The slide in global equity markets continued overnight, with the Nasdaq Composite posting its biggest one-day loss since August 2011. The S&P500 also fell sharply and in so doing has seen all of this year’s gains disappear.
Last night’s heavy falls and another red Asia session this morning have seen markets in Europe continue their slide this morning and there is a sense that the current sell-off may well be a lot more durable than previous ones which have tended to be buying the dip opportunities, due to the lacklustre nature of the rebounds.
Investors appear to be wrestling with a perfect storm of uncertainty around trade, rising interest rates, global geopolitics from Iran, Saudi Arabia, Italy and Brexit and looking ahead to whether the level of profits that companies have become used to will take a large hit in 2019. Given these uncertainties investors have concluded that it is better to diversify out of stocks and into other asset classes like gold, bonds as well as safe haven currencies like the Japanese yen.
There is also the fact that we’ve pushed below a series of key support levels on the DAX, Nikkei225 and the S&P500, which could well trigger further domino effects going forward.
On the earnings front, following on from Barclays yesterday Lloyds Banking Group posted a decent set of numbers for Q3, shrugging off concerns about the UK economy and a pre Brexit slowdown with pre-tax profits beating expectations, coming in at £1 82bn. Despite the improvements seen in profitability for most of the UK banking sector it’s not been a great year so far with Royal Bank of Scotland due tomorrow. Lloyds Banking Group shares are down 15% year to date, and while some would have you believe that’s primarily down to Brexit uncertainty, it plainly isn’t given banking stocks across Europe have fared far worse.
Troubled UK retailer Debenhams this morning announced plans to close up to 50 stores after reporting a £491m loss for the year. Sales and revenue both fell over 2% on the year, with the company still in the process of trying to sell its Danish business Magasin du Nord, which it is hoped could reach up to £200m.
In what has been a troubled year for traditional retail the Christmas period this year is likely to be even more competitive with a number of high profile retailers seeing their profit margins disappear. Names like House of Fraser, Mothercare, Carpetright have all had well documented problems, while even John Lewis saw its profits drop sharply.
Traditional advertising and PR group WPP has also warned on its profit outlook this morning, sending its shares sharply lower, after reporting a 1.5% decline in revenues with a weak performance in the US, UK as well as Europe.
The company also announced it planned to sell its research arm Kantar as new CEO Mark Read looks to slim down the operation and make it more streamlined.
In Europe Swiss banking giant UBS also posted some decent numbers for Q3, with pre-tax profits of CHF1.67bn, above expectations of CHF1.3bn, with wealth management and investment banking helping to boost returns.
Despite these numbers the banks share price has had an awful time of it of late, down over 30% from its peaks and at its lowest levels since the end of 2016, with CEO Sergio Ermotti looking to revise the banks financial targets in an attempt to stem the declines in the share price and shore up investor sentiment.
AB InBev shareholders are likely to feel the effects of an enormous hangover this morning after the brewer announced a swingeing dividend cut, sending the shares sharply lower, in an attempt to pare down the debt it took on when it acquired SAB Miller a couple of years ago. Weaker emerging markets, particularly South Africa and Latin America, as well as a slow US market has seen Q3 revenues fall short of expectations of nearly $14bn, coming in at $13.3bn.
Against this uncertain backdrop and concerns over a slowing European economy the European Central Bank will sit down today to meet for the penultimate time this year.
Speaking at the European Parliament a month ago ECB President Mario Draghi said that “underlying inflation is expected to increase further over the coming months” as he sought to justify the ECB’s current stance of ending its asset purchase program, as well as looking to target its first rate rise in Q4 of next year.
While there is a certain logic to ending the bond buying program given how long it has been running, it still remains open to question as to whether it is wise to put a time frame on a possible rate rise at a time when economic activity is slowing down.
Yesterday’s flash manufacturing PMI numbers from France and Germany for October pointed to continued weakness in that particular sector with both numbers coming in at their lowest levels in over two years.
Furthermore, there remains scant evidence of the wage pressure that the ECB President claims is coming with recent CPI data remaining steady at 2.1%, while core prices remain anchored at 0.9%.
Other concerns for policymakers are likely to revolve around trade and the ongoing budget spat between the European Commission and Italy, and it is here that we could see the ECB’s policy start to unravel.
The latest minutes showed that policymakers on the governing council also remain divided as to the accuracy of the bank’s economic projections, with some suggesting they are too positive. Recent data would appear to support that view, however Draghi’s room for manoeuvre is likely to be limited in that he can’t very well admit that the ECB’s view on the economy could be about to be derailed by factors outside of their control but which have been visible in plain sight for several weeks now.
Quite simply recent data doesn’t support a hawkish outlook and markets certainly aren’t buying it either with the DAX back at levels last seen in December 2016.
German business isn’t buying it either with the latest business climate index falling again in October to 102.8, from 103.7 in September.
As we look to the US open Tesla shares are set to be in focus after the company posted a surprise profit after bringing forward its Q3 earnings numbers, helping the shares to rally strongly in post market trading. Profits came in at $2.90c a share against an expected loss of $0.15c a share, with revenues rising to $6.82bn well above expectations of $6.33bn.
Production of the Model 3 also rose sharply with 53,239 sold during the quarter which helped turn its cash flow into positive territory.
Twitter is also set to report on its latest Q3 numbers after the bell as it looks to improve its ability to monetise its user base at a time when user growth appears to have plateaued. This number may be less relevant in the short term given the company is taking aggressive steps to remove bot and spam users, however the company did manage to post its, first quarterly profit earlier this year. In Q2 the company recorded $100m of net income against a backdrop of a flat lining user base, though some of the reasons for this are undoubtedly down to the crack down on bot and spam accounts. It is these concerns about the ability to monetise is user base which has seen the shares drop sharply from their summer highs to be trading near seven month lows.
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