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European stocks sag, as US markets return

European stocks sag, as US markets return

After yesterday’s positive start, European markets have had an altogether softer tone on fairly light volume today after German ZEW investor expectations for September fell more than expected from 40.4 in August to an 18-month low of 26.5, although the final EU Q2 GDP number saw an upgrade to 2.2%.

Europe

There’s not been a great deal to get excited about today, with this week’s ECB rate meeting looming large, and some chatter the central bank might start to look at discussing the tapering of its bond buying program when it meets on Thursday.

This seems a somewhat remote prospect given that the PEPP is due to run until March next year, and with Q3 growth already slowing the ECB would need to ask itself what purpose would be served in sending such a hawkish signal at a time when the economic data is looking a little on the soft side.

Vistry Group has become the latest housebuilder to post a better-than-expected set of number for H1, as revenues rose 82% to £1.1bn, and profits before tax rising to £156.2m, more than reversing last years loss of £12.2m, pushing the shares close to three-month highs.

The company also raised its full year forecasts for profits to £354.5m as higher forward sales and better margins boosted returns. Gross margins came in at 21.8% up from 14.1% over the same period a year ago.

In July Ted Baker reported full year results that painted a bleak picture as far as losses are concerned, however the numbers were still better than expected, with e-commerce sales providing one of the main bright spots.

The company also provided an update on trading for the upcoming quarter and here the pattern was the same with e-commerce the only growth area, with Covid-19 restrictions impacting sales in the UK, Europe, and Canada, with Q1 revenue down 19.9%.

The picture has notably improved in Q2, with store sales up 142% from the same period a year ago, and although still down on pre-pandemic levels there are clear signs of progress with margins improving by over 500bps vs the same period a year ago, and 190bps higher from pre-pandemic levels. Group eCommerce sales were slightly weaker for the period reflecting the fact that more stores were open compared to last year but were still above pre-pandemic levels. 

In M&A news Meggitt shares have slipped back sharply after US aerospace firm Transdigm pulled its 900p non-binding counter bid proposal, leaving the way clear for shareholders to vote on the £6bn deal from US firm Parker Hannifin, for 800p a share, later this month.

Also, on the M&A front 888 Holdings shares are higher after it was reported that it was in advanced talks with Caesars Entertainment to acquire the non-US assets of William Hill, for a sum said to be in the region of £2bn.  

US

It’s been a subdued start to the week for US markets, after returning from their long Labor Day weekend, as investors continued to absorb Friday’s disappointing payrolls report, with the big caps leading the declines, while the likes of the tech sector and financials are outperforming, led by Apple and JP Morgan Chase.

Match.com has seen its shares surge above its 200-day MA, to a one month high, on reports that it will be added to the S&P500 on September 20th, replacing Perrigo Group.

AMC Entertainment shares are also higher after the company reported that over 2m people attended the groups theatres over the holiday weekend, more than in 2019, while another 800k people attended cinemas across Europe.      

FX

The US dollar looks set for another day of gains, as firmer yields help to underpin a rebound from one-month lows. 

The Australian dollar has slipped back despite the RBA taking the decision to proceed with the reduction to its weekly asset purchase amount from A$5bn a week to A$4bn. The central bank, while acknowledging the risks from recent lockdowns to the economy decided to push the program out into February next year, from its original end date of November, turning what would have been a hawkish decision into a more dovish one.

The euro has also squeezed higher ahead of this week’s ECB rate meeting on Thursday, on speculation that the ECB might be considering going down a similar tapering route This seems highly unlikely even with headline CPI at 3%, particularly since the ECB has gone to such lengths to convince markets that its new mandate of tolerating temporary inflation overshoots to its policy target, is a coherent one.

The whole point of the guidance change was to prevent the type of policy mistakes that saw the ECB raise rates in 2008 and 2011. While the inflation hawks are currently making a lot of noise, it would be premature in the extreme to start signalling a change of stance so soon and based on one 3% CPI reading.

Commodities

Crude oil prices have continued to slip back after the surprise decision by Saudi Arabia to reduce October prices for Asia delivery by around $1 a barrel.

The better-than-expected trade numbers from China don’t appear to be helping, maybe due to the perception that the rebound in trade is being driven by pulled forward demand, as companies build up inventory. On the plus side this should alleviate some of the concerns about higher prices exerting upward pressure on inflation. 

The rebound in the US dollar is continuing to weigh on gold prices, as are higher yields which has seen the US 10 year push up to its highest level since July 14th


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