Financial market research and analysis

UK & European markets have opened higher on Friday. We are taking heart from the higher close on Wall Street and putting the whipsaw action that got us there to one side. Opening gains are being tempered by caution ahead of a key monthly US jobs report.

Services dragged into the slowdown

We can reflect on yesterday’s dramatic price action in equities to understand the market’s logic going into this month’s NFP (jobs) report. US shares fell in reaction to service sector data that missed expectations but subsequently rebounded on renewed hopes for an October rate cut. Naturally the US dollar dropped and has added to the losses for the same reasons, now down for a fourth day running. The ECB has shown its hand via its QE announcement so moves in the forex market are very much dollar-orientated at the moment.

US jobs report coming up

Little can be gleaned from US futures which indicate a flat open. If jobs numbers meet or beat expectations, it will be welcome news for the US economy but will undermine the case for more aggressive easing from the Fed. The Fed are clearly worried about Trump’s trade war, and the decade low in US manufacturing activity this month supports this view. But we think they only start to react with loser policy when the US consumer is affected, and that will start when unemployment rises. Federal Reserve Vice Chairman Richard Clarida, for his part said yesterday that the consumer is “in good shape”. We think poor US economic data poses downside risk to stocks and the dollar while the Fed maintains the current modest stance on easing policy.

Brexit – response to Boris' plan

Neutral observers seem to have been mostly positive about the kind of compromises presented by Boris Johnson. With more detail, Boris’ deal could be workable. Unfortunately it’s not the neutrals that will make or break a UK-EU Brexit deal. MPs are now so bitterly divided that we are of the view, this parliament will never vote through any deal offered up by Boris Johnson. The EU understands the dynamics in the British parliament and we think, are just paying lip-service to negotiations. Sterling has softened alongside the political uncertainty in the past week, but bigger-picture, we think traders will position for another extension, which favours Sterling-strength pre-October 31.

BP’s Bob Dudley to step down

Upstream business head Bernard Looney will succeed Dudley as CEO when he retires in 2020. The logic seems to be that Dudley has steered the ship well through troubled waters so an insider and one of his team is best suited to take the helm. It’s a new man for new challenges. With Deepwater Horizon in the rear-view mirror, a new era of US shale output and the increasing focus on green energy and the environment, shareholders should feel comforted that succession planning is complete.