The DAX slides slowly as German industrials agonise

Equities flat ahead of NFP
by Brenda Kelly

Having struggled for direction yesterday equity indices seem to have decided that the path of least resistance is to the downside this morning. The FTSE is marginally higher but remains below the 6450 level that ultimately marks the line in the sand between a return to this year’s highs and a consolidation.

Today’s UK macro data has neither vindicated nor absolved the Bank of England’s dovish path this morning bringing with it a fairly mixed bag but hardly all that impressive. The trade deficit narrowed by a greater scope than forecast to £9.4bn in September; exports increased to £24bn (up £600m) while imports declined by 900m. The pound remains under pressure today, relinquishing the $1.52 level and bouncing with conviction yesterday off the 0.70p against the single currency. It would seem that the prospect of additional stimulus from the ECB has curtailed any degree of confidence in the UK economy or indeed any notion that any near term price pressure will be to the upside.

Copper prices continue to dive lower this morning and presently trades at $2.25/lb while oil is basically sitting there and doing very little up marginally on the day to $48.15/bbl.

Gold, having taken a bath over the past number of days on speculation that it’s lack of yield was to become even more pronounced has found a temporary bottom for the moment

The dollar is king once again and there is a general acceptance out there that this reign will continue even if today’s jobs numbers lack fireworks.

Some equity highlights.

Rio Tinto (+2.22%) the mudslide in Brazil was initially a barrier to upside for the stock but the company expects to maintain its output strategy in iron ore unit.

IAG (+2.58%) has upgraded its target for 2016 to 2020 earnings growth to over 12% a year, underlining the group's long-term confidence. IAG said ahead of an investor event that it would aim for average annual earnings per share growth of over 12%.This is up from the 10%-plus figure previously targeted.

AstraZeneca (-0.39%) agreed to buy U.S biotech company ZS Pharma for $2.7 billion following its upward revision to FY forecast yesterday.

Inmarsat (+1%) : better than expected Q3 sales of $323m against the exp. $318m and a jump in profit on the back of its aviation division; it has formed a strategic partnership with Deutsche Telekom to develop the ground component of its European Aviation Network.

CRH (+3%) following yesterday’s rating cut from BOFA, the stock is top of the leader board this morning. The UK’s housing shortage and rising population makes it a positive for materials providers. The average PT for the stock is 2015p

STANCHART (-0.77%) Shares slumped in Hong Kong after Fitch Ratings downgraded the bank, citing the outlook for the lender’s profits and asset quality. (BB)

BHP Billiton (-4.68%) Following a 2.7% decline in Sydney trading. Iron-ore tailings dams owned by two of the world’s biggest miners burst in southeast Brazil on Thursday, flooding a valley and burying dozens of homes in mudslides, while reportedly killing at least 15 people.

Burberry (-1.81%) falling on the back of a weak update from luxury group Richemont. FT ‘’Richemont's sales in the Asia-Pacific region dropped by 3 per cent in the six months to September 30 although currency fluctuations helped. On a so-called "constant exchange rates" basis, sales in Asia-Pacific were down 17 per cent during the half year.

Richemont said it suffered a "significant" sales decline in Hong Kong and Macau although sales in mainland China returned to growth.’’

Diageo (+0.24%) UBS have a Buy rating and PT of 2,150p on the stock – ‘’Expect positive message from Investor Day We believe Diageo's forthcoming Investor Day (11th November, with management dinner on 10th) will be a positive catalyst for the stock. We anticipate: (i) a reassuring message on sales and margins in North America (45% of EBIT), (ii) guidance for improving trends in the Emerging Markets as depletions stabilise and de-stocking ends, &, (iii) further detail on group wide productivity initiatives which should give the market more confidence in Diageo's margin targets. Following five weeks of global marketing, we also note that investor sentiment appears to be turning more positive on Diageo.’’

The DAX slides slowly as German industrials agonise
by Ipek Ozkardeskaya

The least we can say is that business gets worse in Germany.

The third quarter has been rough for the German economy, two thirds of companies in the DAX already reported results and the overall earnings missed the estimates by a decent 16.56%; the outstanding underperformance in the financial sector earnings (-62.72%) add to worries that the banks have not sufficiently recovered to fully cooperate or indeed benefit optimally alongside the ECB’s attempts at growth-boosting measures.

Sales in basic material and industrials tumbled worryingly also, the figures remains 3-4% short of market expectations in the last quarter.

Apparently the slowdown in China, which stands for 10% of German exports, has not been anodyne; the industrial production retracted by an extra 1.1% in month of September, following the 1.2% drop in August. Naturally, the DAX opened downbeat in Frankfurt and seems unable to step above the 11000 mark, even with the cheapening euro.

Euro made an attempt to regain the 1.09 mark against the US dollar. Traders are apparently sellers on any rallies before the US nonfarm payrolls. The US dollar appetite is clearly strong on hawkish comments from the FOMC member especially in light of the rhetoric that only as print sub 120,000 in the Nonfarm payrolls would put any near term monetary tightening off course. More resistances are seen at 1.0960 (minor 23.6% on Dec’14 – Mar’15 decline) and 1.0975 (200hma). Decent vanilla calls trail below 1.0850 for today’s expiry.

US nonfarm payrolls to not damage December rate hike expectations.

The US nonfarm payrolls and jobs data are the main macro events of the day. It’s all about the US dollar. The US 2-year yields hit a 4-year high yesterday on hawkish Fed expectations for a December rate hike. The consensus for the NFP in October is 182K vs 142k last month; unemployment rate is expected to have improved to 5% with 0.2%m/m rise in average earnings.

As the Fed officials downplay the slowdown in US labour market recovery, soft figures from the US today could not suffice to damage the hawkish sentiment regarding the Fed. It appears that a read above 100K is legitimately sufficient to keep the possibility for a December rate hike warm and safe.

Yellen said on Wednesday ‘At this point, I see the US economy as performing well […] Domestic spending has been growing at a solid pace and if the data continue to point to growth and firmer prices, a December rate hike would be a live possibility.’ According to St Louis Fed slowing in the labour market is ‘natural at this point in recovery, 100-250k job growth adequate’ for keeping the December rate hike on the table.

The market gives 56% probability for a December Fed rate hike.

The SNB reserves expand to record

The Swiss National Bank’s official reserves increased to a record high of 550.9bn francs in October from 541.5bn. Attempts to stabilise the Swiss franc against the US dollar and the euro in Q by the SNB may well be reaching an impasse. The ECB is by all accounts moving toward a more unorthodox monetary policy by December and the SNB can do nothing but adjust its own monetary policy and its budget via riskier investment portfolio and lower rates.

The negative rates have proven to be efficient in diminishing demand in franc. However the renewed weakness in euro will increasingly weigh on SNB’s budget. The euroswiss rate futures hint that the expectation for more negative Swiss rates are now being priced in.

The SNB will need to spend more to keep the EURCHF within 1.08/1.10 range. The SNB will almost certainly succeed in keeping the cross within the 1.05/1.10 target band to the end of the year, yet at an increasingly higher expense.