UK and Europe
Global growth fears brought on by data showing a sharp slide in US service sector growth tipped European stock markets into a daily loss. Shares had spent most of the day yesterday slightly in the positive with German economic data, which fell short of expectations, offset by M&A talk from Bayer (DE:BAYGN) and Monsanto (NYSE:MON).
Bayer has said it is willing to up its bid for US seed giant Monsanto to $56bn or $127.5bn per share in what it has described as advanced talks over the merger. There is clearly dialogue taking place, but it’s unclear if this new offer will be acceptable. Monsanto shareholders will be aware that the multiple paid for rival Syngenta (SIX:SYNN) by ChemChina was a lot higher, equivalent to around $139 per share.
Gains amongst homebuilder shares led by Berkeley Group (LON:BKGH) after well-received earnings were more than offset by a decline amongst financial and energy company shares, leaving the FTSE 100 down by over half-a-percent. Standard Chartered (LON:STAN) was the biggest faller on the main benchmark.
Shares of Berkeley Group rose over 4% after the homebuilder reiterated its guidance of £2bn pre-tax profit over the next three years. It’s a last hurrah for Berkeley on the FTSE 100 before it is demoted in the quarterly reshuffle. The company did, however raise its concerns over government housing policy in the capital, suggesting that higher taxes and conflicting local and national policies are affecting supply. With the highest exposure to London amongst top homebuilders, Berkeley shares have taken the most punishment. This is because the capital’s housing market, with stricter rules on second homes and foreign buyers could suffer the most from Britain’s exit from the European Union.
US
US stocks dropped in early trading following the disappoint service sector data. The data, in combination with weak manufacturing data and a slowdown in jobs growth would suggest the US economy is ill-equipped for a rate hike in September.
Until Fed speakers confirm that they are interpreting the US economic slowdown in August as a reason to tread carefully in tightening monetary policy, US stocks could come under pressure.
Shares of Monsanto gained on the latest bid from Bayer but continue to trade well under the offer price as investors show scepticism the deal can get done.
FX
The US dollar got crushed after data showed the US service industries expanded at the weakest pace in six years. GBP/USD and EUR/USD shot through 1.34 and 1.12 respectively in the minutes following the data release. The US August ISM non-manufacturing index fell to 51.4 when expectations were for a drop to 55 from 55.5 in July. Looking under the hood of the services data there aren’t any silver linings. Non-factory orders declined the most since January 2008.
The ISM’s Nieves said the data indicates the US is at 1% GDP growth in the third quarter. In the context of manufacturing contraction and a huge service sector slowdown it would be a policy error for the Fed to hike interest rates in September.
The British pound firmed against the dollar and the euro on Tuesday. Traders bought the dip after a pullback from the 6-week highs following the run of better than expected data. With the improvement in the data, institutions are beginning to backtrack on previously negative views on the UK economy. A number of investment banks no longer believe the UK will see a technical recession this year and rating agency Fitch has said its concerns on the UK current account may prove unfounded.
Commodities
Oil prices continued to slide on Tuesday after the temporary spike on Monday proved unjustified by the limited agreement to cooperate between Russian and Saudi oil ministries. It would appear the 5% price spike on Monday was used as an opportunity for those who believe there will be no agreement on freezing output at this month’s unofficial OPEC meeting to sell oil futures.
Gold and silver prices leaped over 1% off the back of the US service sector data which maked an imminent rise in US interest rates unlikely.
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