Europe

It’s been another mixed day for markets in Europe with the FTSE100 underperforming this time after a series of disappointing earnings announcements, while the DAX has rebounded after yesterday’s heavy losses.

This morning’s disappointing EU Q2 GDP and weak July CPI data has helped reinforce expectations that the European Central Bank will be much more accommodative when it next meets in September, and this appears to be helping support French and German markets.

House builder Taylor Wimpey latest first half numbers don’t appear to have elicited that much enthusiasm, with the share price slipping towards the bottom of the FTSE100, despite the company completing more homes in the first half of the year, compared to a year ago. While the business was able to see a modest rise in revenue to £1.73bn, profits before tax fell modestly to £299.8m, from £301m, driven by a decrease in profit margins from 20% to 18%.

Current trading continues to look positive with forward sales at 87%, and a solid order book, however the slide in the share price appears to be as a result of investors focussing on the rise in build cost inflation which is expected to rise to 5% in 2019, from 3.5% in 2018, which could well shrink margins and profits further. 

Defence contractor BAE Systems has seen a positive reaction after the company reported better than expected revenues of £8.6bn, driven by an increase in US defence spending, which has seen profits rise close to a £1bn.

Banks have been in focus today after Swiss banking giant Credit Suisse posted better than expected numbers for Q2, with profits jumping by 45%. This came about despite a difficult economic backdrop and the low interest rate environment. Pre-tax income saw an increase to 1.3bn Swiss francs, from 1.1bn a year ago, helped by a decent performance in its wealth management division.

French bank BNP Paribas also beat profit expectations for Q2 with net profits rising 3.1% over the same period a year ago. This improvement appears to have been achieved as a result of cost cutting as revenues saw a minimal increase of 0.2% to €11.2bn. Equities trading was the main drag with a fall in revenues of 14.3%.

A larger than expected provision for PPI has seen Lloyds Banking Group miss expectations on its Q2 profits, sending the shares lower on the open, after the bank took a £550m provision, which resulted in its Q2 statutory pre-tax profits coming in at £1.3bn, below expectations of £1.76bn. There was always the prospect of another lumpy provision in the Q2 numbers with the new deadline for PPI claims fast approaching, however the extent of the provision was a little unexpected.

The picture for Q2 was always likely to be much more tricky given that the UK economy slowed quite significantly during April and May, in the wake of the extension of the Brexit deadline at the end of March.

This belief has been reflected in a share price slide from the peaks in April just above 65p a share, and has continued today with another big decline, and which has also weighed on RBS, who report their latest numbers later this week.

Despite the higher than expected provision today’s numbers still paint a picture of a bank plotting a pretty steady course in a difficult economic environment.

Aston Martin’s latest numbers are nothing short of a disaster, as the company posted a pre-tax loss of £78.8m in the first half as the pre-IPO optimism of late last year, has become a distant memory, with investors undergoing a significant reality check. The share price has lost over 75% of its IPO valuation, and while we knew that this week’s results would be bad, the loss of confidence in the management of the business from investors has been startling.

Management have restated that they remain optimistic of the new DBX launching in Q2. They will need to be, and while the sales the numbers still look steady in overseas markets, they will need to remain so, given how confidence in management has been shaken these past few months.

The success of the DBX will be crucial in shoring up confidence, and while a weaker pound will certainly help, the DBX is likely to be the final throw of the dice for current management, who appear to have underestimated the effects of higher costs as production capacity has been ramped up.

The UK consumer has always been seen as a key bellwether of the UK economy and its big name retailers play a part in reflecting that.

Today’s trading update from Next PLC is hugely encouraging in an environment when Brexit dominates the news flow.

Its latest numbers would appear to show that the UK consumer is as resilient as ever. Q2 full price sales saw a rise of 4%, and this has prompted the company to more than double its full year sales guidance from 1.7% to 3.6%. the company also upgraded its profit guidance to £725m, a rise of £10m, sending the share price to its highest level in over a year.

The improvement has been entirely driven by its on-line division, which has seen sales rise by 11.9%. It’s not such good news for the High Street which has seen sales fall 3.9%, and it is this area which is likely to be a continued weak spot going forward.

Intu Properties, owners of the Trafford Centre in Manchester, and Lakeside in Essex, saw a decline in rental income of £17.9m, compared to the same period a year ago. Combined with an increase in finance costs, underlying earnings fell by £32m to £66.4m.

The company, not surprisingly, was quick to blame the problems facing the retail sector, resulting from a higher number of administrations and CVA’s as retailers struggle with a difficult retail environment.

It is hard to imagine the outlook improving as more and more retailers push for rent reductions, when they see there less efficient peers, file for a CVA and get the reductions as a matter of course.

To deal with the challenges facing the retail sector Intu management have outlined a 5 year programme to pay down debt levels, by disposing some of their underperforming assets, cutting the dividend, and transform their remaining real estate to more reflect the changing retail environment.

It would appear that investors don’t have much faith in that plan, if today’s price action is any guide, with the shares falling sharply, to the bottom of the FTSE250, and a record low.  The fear appears to be that management may well be forced to raise extra capital, as investors worry about the depreciating nature of its assets, relative to its debt levels.

US

US stocks are holding steady ahead of the Federal Reserve rate meeting later today, with most investors expecting a cut of 0.25% in the Fed Funds rate.

It will be the press conference that is likely to be most instructive, with Fed chair Jay Powell looking to navigate a tricky path of keeping the markets happy, while not pushing the US dollar too much higher, and not incurring the wrath of President Trump.

Whatever happens, it’s quite likely that whatever Powell and the Fed does today, the President is likely to criticise them, because that is what he does. 

Apple shares jumped to their best levels this year after the company posted numbers that came in better than expected, as a slowdown in iPhone sales was offset by improvements in iPad and Mac sales as well as the best ever performance in services. The company also upped its Q4 guidance for revenues to $61bn, to $64bn.

FX

It’s all about the Fed as currencies trade quietly ahead of this evenings rate decision.

The  Australian dollar has managed to outperform, after the latest quarterly inflation numbers showed a bigger than expected rebound from Q1’s 0% reading. A rise to 0.6% was above expectations of a rise of 0.4%. With the RBA set to meet next week and widely expected to cut rates again, this was an unwelcome reminder to Australian dollar short positions that the bank might want to wait and see, before pulling the trigger. We already know RBA chief Phillip Lowe is sceptical that further rate cuts will be particularly effective if everybody does them.

The pound has been the best performer today, moving sharply higher this afternoon in the wake of a disappointing US Chicago PMI number which came in at its lowest level since December 2014 at 44.4. This probably shouldn’t be come us a surprise given how bombed out the pound is in terms of recent declines, as traders pare back positions, ahead of the Fed.

This is only sensible ahead of this evening’s Fed meeting, as well as tomorrow’s Bank of England decision, particular if either central bank springs a surprise. Bank of England Governor Carney is also likely to face some intensive questioning tomorrow as to how well prepared the central bank is for a hard Brexit, given the sudden deterioration in political relations between the UK government and the EU.

Commodities

Oil prices have continued their recent moves higher, after inventory from the American Petroleum Institute and EIA fell by more than expected, while new outages in Libya helped put a floor under prices.

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