Summary
European stock markets are getting a lift from signs of a dramatic breakthrough in the trade conflict and a barrage of mostly promising earnings.
Auto shares ahead
Largely robust earnings reports eclipse persistent uncertainty in Europe’s auto sector. Even Daimler shares join a rally of heavyweight DAX peers VW (LON:0P6N) and BMW(MI:BMW) despite a 30% profit collapse. That was partly due to pre-existing problems like softening Mercedes-Benz pricing and zero-emissions costs. But increasingly combative U.S.-China trade relations and multiple mutual tariffs also fractured Daimler’s supply chains and pressured margins.
Together with Fiat (LON:0QXR), Ford (NYSE:F) and GM (NYSE:GM) earnings showing industry conditions are deteriorating, Daimler’s report underscores the urgency of last night’s slight progress towards resolution.
How “major” a concession?
The chances that EC President Jean-Claude Juncker can deliver U.S. President Donald Trump’s “major concession” may be no better than 50/50 though, given a history of walk-backs by the U.S. administration.
Strictly speaking the most solid pledges unveiled last night excluded tariffs on European car imports Washington threatened months ago. As ever, regardless of how ineffective negotiations with Trump’s White House appear to be, the trick is to keep talking. That is how NAFTA talks have limped on into a new Mexican government with better chances of a deal than the former. Markets will be sensitised to any hint that the outbreak of EU-U.S. civility was only skin-deep.
Widening investor displeasure about dominant U.S. industrial and web groups prevents U.S. indices from fully participating in trade cheer. Futures contracts on the technology laden Nasdaq index lead the market from behind with a loss of about 1% after Facebook’s revenue and user-growth let-down. The social media firm reported earnings, sales and monthly active users that were just a little short of blockbuster levels shown in numerous quarters of the last few years. But short enough.
Cash burn
The precise strain of investor animus afflicting Facebook is taking root. The group pointed to intensifying spending to meet new security, regulatory, marketing and content demands as reasons for single-digit revenue falls seen in Q3 and Q4. Investors mostly heard that Cambridge Analytica blowback had duly arrived. A 24% sell-off ($150bn in market value) suggests sellers think consequences will echo far longer than two quarters.
Value incineration will almost certainly carry into Thursday’s cash trading and could challenge weak buying rationale around the web sector and beyond.
The euro unleashed
The euro will move into sharper focus later during what’s likely to be one of the most ambivalent European Central Bank policy communications for some time. The single currency is already underpinned at early $1.17s by trade promise from mid $1.16s just a week ago. Customary ECB conference volatility could easily take EUR/USD back to $1.185 summer peaks. But ECB events will almost certainly be anti-climactic compared to the global backdrop. ECB President Mario Draghi must address Europe’s still healthy economic pace and yet also affirm that the horizon before tightening starts is no nearer than the one stated last time. Unless he gives up and unreservedly accentuates the negatives (unlikely), the euro can only rise. And it tends to do this sharply when Draghi speaks.
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