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European Stocks Edged Up Friday Amid Mixed Earnings Report Card, A Slump In Oil

Published 04/28/2019, 03:11 AM
Updated 09/16/2019, 09:25 AM

The European stock market (Stoxx-600) closed around 390.84 Friday, edged up +0.18% on the mixed earnings report card, lower USD (i.e. higher local currency) and a slump in oil (energies). Healthcare helped on an upbeat report card from Sanofi (PA:SASY), while aero engine maker Safran (PA:SAF) also helped industrials after a solid report card, while basic materials/metals dragged on Glencore (LON:GLEN) probe.

Overall, Stoxx-600 ticked up +0.10% for the week on mixed earnings, suspense of the US-China trade talks, higher US dollar (still up almost +0.60% after Friday’s slump of -0.25%), while undercut by a slump in oil (-1.09%), talks of less Chinese stimulus, lingering Brexit uncertainty and soft German economic data.

On Friday, the US dollar index (DXY) eased from the multi-month high of 98.32 (scaled Thursday) and made a session low of 97.86, slumped almost -0.25% after an apparently blockbuster US GDP figure of +3.2% in Q1 shows that the unusual gain came from net trade gain and inventory buildup, which may not be repeated in Q2; without these two exceptional gains and the benefit of lower inflation deflator due to lower inflation, the US economy grew a mere +1.5% in Q1.

The US dollar was also under stress on a report that the Fed may lower its IOER (interest on the excess reserve-reverse repo) rate by 0.05% in its forthcoming policy meeting on 1st May. As a pointer, the recent surge in USD was also a result of the familiar story of dollar shortage after Effective Fed Fund Rate (EFFR at +2.40%) goes higher than the IOER of +2.42%.

The US dollar was also undercut as China’s President Xi pledged not to weaken Yuan as a trading tool in his OBOR summit. Xi said China won’t pursue yuan depreciation that harms others and will keep Yuan stable at a reasonable and equilibrium level.

On Friday, the much-awaited Q1 US GDP growth flashed as a blockbuster at +3.2% from prior +2.2%, higher than the expectations of +2.0% on an annualized basis. The core PCE prices slumped to 1.30% from prior 1.80%, but right on the expectations of 1.30%. The GDP price index (deflator) slumped to 0.6% from prior 1.9%, lower than the expectations of 1.3%. The sudden fall in GDP deflator basically boosted the headline number coupled with an unexpected one time gain from net trade (added +1.03%) and inventories (added +0.65%).

Basically, the surprised Q1 GDP headline number of +3.2% is a function of higher inventories and lower import, which may be transient. Excluding these effects, the Q1 GDP growth should have been around +1.55-1.50% and the market is now expecting a modest Q2 GDP growth at around +1.1% on expected reversal in net trade and inventory gains.

Subsequently, the US as-well-as European stocks faded, but such mixed GDP figure may also keep the Fed in the neutral mode rather than a hike for “red-hot” GDP and thus stocks got some boost. In any way, even at the projected GDP rate of +1.1% in Q2 assuming no benefit from net trade and inventories, the average US GDP growth would be around +2.1% for Q1/Q2, in line with the market/Fed estimate (on the upper end).

Also, the overall risk-on sentiment was also supported by a report (from Chinese sources) that China’s President Xi could visit the US to sign a trade deal in June. The report suggested that Xi could meet his American counterpart Trump in Washington as early as June if the two sides can finalize a deal to end the trade war. But in an interview, the White House CEA/NIC Kudlow said Trump would like to meet China's Xi and close trade deal, but “we're not there yet”. The market knows that this is a “war of attrition” on trade between the two biggest economies/superpowers of the world and thus patience is the key to see who blinks first.

In any way, the sentiment was also helped as Chinese President Xi signaled his approval for Trump’s trade war demands in an OBOR speech to some 40 world leaders where he pledged to address state subsidies, protect IP rights, allow foreign investment in more sectors and avoid competitive devaluation of the Yuan

Again, the European market was also dragged by energies as oil tumbled on mixed US GDP report, Trump’s reported “SOS call” to OPEC and lingering Saudi/Russian suspense to boost production for any Iran shortage.

On Friday, Trump said he “called” some OPEC officials and told them to tame fuel costs and after that U.S. “gasoline prices are coming down”. As a pointer, Trump is under immense pressure in his domestic front because of his bellicose Iran policies, gas prices in the US pumps are again eyeing $3 levels from around $2.25 levels a few months ago; i.e. over 30% surge, enough for public agony. Trump said: “The gasoline prices are coming down. I called up OPEC. I said, ‘You’ve got to bring them down. You’ve got to bring them down,’ and gasoline’s coming down”.

But on late Friday, Saudi/OPEC officials denied any such Trump phone call, saying that the phone conversation that Trump claimed to have did not include OPEC Secretary General Barkindo, Saudi Crown Prince Mohammed bin Salman and Saudi Energy Minister Khalid.

Trump may have called some oil trader to keep oil down. In any way, later Trump also tweeted to cover up his bluff. He advised California to reduce their gas tax in turn:

“Spoke to Saudi Arabia and others about increasing oil flow. All are in agreement. The California tax on gasoline is causing big problems on pricing for that state. Speak to your Governor about reducing. Economic numbers, 3.2% GDP for what is often the worst quarter, looking good!”

On China trade deal, Trump said: “We will soon be having China’s Xi coming to the White House—trade talks with China are going very well. China is also helping us in North Korea and I also appreciate statements made by Russia’s Putin about North Korea”.

