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Shares in Europe opened mostly lower on Thursday, with the exception of Spain’s IBEX which edged higher. Blue chip British stocks gained ground thanks to the foreign-earnings benefit of a weaker pound.
A bounce in Spain
The collapse of the IBEX through the 10k level for its worst daily fall in 15 months should entice some of the braver value-buyers. Notably, volatile Spanish bank shares were not the place investors were seeking value. Spanish energy companies Endesa and Iberdrola were amongst the top risers.
British pound cough-drops
The pound has fallen following the shambolic party conference speech from Prime Minister Theresa May. We think the spurts of coughing, a collapsing sign and a prankster is emblematic of her future. The odds she can hold on until the end of Brexit talks and provide enough stability for markets have been cut by that performance. A looming leadership battle at the top of government adds another dose of political uncertainty on top of Brexit negotiations. The battle lines for Sterling are clear; rising political uncertainty versus an impending rate hike from the Bank of England. Speeches on Thursday from BOE policymakers McCafferty and Haldane could shape which factor wins out over the short term.
More domestically-orientated UK midcaps fell at the open in response to the rising political uncertainty. There has been a negative response in markets to the policies of greater government intervention into energy and housing industries.
DFS couched in excuses
Share of DFS fell as much as 6% in early trading after it reported a sharp drop in profits and warned of a “very challenging furniture market”. Shares recovered off the lows in some relief that DFS has left the dividend policy unchanged. The DFS results are proof of the pudding that the cost of living squeeze is already starting to weigh on consumption. The talk of challenging market is in this case not just an excuse. Retailers from the homewares sector like Dunelm to clothing like Next have issued similar warnings about the health of consumer spending.
From Morning Call…
A combative televised address by Catalan President Carles Puigdemont did little to soothe tensions across Spain. Spanish stocks closed near lows of the day on Wednesday in a sign markets expect things to get worse before they get better. It’s a dark moment for Spain but there is some light at the end of the tunnel.
Puigdemont has requested mediated talks with Madrid. This was likely the aim all along. We think Catalonia was using the referendum as a bargaining chip with Madrid but that the violent police response on Election Day forced them into a more aggressive position. The next key turning point will be when Catalonia’s regional parliament convene on Monday to review the results of the independence referendum. The most likely outcome is that both sides back down but if Catalonia does announce independence, all bets are off.
Futures point to a muted open for US stocks are another record close for the major equity benchmarks. With only a few days until the big names starting reporting Q3 results, there has been no sign of a pre-earnings season jitters.
Fed leadership hinders the buck
The US dollar is giving back a little ground as investors wager who the next Federal Reserve Chair will be. The limp reaction to a series of strong economic data shows signs of weakness in the dollar rally. Trump’s shortlist includes Chairwoman Janet Yellen, Fed governor Jerome Powell and former Governor Kevin Warsh.
Neel Kashkari has been touted as the next chair by bond heavyweight Jeff Gundlach. Gundlach may be onto something by selecting the most dovish Fed member. Trump has said the dollar is too strong and that he is a ‘low rates guy’ – neither of these imply adding a hawk to the head up the Fed. Expectations of a more rate hikes and QT will be thrown into reverse if Trump opts for a Fed boss to help him ‘Make America Great Again’ with more cheap money.
Oil steadies decline after inventories
Crude oil markets have steadied at the lows after the Energy Information Administration reported that crude stockpiles shrank by 6 million barrels last week, much more the 300k decline expected. Tighter supplies in the US will go some way to relieve concerns over poor compliance and higher production form OPEC. Whether Brent can hold above $55 per barrel could hinge on next month’s OPEC meeting.
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