Europe's growth engine is sputtering

Europe’s growth engine is sputtering
by Ipek Ozkardeskaya

Germany woke up to a grey sky this morning. Its exports slumped by a significant 5.2% in month of August. The slowdown in China, which stands for 10% of German exports, is dangerously creeping in. Rising euro is also pulling away some support from German products in terms of price competitively. At a time when German companies are also suffering from reputational risk following the Volkswagen scandal.

European investors are talking about Deutsche Bank expecting EUR 5.8 billion write down in its investment bank division and predicting EUR 6.2 billion worth of loss in Q3. Bank’s board recommended a cut or even a possible elimination of dividend for FY2015. Despite unpleasant news, Deutsche bank stocks opened only 3% lower and quickly reversed early losses, shareholders seem comfortable receiving fewer dividends in exchange of a more adequate capital buffer.

It is sad to say but Europe’s most powerful economy is going sour. Negative pressures in German stocks are here to stay and the murk could well spill over the entire European markets. Capital is flowing into Eurozone sovereign bonds this morning as euro keeps on climbing. It looks like Draghi will be given no option other than to react. And even Bundesbank will likely be less of an opposition.

Today's equity highlights:

Ex divs are taking some 2.91 points from the FTSE today, including Aviva, WPP, Next, Kingfisher, Smith & Nephew, Travis Perkins.

TESCO (-0.61%) UBS ‘’We see scope for Tesco to recover trading and earnings momentum in the UK over the next 2-3 years; the business is relatively well differentiated versus peers and we think management's initiatives to improve service and availability will be rewarded’’ UBS have a Buy recommendation PT 245p from 250p

Shire PLc +1.25%: Cosmo Patent for Shire’s Lialda to Be Reviewed by Patent Office Hedge-fund manager Kyle Bass persuaded the U.S. Patent and Trademark Office to take a second look at a patent that protects Shire Plc’s colitis medicine Lialda from generic competition.
Bass’s Coalition for Affordable Drugs has a “reasonable likelihood” of proving that the patent is invalid, the U.S. Patent and Trademark Office said in a decision posted on its website. A trial will be held with both sides making arguments, and a final decision is expected in 12 months.

Deutsche Bank +0.16%: 3Q15 Profit Warning & Major Write- Downs Charges of €7.6bn - Deustche has announced an impairment of €5.8bn on goodwill and intangibles of CB&S and PBC, a €0.6bn write-down of the 20% stake in Hua Xia Bank and an extra €1.2bn litigation provision. Citi on DB ‘Importantly the first two charges will have no significant impact on capital. Meanwhile the latter is only €0.2bn heavier than consensus expectations.’ The stock had initially dropped at the open by 6% but has recovered. Still remains in a long term downtrend and would need to break above EUR28 per share to provide a real bull case. Dividend cut also makes fears of a capital raise less likely hence the lack of significant downside.

It will be nothing more than barely-above-the-average-Thursday in the UK.

The BoE is broadly expected to maintain its bank rate at the historical low of 0.50%. Of course, the delay in Fed’s normalisation plans will not be directly mentioned, yet cold winds from China and the slowing signs in economic recovery will certainly keep the MPC members from sailing the open sea.

Still, the pound trades above its 200-day MA level (circa 1.5320), a move that has been driven by SAB rumours and the better-than-expected industrial data yesterday. Even if the SAB Miller is not happening for the time being, the positive momentum in pound could well pave the way to 1.5490/1.5500 against the US dollar and down to 0.7280/0.7250 against the euro.