US dollar retreats, US retail sales, PPI and Q3 earnings in focus

Gold challenges 200DMA - Miners Gain.
by Brenda Kelly

The risk aversion in Asian markets has rippled its way to European markets this morning. Market sentiment is dented for the second consecutive session on poor Chinese macro data. Following yesterday’s weak import data, the flame of growth concerns has again been fanned as inflation cools in the world’s second largest economy. The consumer price index (CPI) rose 1.6 percent in September from a year earlier, against forecasts of a 1.8 percent rise. The producer price index (PPI) fell 5.9 percent, in line with expectations and after a 5.9 percent fall in the previous month and tends to underscore weakness in domestic demand.

The effects on the FTSE constituents is broad with miners under pressure again and the likes of Burberry losing face as one of its key markets looks more than a little problematic. The fashion house generates around a third of its sales from the Asia Pacific region and has a significant presence in China. Burberry (-1.96%) is expected to announce slowing sales when it posts an update on Thursday.

Glencore initially started the day languishing at the bottom of the index but has since pushed higher despite the perception of a Chinese slowdown. The weaker dollar is aiding the metals complex and copper prices are slightly higher on the day.

The gold price has broken out of 10 month downtrend and is now presenting a credible challenge on the 200 Day moving average at $1176/oz. A rise through this average, would essentially be considered bullish for the precious metal and would mark the first time since May that price action has breached this psychological metric. A sustained hold (unlike in May) would indicate a move higher is on the cards with $1200/oz a likely target.

Despite the cut to hold at GMP Securities, there seems to be fresh interest in the precious metals stocks this morning. UBS sees potential for a rally in mining, specifically gold stocks. Randgold (1.3%) is presently working on rebuilding the AngloGold Ashanti mine in Ghana. It’s estimated to hold potentially 20 million ounces. Fresnillo is also garnering some flow rising 1.16% in early trade.

Depending on the angle you take, the labour picture in the UK was a conglomeration of good and bad. The UK’s unemployment rate dropped to 5.4%, the lowest since 2008 and now leaves the employment rate (73.6%)in the country at its highest since the records began in 1971. But the fact that pay growth has slowed tends to overshadow this. Wage growth excluding bonuses slowed to 2.8% against the consensus expectation for a rise 3%. The BoE now face a similar sticking point as the FOMC. The labour market certainly looks healthier but inflation remains far below the mandated 2%. The initial reaction in the pound was to drop against the dollar but it has since recovered the $1.53 level. The chill winds from China are still also a factor and all in all, it may prove premature to talk about monetary tightening while uncertainty plagues global markets.

Other equity highlights:

Hargreaves Lansdown +6% posted record net new business with net revenue of £78.5m – an increase of 11% yoy. The firm is confident it can continue to grow.

Intertek (+1%) The exposure to the US construction market through the purchase of Professional Service Industries is expected to bring about significant uplift in revenue as a result of cot synergies

Sky +0.09% Raised to outperform v underperform at Credit Suisse. The bank says the UK has the largest short term cyclical upside potential with UK media buyers expecting a 5.8% growth in 2015.

US dollar retreats, US retail sales, PPI and Q3 earnings in focus
by Ipek Ozkardeskaya

As the Q3 earnings season kicks off, the attention partially shifts away from the macro to micro data.

JPMorgan disappointed last night with a lower-than-expected EPS of $1.29 versus $1.375 expected. The 10% drop in corporate and investment banking revenues, lower banking activity on commercial and consumer fronts, difficult trading environment due to high volatility in the market, rout in commodity prices and exceptionally high FX volatility, combined to $1.3 billion worth of litigation bill outshone the Q3 results. As its cost cutting program failed to enhance revenues, JPMorgan could be tempted to announce additional measures. The bank already cut 10000 jobs so far this year. While job cutting is an efficient and immediate way to reduce expenses, the bank can hardly infinitely reduce staff. In the long-run, only the right strategical and structural decisions will bring in business.

According to a recent note from JPMorgan, the S&P500 financials’ EPS could have improved by an average 10% in the third quarter. However, regarding at JPMorgan’s 6.22% miss on its own EPS, we suspect that the Q3 results may well fall short of this optimism across the sector. Stricter set of regulatory measures, fines, the substantial restructuring in activities, added to high currency risk and challenging trading environment hint at potential let-down vis-à-vis the financials earnings in Q3, 2015. Bank of America will release results today; Goldman Sachs and Citigroup are on the watch list tomorrow.

On the macro front, the US retail sales are expected to have expanded by a timid 0.2% in month of September. In cyclical terms, this is a poor expectation for an average month of September.

The headline producer prices in the US may have stepped in the negative territory in September. The low commodity and energy prices creep in the US macroeconomic data. And the unsolicited spin in the macroeconomic picture hints at a delay in Fed normalisation. Hence the fading expectations on a December Fed rate hike weigh on the US dollar. The market gives no more than 35% for a December move. The consensus for the first step has now shifted to March 2016.

The US dollar index has given away more than 50% of January-March gains.

No good news came out of China overnight.

Chinese inflation slowed to 1.6%y/y from 2.0%y/y in September, more than market forecast of 1.8y/y. The producer prices contracted 5.9%y/y as anticipated. Thanks to PBoC’s announcement to enhance liquidity through bank lending on Monday, the sell-off in Chinese stocks remained contained. The commodities are again under pressure.