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Markets Slide On Lacklustre U.S. Earnings And Commodity Rout

Published 07/22/2015, 08:20 AM
Updated 04/25/2018, 04:10 AM

Overnight losses in US and Asia and the failure of the US tech sector to provide earnings fireworks (of the good kind) is weighing on Europe this morning. A stronger euro as the dollar took a nosedive against a basket of currencies is also not helping to underpin the export led economies in the Eurozone.

It seems we are coming to the brink of the loose monetary policy; Bank of Japan Governor, Kuroda warned yesterday that he expected Japan’s inflation rate to accelerate and hit the central bank’s 2% target by the first half of 2016. The BOE are also on inflation-watch and expectations that we will be dissent within the 9 member committee as early as August in relation to monetary tightening is also putting the kybosh on risk assets. The supposed transient falls in energy, food and import prices are keeping a cap on inflation levels for the time being.

Eurozone sovereign yields are mostly lower ahead of the Greek vote on reforms; which are widely expected to pass. 120 lawmakers are required to pass with majority. Anything lower than this could indicate Autumn elections.

UK earnings are well underway with Apple’s massive declining leaving quite a mark on some of connected contingents in the FTSE this morning.

Arm Holdings (-3.27%) reported good numbers today but the failure to match market expectations has pushed some investors towards the door. Additional licensing activity to underpin future revenue and a dividend hike to 3.15p per share may well entice some back. With support to be found at the 1000p marker. The average broker target price is 1219p. Profits before tax were up 32% to £123.9m with revenue of £228.5m

With metal prices continuing to slide, the basic resource sector is finding it difficult to hold any of yesterday’s gains, the upside move was essentially a dead-cat bounce. Fresnillo (LONDON:FRES), BHP Billiton (LONDON:BLT) and Rio Tinto (LONDON:RIO) are all out of favour today.

EasyJet PLC (LONDON:EZJ), buoyed most likely by a stronger pound and increased trading to beach routes in Europe is the high flier today. Up 4.26%, the airline saw better than expected revenue per seat owing to upbeat trading in the UK and beach routes across Europe. The company is confident that the business remains on course for full year FY2015 guidance of 28% operating margin and at least 6% organic revenue growth. The decline in oil prices is also a benefit for the group

In fact, now that oil prices are once again headline news, with WTI slipping below the $50/bbl yesterday, today’s inventories will be in focus. Dollar strength, the lifting or Iranian sanctions and weaker demand have all been factors of late but an increase in supply will likely see the majority remain bearish on the commodity for the near term.

We are calling the Dow lower to 17869. Down 50 points.

BoE more likely to hike in February

Released in London this morning, the BoE minutes came out more dovish-than-anticipated. The MPC vote has been unanimous; all nine voting members preferred the BoE to maintain the bank rate at the historical low of 0.50% in July. To our surprise, the BoE bulls refrained from rushing toward a rate normalisation. And perhaps, they had reason to do so given that the budget goals that have just been disclosed by George Osborne had a flamboyant echo in the UK’s market place.

Even if the intention of the Conservative government on its budget consolidation plans was crystal clear, the budget goals set by George Osborne somewhat surprised.

As Chancellor Osborne urged ministers to cut their spending by sizeable 25% to 40% targeting a £20 billion worth saving on government’s budget before the end of 2020, the Committee’s unanimous decision to keep the benchmark rate steady certainly avoided a panic in the UK markets today.

Given the decisive shift in UK’s fiscal policy, even BoE’s hawkish members could refrain from hiking the policy rate as soon as November. As George Osborne sharpens edges, the BoE would better wait three more months and avoid the budget consolidation from turning detrimental for the UK’s economic recovery.

That being said, some BoE members voiced concerns about rising inflation risks. Indeed, the improvement in wages could easily boost inflationary pressures and leave the Bank of England short of time before taking back the full control on consumer prices. Yet the rout in commodities should buy some time before the BoE steps into the policy normalisation. The risks related to a dovish monetary policy now seem worth taking with the inflation perfectly flat in the UK at this time of the year.

February hike becomes more likely

Despite the dovish shift in BoE expectations, the clear divergence from the leading G10 policy makers, particularly from the ECB, BoJ and commodity sensitive BoC, RBA and RBNZ, should keep the appetite in pound tight enough for further appreciation. On trade weighted basis, British pound recovered two thirds since it fell from its 2007 pick, there is 30% more to go before reaching the pre-crisis levels.

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