Europe
In stark contrast to the slow moves higher in the last few days, today we’ve seen a bit of an air pocket open up as European markets dropped sharply today with the DAX and FTSE100 both hitting one week lows.
There hasn’t been one single catalyst rather there was a combination of factors, starting with further developments in the constitutional crisis unfolding in Spain, with the prospect that the current standoff could move towards its denouement after Catalan President Puigdemont reiterated his pledge to declare independence unless the Spanish government pledged to talks. This appears to have prompted reports that the Madrid government will trigger article 155 at a cabinet meeting this weekend unless the Catalan government backs down.
Investors also didn’t react to well to a warning from the governor of the People’s Bank of China that warned of a significant sell-off due to too much leverage, in both corporate and household debt, while some disappointing earnings announcements prompted bouts of profit taking in some key sectors, with consumer goods and consumer services stocks getting a thumping.
Having fended off Kraft Heinz's (NASDAQ:KHC) attentions earlier this year prompted Unilever (LON:ULVR) management to accelerate its restructuring process and slim-line the business. The performance in Q2 appeared to vindicate this approach, however this morning’s Q3 numbers were disappointing to say the least. While underlying revenues rose 2.6% they fell well short of guidance and were below the numbers in Q2. The company blamed the hurricanes in the US for the drop off in sales with ice cream a particular weak spot. The company did keep its full year guidance unchanged but that hasn’t been enough to stop its shares falling sharply, over concerns about weak consumer spending, a factor that was blamed for weak revenues in the latest updates from Nestle and Reckitt Benckiser.
Advertising giant WPP (LON:WPP) is also underperforming after sector peer Publicis in France posted some disappointing numbers in its latest Q3 update. Revenues came in below expectations raising concerns of a slowdown in the sector.
US
Despite a record finish last night US markets opened lower as markets in Europe have pulled back on profit taking and disappointment over some company earnings misses.
On the earnings front Verizon (NYSE:VZ) reported numbers in line with expectations, while Apple’s share price (NASDAQ:AAPL) opened lower on reports that the company has cut iPhone 8 production due to a sharp drop in orders. It would appear that consumers are opting for the iPhone 7 given the small differences between the two handsets. If this translates into lower orders for the iPhone X then there maybe concerns about whether the company will hit its revenue target for the current quarter.
Higher credit card spending also saw American Express (NYSE:AXP) post better than expected numbers for Q3
Weekly jobless claims came in much better than expected, dropping to 222k their lowest level since 1973, and well below expectations of 240k.
All eyes are also expected to be on today’s meeting with current Fed chief Janet Yellen and US President Trump with some Republicans calling for her to be allowed to leave.
FX
A little bit of risk off today as the Swiss franc and Japanese yen have outperformed on a day when equity investors have decided to take some profit after posting record highs in the DAX, the US and multi-year highs on the Nikkei 225, which looks set to open sharply lower when Asia opens on Friday morning.
The New Zealand dollar has slid sharply after it was announced that the new government would be a coalition led by the Labour party who favour a more interventionist approach to governance, along the lines of the UK Labour Party. Could this be an arbiter of things to come here in the UK if the latest Brexit talks precipitate in the collapse of the incumbent Conservative coalition government here?
After three consecutive months of gains UK retail sales fell 0.8% in September, a much bigger than expected drop, though by no means the worst fall we’ve seen this year, having seen a fall of 1.8% in March.
The numbers are still a little disappointing and do point to slowing consumer demand as we head towards the end of the year, and this does seem to be a trend that is being reflected in terms of lower revenue growth in companies like Unilever, Reckitt Benckiser (LON:RB) and Nestle (LON:NESNCHF). It would appear that weaker consumer spending is not just a trend here in the UK but something that is being reflected in company profits across Europe.
Commodities
While OPEC is expected to extend its supply caps well into 2018 and the tension in Northern Iraq shows no signs of ratcheting down, crude oil prices have nonetheless slipped back after several days of gains as some element of profit taking starts to kick in. Some of that may well be down to the prospect that as prices move higher the likelihood of new US shale supply coming on line is likely to increase.
Overall while the main drivers point to higher oil prices, the prospect of fresh supply is capping gains today and pulling prices off their recent peaks.
There was much bullishness earlier this week about palladium prices hitting their highest levels since 2001. Demand for the metal has been rising due to its use in catalytic converters and its role in cutting emissions in petrol powered motor vehicles.
Prices have accelerated as people move away from diesel cars in the wake of recent emissions scandals and this has helped drive the current move, however platinum can also be used and now that palladium prices have moved above platinum prices, palladium demand could wane. This is exactly what we appear to be seeing in a classic bull trap, and warned about earlier this week. The price of palladium has dropped 5% since Monday’s peaks and could fall further in the coming days, as long positions continue to get unwound.
Copper prices have also slid back for the third day in succession after peaking at a three year high on Monday, despite Chinese economic data coming in slightly better than expected. A classic case of buying the expectation and selling the news.
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