European markets have picked up where they left off yesterday opening higher after yesterday’s surprise decision by the Bank of England to over deliver on its latest monetary policy decision.
It would appear that while the MPC has set aside concerns about the effect of lower rates on UK banks’ balance sheets investors appear more reluctant to do so though the underperformance of Royal Bank of Scotland (LON:RBS) this morning has more to do with the fact that the bailed out UK bank has once again posted a big loss, this time of £2.04bn for the first half of this year, pushing the total losses incurred since 2008 well above the £50bn mark.
Once again it appears that legacy issues are the anchor holding the bank back as legal and PPI costs hammered the top line, with another £450m set aside for PPI provisions.
The bank also reported a further £630m of restructuring costs and 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 £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.
The share price continues to struggle, down nearly 40% this year alone, though it is above its post Brexit lows of 148.5p, but at 183p remains well below the price the UK government sold some of its stake at 330p.
House builders are making some early gains this morning after FTSE250 listed Bellway (LON:BWY) Homes said it expected to see a 27% rise in sales when it reports its full year results in October. Persimmon (LON:PSN), Berkeley Group and Barratt Developments (LON:BDEV) are all up on the day.
US markets look set to follow European markets higher today as investors look towards this afternoons US jobs report for July.
Expectations are for 175k new jobs to be added for July more or less in the middle of the numbers seen from May and June which painted a rather disjointed picture of the US labour market, with 11k new jobs seen in May and 287k in June.
While the unemployment rate is expected to fall to 4.8% it must be remembered that the participation rate is also at a multi-year low of 62.7, which helps push that headline rate down. It is becoming much more apparent that the better gauge of the US labour market is the U6 rate which is a much higher 9.6%.
US policymakers have continued to give the impression that they want to raise rates this year, and while a decent number today could keep alive that speculation, last week’s Q2 GDP number was rather worrying given that it fell short by quite some distance, raising concerns about the overall strength of the US economy
There is also the problem that the growing divergence being seen in terms of monetary policy between the US and everyone else, that another good number today could well see the pressure increase on the Fed to come off the fence on whether rates will rise this year or not.
It is becoming increasingly clear that the markets are no longer listening to what Fed policymakers are saying about the prospect of a rate rise this year, despite Chicago Fed President Charles Evans comments earlier this week that he still expected to see a rise by the end of the year.
The odds of a move in December have declined from 45% a week ago to 37% now.
The Dow Jones is expected to open 34 points higher at 18,386
The S&P500 is expected to open 4 points higher at 2,168.25
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