Europe
Today’s rebound, which appears to have been helped by a rebound in oil prices, so close from last month’s August lows, has raised the hope that maybe we may well be near a short term base, as we get some tentative buying interest in some of the most heavily sold stocks in the past few days with mining stocks in particular seeing some buying interest.
Glencore’s shares in particular are rebounding, a welcome relief after four days of declines. The company could well do with some relief given that the share price has declined every week for the last three months, bar one.
Whether we have seen a short term base remains to be seen, but the recovery seen today, despite a disappointing Caixin Manufacturing PMI number from China, is a positive sign. Whether it turns out to be anything more than a dead cat bounce remains an open question, but there is no question that the overwhelming narrative from the past few days is one of a slower global economy as we towards the end of Q3, and towards Q4 next week.
We also did some slight improvement in the latest French PMI numbers for September, notably manufacturing which has raised hopes that we could start to see a turnaround here, after several months of contraction in this underperforming sector.
This morning’s continued weakness from China in particular reinforces the narrative behind last week’s decision by the Federal Reserve to leave rates on hold, at a time when global growth could well come under further pressure into year end.
Despite this we’ve seen a solid rebound in VW shares as well as the broader automotive sector today, as CEO Martin Winterkorn gets ready to face a day of destiny with the VW board. Despite today’s recovery be under no illusions the Volkswagen (XETRA:VOWG) brand faces an uncertain future as prosecutors across the globe start to launch criminal enquiries into the company’s conduct.
The problems of Volkswagen could well cause a trickledown effect in Germany’s economy in Q4, as the company seeks to discover how many cars are affected by the “defeat device”. The German auto sector makes up a significant part of German GDP, not only from exports, but also further down the supply chain. Any indication that this scandal translates into a sharp drop in car sales in the coming months is likely to have significant implications for the German economy.
Not only is there the possibility that we could see up to 11 million cars recalled, but the company will also need to perform upgrades on its entire existing inventory to make them compliant, but it also begs the fear that they could struggle to sell the cars in question.
That’s before the company even considers the logistical nightmare of attempting to implement a recall plan for those vehicles that might be in breach of the regulations already.
Also doing well today water group United Utilities has managed to shrug off concerns about the cryptosporidium scandal by announcing that it was setting aside £25m in costs and compensation, hopefully drawing a line under an episode that could have had more serious consequences had it not been caught earlier.
The airline sector also received a boost as Morgan Stanley (NYSE:MS) upgraded its price targets for Easyjet and International Consolidated Airlines.
US
While US markets managed to open a little higher today, progress has been sluggish despite a positive cue from European markets with sentiment continuing to be weighed down by weak cues from the auto and biotech sectors.
The manufacturing part of the US economy continues to show worrying signs of weakness with the Richmond Fed manufacturing survey for September yesterday slipping into contraction, following in the footsteps of the Philadelphia and the Empire surveys which were also disappointing.
The latest Markit US manufacturing PMI for September came in unchanged at 53 on its headline number but the internals were worrying with its weakest employment reading since January 2014.
FX
The pound has continued to come under pressure after yesterday’s disappointing economic data appeared to suggest that tax receipts were starting to fall back, while the latest CBI data from the manufacturing sector suggested stagnation in growth for September. If this weakness were to become sustained it could delay the prospect of a rise in interest rates, and this is weighing on the pound.
The Australian dollar has also slid back; weighed down by this morning’s weak Chinese data, as last week’s politically inspired rebound on the back of a change in PM, soon gave way to the economic reality that Chinese weakness is likely to see further easing come from the RBA.
The euro has been one of the better performers against the US dollar today when contrary to expectations ECB member Ewald Nowotny said he was wary of making more promises of additional stimulus, while ECB President Mario Draghi adopted a similar line by saying that he was unsure if the current weakness was temporary, and indicated that he expected inflation to begin ticking higher by the end of the year, suggesting that the central bank wasn’t in any hurry to take extra measures.
Commodities
Crude oil prices continue to be choppy but three successive up days for Brent would appear to suggest that we could be near a short term base, though any rebound is likely to be tempered by a continued surplus of supply relative to demand. Weekly inventories showed a decline of 1.9m barrels outside expectations of a decline of 1m barrels.
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