Europe
European equity markets appear to be trying to build a bit of a foundation after the declines of the past few weeks, with good gains for German and French markets with the FTSEMib leading the move higher, after the Italian government met the EU deadline for agreeing their 2019 draft budget.
This reaction seems somewhat counterintuitive given that the EU have indicated that they will probably push back on the spending proposals, of 2.4%, if comments by EU Commission President Jean Claude Juncker earlier this morning are any guide.
It also means that despite their differences the two sides of the Italian coalition have managed to hold together to the point that the EU will have to think long and hard as to how they respond, in order to avoid a confrontation that could play into the Italian government’s hands. It is a lesson President Juncker would do well to learn given his comments this morning that the rest of the EU would rise up if the commission agreed the new budget.
The FTSE 100 has been hindered to some extent by a decent day for sterling after UK wages posted their biggest gain since August 2009.
It’s been a mixed day for UK food retail today as Tesco (LON:TSCO) and Sainsbury (LON:SBRY) shares came under pressure today after the latest Kantar survey showed that the bigger supermarkets continued to have their market share chipped away at by the young upstarts from Lidl and Aldi. In the three months to the 7th October Aldi saw a sales rise of 15% helped by the opening of new stores, while Lidl also a rise in sales of 10%.
In terms of market share Tesco saw a fall from 28% to 27.4%, while Sainsbury’s market share fell to 15.4% from 15.8%. Ocado (LON:OCDO) also fared well with an increase in sales of 7.5% helping it to the top of the FTSE 100.
It’s not been a great few months for British American Tobacco (LON:BATS) shares, down over 30% this year alone, despite the fact it has in the past been a safe haven staple for yield starved investors. Unfortunately for its shareholders, the regulatory environment for tobacco products has become extremely onerous over the last few years, while smoking rates have been in decline for quite some time which has hurt revenues.
Against that backdrop the company has warned that revenues from its smoking alternative products are likely to miss expectations for this year, due to a slowdown in Japan for vaping products.
Despite this slowdown, revenue from vaping is still expected to rise by more than 10%, however the company has warned that adverse currency shifts will hurt its full year numbers by about 7%, as management look to justify falling short of expectations. This seems a rather high number given how stable currencies have been the past few months, unless the FX hit has come from its exposure to emerging market currencies.
Alton Towers and Legoland owner Merlin Entertainments (LON:MERL) also updated the markets today with its numbers over the summer trading period. The long hot summer should have been conducive to some very good numbers, as the company put to one side the negative effects of last year’s terror attacks.
Overall revenue over the summer period to the beginning of October saw a rise of 4.7%, driven primarily by new business growth, and the company said that it expected results this year to meet expectations.
This comes across as rather disappointing given the good weather this summer, and the number of people who probably stayed at home for their annual break this year. It would appear that markets agree, with the shares sharply lower. While the company was keen to stress that the cost environment was a challenging one, due to increases in the living wage, the fact that the company has merely met expectations given the great summer weather, is rather disappointing.
US
US markets have opened higher, helped by better than expected numbers from Wall Street giants Morgan Stanley (NYSE:MS) and Goldman Sachs.
Both banks posted Q3 numbers that beat expectations, beating on the top and bottom line as profits and total revenues managed to beat expectations.
Morgan Stanley posted Q3 profits of $1.17c a share, well above estimates of $1.03c, while Goldman Sachs (NYSE:GS) also blew past expectations coming in at $6.28c a share, $0.90c above consensus. There was some weak spots on the fixed income side, however by and large the numbers painted a fairly positive outlook.
These sorts of numbers should be expected given the higher interest rate environment and higher fees from M&A, however we also need to see similar sorts of activity in areas that reflect consumer discretionary spending, which could be impacted by higher rates.
On the retail front things are a little more concerning, given this week’s news from Sears, while this morning’s announcement from Wal-Mart (NYSE:WMT) could also be a cause for concern. The company downgraded its earnings outlook for 2019 citing the impact of higher costs in absorbing its acquisition of India’s Flipkart for $16bn. It also warned that sales growth in its e-commerce division would be 5% lower in 2019 than this year, with growth of 35% expected, below this years expected 40% rise.
After the bell the tech sector could come under further pressure if the latest Q3 numbers from Netflix (NASDAQ:NFLX) disappoint in the same they did in their Q2 update when they fell short of additional new subscribers by around 1m. Management blamed being overly optimistic in their forward guidance, and adjusted their outlook accordingly.
Despite this there does remain some concern that the pace of subscriber growth could well slow down due to other factors including much more choice when it comes to alternative platforms for streaming content.
Amazon (NASDAQ:AMZN) Prime is ramping up its offering, as are Apple (NASDAQ:AAPL), while Disney could well offer a streaming service next year. Given that Netflix are set to spend $13bn alone this year on new content, investors will be looking to see in what other areas Netflix is able to monetise its content offering, in addition to its existing subscriber model.
FX
The pound has had a decent day today after wage growth, excluding bonuses, came in at its highest level since January 2009, at 3.1%. Unlike 2009 the gap with the CPI number was wider to the tune of 0.4% real wages growth, while unemployment rather than falling, was on the rise towards peaks above 8%. This is another piece of good news for an economy that continues to be overshadowed by concerns over the current state of Brexit negotiations. If tomorrow’s inflation numbers reverse the sudden spike that we saw in the August numbers from 2.4% to 2.7% then that will be double reason to celebrate the return to the types of real wages growth that we saw throughout 2015 and 2016.
The euro has underperformed a touch, after the latest German ZEW economic sentiment survey plunged in October matching its worst reading since August 2012 over concerns that a messy Brexit, as well as concerns about an escalating trade war between the US and China have fed into an overwhelming sense of pessimism about the outlook. While a number of politicians in Europe would have you believe that a bad Brexit would have significant consequences for the UK, the fallout in Europe would be no less negative, particularly since EU financial markets are so closely intertwined with London’s capital markets.
Commodities
Brent crude prices have continued to look a little soggy as concerns about falling demand and rising inventory levels, outweigh worries that the situation between the US and Saudi Arabia might deteriorate to such an extent that prices might be forced higher. Pressure appears to be rising on the Saudi’s to admit that some rogue elements within their security forces may have been responsible for the demise of Khashoggi, however for this to fly they would need to offer up a scapegoat of some sort. With the visit of Secretary of State Mike Pompeo today there is a sense that the US needs a reason to keep the Saudi’s on-side particularly given both sides distrust of Iran.
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