On Friday Trump was interacting with children of White House staff and press. He told those children about the historical significance of the White House and indirectly confirmed that Xi is coming:

“We have Prime Minister Abe of Japan coming tomorrow for a very important meeting. We will soon be having President Xi from China coming--- the White House is a place of history, 1799…That’s a long time. Now when President Xi comes from China, and I say 1799, he thinks that’s a modern house because their culture is very old, 5,000 years. But this is really something that no matter where you go, no matter the time, no matter the date, there is nothing like our great White House”.

Trump also told those children about the potential of a great US economy: “Our country is doing very well. Our economy is at a level that perhaps it’s never been at, and all over the world they’re talking about our great country and how well we’re doing”.

Coming back to the European market, on Friday, overall, the European market sentiment was also dragged by subdued report card from chip major Intel (NASDAQ:INTC), affecting the overall chip makers in the region despite Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT) and Amazon (NASDAQ:AMZN) boost. Intel basically issued a guidance warning as Chinese data center sales may remain soft in the coming days as the region is consuming less microchip than expected. This follows similar guidance warning from another hardware/chips maker Texas Instrument and also by industrial bellwethers like Caterpillar (NYSE:CAT) and 3M (NYSE:MMM), citing China slowdown/intense competition.

The market was also undercut by the sudden drop in Japan’s factory output in March amid falling exports, which could send the Q1 GDP into a contraction. The fall in Japanese exports is also a byproduct of Trump trade war and Brexit uncertainties in part.

On Friday, apart from Sanofi result boost, EU healthcare was also upbeat on hopes of higher business as the US is considering concessions on drug protection in talks with China after the latter was said to offer 8 years of IP protections against 12 years under current U.S. law. But it may draw severe protests from the US drug majors as well.

The European market was also supported by dovish ECB talks. On late Thursday, the ECB Vice-President Guindos virtually opened the door for QE-2, if needed to boost inflation in the Eurozone.

On Friday European banks were helped by Asia savvy banks such as HSBC, Standard Chartered (LON:STAN) on renewed China trade optimism.

Germany’s Commerzbank (DE:CBKG) jumped on hopes of takeover by any foreign bank/entity after a report that the German government is open to such an idea. As a pointer, M&A talks between Deutsche Bank (DE:DBKGn) and Commerzbank were abandoned due to some structural issues (as almost 40K bank jobs could be at stake due to the proposed merger being brokered by the German government). Now the German government is saying that both of these banks are important for the German economy (as they are “too big to fall”, especially Deutsche Bank). And the German government is looking for a foreign buyer for Commerzbank (bail out).

Earlier Friday, European banks were under pressure on a subdued report card from RBS (LON:RBS) and Deutsche Bank. Although RBS was able to beat the estimate, guidance was below expectations amid never-ending Brexit uncertainty. Deutsche Bank was also under stress on muted guidance for 2019, but Spain’s Banco quarterly net income beat estimates.

On Friday, French drugmaker Sanofi jumped as it returned to much-awaited growth with higher revenue and profits for Q1 and helped the overall healthcare sector. Similarly, French aero-engine giant Safran zoomed on revenue and guidance beat, boosting the overall industrials/aerospace.

Renault (PA:RENA) jumped after in-line with estimate report card (revenue and guidance), helping the European automobile sector. There was also a report that Renault may propose to Nissan a plan to create a joint holding company which would give both firms equal footing. As a result, French automaker space was also boosted; Ford and Valeo (PA:VLOF) were also upbeat. Continental AG (DE:CONG) jumped as it confirmed its guidance despite a fall in Q1 earnings. The European/French satellite operator SES led media stocks higher after it maintained its full-year guidance on the back of the company's Networks division.

On Friday, Energies were under stress as oil slips and as France’s Total slumped after a subdued report card. Glencore plunged on the regulatory probe on an allegation of CFTC rule violation (corrupt practices, which may have broken the rule). Just Eat tumbled as its UK orders increased by only 7.4%, below estimate. Regional Chipmakers (STMicroelectronics, Siltronic, and AMS) were under pressure after subdued guidance from Intel.

Technical View (DAX-30, CAC-40, MIB-40, and FTSE-100):

Technically whatever may be the narrative, DAX-30 has to sustain over 12450 for a further rally to 12600*/12650-12725/12820 and 12875*/13095-13210*/13315 in the near term (under bullish case scenario).

On the flip side, sustaining below 12425-12375, DAX-30 may fall to 12230/12180*-12140/12100 and 12000*/11900-11830/11750 and further to 11600/11450*-11370/11320 in the near term (under bear case scenario).

Technically whatever may be the narrative, CAC-40 has to sustain over 5555-5575 for a further rally to 5605*/5675-5715/5855 and 5925/6000-6075/6125* in the near term (under bullish case scenario).

On the flip side, sustaining below 5540, CAC-40 may fall to 5470/5425*-5380/5305* and 5275/5245*-5200/5180* and further 5130-5070 in the near term (under bear case scenario).

Technically whatever may be the narrative, MIB-40 has to sustain over 21650 for a further rally 21745/21925-22025/22105 and 22200/22295-22380*/22445 in the near term (under bullish case scenario).

On the flip side, sustaining below 21630-21570, MIB-40 may fall to 21440/21350-21245/20900 and 20795/20575-20525/20475 and further 20395-20295 in the near term (under bear case scenario).

Technically whatever may be the narrative, FTSE-100 has to sustain over 7525 for a further rally to 7600/7715-7775/7890 and 7930/8000-8050/8115 in the near term (under bullish case scenario).

On the flip side, sustaining below 7500-7485 FTSE-100 may fall to 7390/7350*-7290/7220* and 7150/7095-7045/7000 in the near term (under bear case scenario).

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