Europe
It’s been a lacklustre day for stocks in Europe, with investors struggling to throw off the negativity of a disappointing session in Asia, where we saw Chinese markets hit their lowest levels since late 2014, despite the currency weakening further to a 21 month low.
Fears over an accelerated slowdown in the Chinese economy appear to be sending chill winds through stock markets as a whole, ahead of the release of the latest China Q3 GDP and the industrial production and retail sales data for September, which are due early tomorrow morning.
Having come off the back of a bloody nose from shareholders, about their head office relocation plans, Unilever (LON:ULVR) management announced their latest numbers for Q3, which showed that despite modest price increases of 1.4%, sales managed to hold up reasonably well, rising 3.8% across the regions. This was below consensus expectations of 4.3%, which is probably why the shares have slid back on the open, however guidance for the year was kept unchanged.
Even in Brazil where the company had a disappointing Q2 sales picked back up, after the disruptions caused by a strike by lorry drivers. The price growth numbers from Argentina were excluded due to the hyperinflationary status of that economy, which would have introduced an enormous skew on the overall numbers.
On balance the numbers show that the business is doing well, though not well enough given that the consensus around the forecasts was for 4.3% growth across the regions. Combined with the recent botched attempt to relocate the company’s HQ these numbers reinforce the uncertainty around the futures of the CEO Paul Polman and Chairman Marijn Dekkers, whose judgement has been questioned about the overall strategy of the business.
Dominos Pizza’s latest trading update showed that group sales for the 13 week period to the 30th September rose 5.9%, as the UK’s appetite for takeaways showed no signs of abating, despite the hot summer weather. The company announced plans to hire an additional 5,000 staff to cover the Christmas period. On-line sales rose 11.4% and represented 78.3% of sales during the period.
US
US markets opened lower after a marginally weaker session yesterday as investors mulled the publication of the minutes of the September Fed meeting.
Investors have been forced to sit up and consider the prospect that US policymakers were exploring the possibility of overtightening, by way of pushing up rates to the point that rather than being accommodative, they become “modestly restrictive” over concerns that inflationary pressures might get a little too hot.
At present there is little sign of inflation pressures racing away, which makes the discussion all the more puzzling, nonetheless US bond yields have moved higher as a result with the 2-Year yield hitting a new post crisis peak above 2.9%. It has raised concerns that President Trump has a point when he talks of the Fed going too fast, even if his way of expressing that concern is unconventional.
In the short term nothing in the minutes suggests that the Fed will not move again in December, however they may find it more difficult to move next year if today’s comments from St. Louis Fed President James Bullard are any guide, when he stated that under the updated Taylor Rule there is no need to raise rates further at this time.
While he won’t be able to influence the voting this year, and probably wouldn’t be able to even if he wanted given that most FOMC members favour a fourth hike this year, in 2019 he comes back on to the voting committee, so post the end of this year, his views will start to matter.
On the earnings front Bank of New York Mellon's (NYSE:BK) latest Q3 numbers followed a similar theme for US banks with EPS coming in at $1.06c a share, above expectations, however there was some disappointment on the revenues front which saw a 2% decline, while fees also came in lower by 1%.
US home builders which have been under pressure for most of this year have continued to fall as the prospect of higher rates weighs on profits, as well increasing mortgage costs.
On the data front there was nothing in the data to suggest that the US economy was slowing down as jobless claims came in at 210k, while the latest Philadelphia Fed survey for October came in at 22.2, a slight slowdown from September’s 22.9.
FX
The pound briefly hit a one week low against the US dollar despite reports that the UK government was open to extending the Brexit transition period beyond 2020. While some of the losses have been on the back of a stronger US dollar, a weaker than expected September retail sales number also weighed a little. The pound also came under pressure on reports that the UK government were concerned that EU leaders were close to pulling the plug on Brexit talks.
This seems somewhat premature given we are still 5 months away from the final exit date, however it also speaks to the frustration of EU leaders that the Prime Minister seems completely unable to come up with a consistent negotiating position.
Italian yields have also pushed higher, above 3.6% on the 10 year on reports that the EU’s Moscovici will hand a letter raising the EU Commissions concerns over the “beautiful” Italian budget to Italian finance minister Giovanni Tria.
The US dollar has remained fairly well supported in the wake of last night’s Fed minutes, helped by the increase in yield differentials.
Commodities
Brent crude prices have continued their declines from yesterday, dropping below last week’s lows, , as well as below $79 a barrel, and a three week low, after inventory data showed rising stockpiles for the second week in succession. A slowdown in demand which is pushing inventories higher is putting downward pressure on prices, along with a market that had expected prices to head towards $90 a barrel. The worries that some had at the beginning of the week, that Saudi Arabia might weaponise their position as an oil swing producer, has subsided to some extent
Despite the increase in rates gold prices have only slipped back modestly in the last day or so, nonetheless the recent run higher could come under further pressure if US yields continue to climb.
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