds (LON:LLOY) though who have a net interest margin of 2.74%.
Gold mining stocks have also slid back after gold prices slipped in the wake of this afternoon’s US jobs report.
US
US markets opened higher Friday in the wake of the latest payrolls report for July which showed jobs gains of 255k well in excess of expectations of 175k, while the June numbers were revised up to 292k. This also suggests that the initial disappointing Q2 GDP number that had so many people concerned last week could well get revised up, which in turn has shifted the odds upwards for a move on rates sometime later this year.
It appears that investors are now welcoming good economic news as an excuse to drive stock markets higher, with the S&P500 hitting another record high, however a strengthening US dollar may well put a lid on that if it continues.
Stocks in focus include social media giant LinkedIn (NYSE:LNKD) which posted a $119.3m loss in its second quarter in results after the bell Thursday night.
On the plus side, revenues showed an increase to $933m on the back of an improvement in its user base. While these numbers aren’t exactly a validation of Microsoft’s decision to pay $26.2bn for the company in June the fact that revenues and users are rising is encouraging.
FX
After a disappointing day Thursday the pound did initially look as if it was going to recover some of its poise despite further dovish noises from both Bank of England governor Mark Carney and another MPC member Ben Broadbent. Thursday’s actions by the central bank continue to provoke debate with policymakers pledging to do more if necessary while others claim that the bank is acting too hastily.
A decent US payrolls report undermined all of that stabilisation in the pound, pushing the US dollar up across the board, as investors once again chose to focus on the positives of an improving US economy. The main imponderable continues to surround wage growth which remained at 2.6% on an annualised basis, but speculation is now shifting towards this month’s Jackson Hole symposium where we have seen in the past the US Federal Reserve give a steer on its monetary policy path in the months ahead.
The Canadian dollar has been hit the hardest after its latest employment report for July saw a loss of 31.2k, missing expectations of a 10k gain. The unemployment rate also edged higher at 6.9%.
Commodities
A lunge higher in the US dollar following the strong US jobs report dominated dollar-based commodity contracts on Friday, with oil, gold, silver and copper all taking a hit.
The strong pace of hiring in June and July increases the odds of a September rate-hike from the US Federal Reserve, a bearish proposition for non-interest bearing assets like gold and silver. The positive equity market reaction to signs that the health of the US economy has improved in the third quarter reduced the need for a safe-haven, adding to the pressure on gold. Friday’s decline has seen gold put in a near-term top below its previous peak in July, suggesting a larger pullback towards $1300 per oz could be on the cards.
The decline on Friday capped a two-day rebound in oil prices, which earlier in the week saw Brent and WTI crude contracts fall into a technical bear market with a 20% decline from the peak in June. Oil prices were already lower before the economic data as traders questioned the rebound which had come in spite of a surprise build in DOE US inventories and had the look of short-covering near strong technical support at $40 per barrel in WTI. The price decline is not all-supply related though, a recent dip in Chinese imports, coupled with weak US second-quarter GDP data weakens the demand outlook.
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