Weakness in mainland Chinese stocks after both the official and Caixin PMIs showed manufacturing remains subdued. The official Purchasing Managers’ Index (PMI), which tracks activity in the crucial factories and workshops sector, fell to 49.6 and was the lowest print since August 2012. The market appears to be taking this as a signal that further easing is now on the cards from Beijing. To be fair, this has been a recurring theme in market movements post crisis.
Certainly it would appear that the Reserve Bank of Australia is unconcerned about the Chinese demise as it left the cash rate at 2% for the 7th consecutive month. The Aussie dollar is higher despite the bank leaving the door open for a cut next year.
Eurozone PMI data was fairly good and with manufacturing gaining some pace in November. Italy seems to be undergoing something of a mini-boom over the past number of months as its’ PMI hit a 4 month high. Italian unemployment also fell to its lowest since 2012 with a rate of 11.5% observed.
The need for circumspection in the face of these data is that while Spain posted a 3 month high for its manufacturing in November, it had slumped to a 21 month low in October. Ireland took up the mantel of a lower than previous number coming in at 53.3 for the month – this was a 21 month low.
Germany appears to be recovering it’s ‘core’ credibility as unemployment levels were better than expected. Exports there also saw their strongest increase since February 2014. The weak euro is finally starting to bear fruit.
Ironically, the single currency has recovered the $1.06 level on the back of all this.
Equity indices, following yesterday’s upside are slightly softer this morning. Despite an overtly bullish sentiment out there, many are willing to pre-commit ahead of the ECB and of course the Non-Farm Payrolls later this week.
The UK bank stress tests are the key highlight for the FTSE this morning. Royal Bank of Scotland and Standard Chartered were the weakest of Britain's seven largest lenders as it was found that under the assumed conditions that they had insufficient capital. Given the latter’s exposure to emerging markets, it was likely subjected to greater scrutiny.
All 7 banks were told they would have to set aside capital to protect their UK exposures as part of a new measure the bank is phasing in called a 'countercyclical capital buffer'.
The financial sector is outperforming in any case this morning.
Standard Chartered +2.24%
RBS + 2.25%
While we’ve had no confirmation so far, investors should be wary that we may well see some cuts to some bank dividend pay-outs in the aftermath of these stress tests.
Aberdeen Asset Management (-0.94%) remains unloved this morning as much of the data emanating from emerging markets continues to look soft and while earnings released yesterday were in line with estimates the outflow of capital will likely drive lower earnings estimates in the near term.
The rebound in gold overnight is pushing precious metals producers higher – we may well be seeing a temporary technical bottom for gold with $1050 providing base support. Naturally, all will hinge on what the FOMC decides to do later this month.
Fresnillo + 1.32%
BHP Billiton + 2.25%
Glencore (flat) Cobar copper mine receiving limited interest from Australian miners. Glencore may have to look for international buyers as OZ Minerals has left the process while Sandfire Resources is showing minimal interest. (The Australian)
Other equity highlights:
CENTRICA (-1.15%) Upgraded to outperform at CS. ‘’Centrica has underperformed the sector c14% across the past 4 months. At the current 222p/sh price, we think US$46/bbl oil with no mitigating factors is priced-in. On the basis of our CS gas and oil price forecasts we lower our EPS estimates c9% in 2016E and 17% in 2017E. Our investment case is built on: (1) Falling gas prices and the Government cutting social spend leads to margin expansion in BG Residential. While this will mostly be passed to customers, it takes away political risk as bill rises are not needed until 2018 at the earliest; (2) US$46/bbl oil priced-in to the upstream and (3) c£1.5bn of Upstream capex cuts are being redeployed in growth areas. Of which c2/3rds will be in distributed energy and power (e.g. solar panels) which is lower risk with more visibility.’’
Babcock -1.68% has been downgraded to sell from neutral at Citi on too many risks. New price target of 1000p implies a further ~5% further downside.
BAT (-0.53%) BBC Panorama made allegations that company employees had paid bribes in East Africa. They have responded – and the employee was terminated years ago. It’s basically old news and it would seem that the tobacco company is being rather successful in damage control if the resilience of the share price is any indication.