UK & Europe
An early attempt at a rally in UK stocks wilted in afternoon trading as a rally in the pound devalued the foreign earnings of multinational firms. A slide that in the FTSE 100 that began in middle of August has now erased two thirds of the gains in the index since the Bank of England eased monetary policy.
A shift out of multinationals exposed to a stronger pound and into domestically focused firms that benefit from a resilient UK economy after the EU referendum saw the FTSE 250 outperform the blue chip index.
UK manufacturing PMI data for August compiled by Markit came in at 53.3, way ahead of the 48.3 in July and the 49.0 expected. The data is another red-faced moment for the Bank of England economists who unanimously opted to pre-emptively cut interest rates in the belief the British economy would tip into recession after the vote to leave the EU.
Oil and Gas and healthcare sectors led the decliners. Mining stocks gave back early gains after data showed US construction spending stalled in August and amid a decline across prominent UK-listed multinationals. Antofagasta (LON:ANTO) and Glencore (LON:GLEN), which are sensitive to changes in Chinese commodity demand had risen after well-received China manufacturing data.
Shares of Hays dipped around 1% on Thursday, recovering early losses in excess of 4%. A pause in hiring plans in the UK and Ireland, which makes up a third of Hays’ business, in lead up to the EU referendum vote has weighed on results. Despite some signs of Brexit uncertainty, UK hiring was flat over the year and could easily pick up alongside the various economic confidence indicators in the months after the vote.
Spanish stock markets were unrattled after Prime Minister Rajoy lost a confidence vote on Wednesday. The Spanish IBEX was the best performing major stock index in Europe. Investors clearly don’t see the impasse in Madrid as a reason not to invest in Spain’s top companies.
US
US stocks gave up early gains after disappointing manufacturing data signalled weakness in the US economy, just as the Federal Reserve is gearing up to raise interest rates. Markets don’t like indications of a weakening economy alongside a hawkish Fed.
Shares of Apple (NASDAQ:AAPL) were trading higher as the debate over its tax bill in Ireland raged on. Apple CEO Tim Cook called the €13bn “total political crap” and pointed to what many believe to be the real political motivation behind the European Commission’s decision: "I think it’s clear that there is a desire to harmonise tax rates across the EU."
Shares of Salesforce dropped over 4% in early trading after the cloud computing software firm offered third quarter guidance below Wall Street estimates.
FX
The movement in the FX market on Thursday was dominated by Sterling. The British pound surged after a surprise return to expansion in August for the manufacturing industry. GBP/USD surged back above 1.33, having been below 1.31 earlier in the week.
Still manufacturing is only 10% of the British economy and has a strong export-bent which makes it particularly benefit from a devalued British pound. The UK services PMI on Monday is the big one. Brexit doom-mongers can't attribute the surge in the manufacturing PMI purely to the drop in Sterling if services see a big rebound too. A rebound in both services and manufacturing would suggest the UK economy has been resilient to any ‘uncertainty’ surrounding the EU vote. It would also make another near-term cut in UK interest rates unlikely.
It was a different story for US manufacturing which unexpectedly slumped back into recession. The ISM manufacturing PMI fell to 49.4, much lower than the 52.0 forecast and the 52.6 previously. USD/JPY dropped back from 104 on the news.
Incidentally, the triennial report from the Bank of International Settlements showed FX volumes decline for the first time 2001. FX volume fell 5.1% from the levels seen in 2013 according to the BIS. The decline matches a decline across almost every asset class as banks cut back trading departments under restrictive regulations imposed since the financial crisis.
Commodities
Weak US economic data which gives the Federal Reserve less scope to raise interest rates this month and a pullback in stock markets supported the price of gold. Gold rallied back above $1315 per oz, erasing most of Wednesday’s decline.
The bigger than expected build in US weekly oil inventories continued to weigh on the price of oil, sending Brent crude oil below $46 per barrel. Russia’s apparent disinterest in discussing an output freeze while oil prices are near $50 per barrel added to the downside. Saudi Arabia has previously said it would need big producers outside OPEC to be on board with a production freeze for it to agree. The oil declines were particularly aggressive given the dollar weakness following poor US economic data.
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