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European stocks shrug off faltering flash PMIs

CMC Markets

Whatever the setback US markets appear to have an almost Teflon like ability to shrug off any negative headlines as the Nasdaq once again set a new record high, shrugging off the concerns expressed in Wednesday’s Fed minutes by various central bank officials, about the strength of the US economy.

These concerns were amplified by a sharp 130k rise in weekly jobless claims, which pushed the number back over the symbolic 1m mark to 1.1m. For a couple of weeks now there had been a concern that the expiry of the recent weekly $600 stimulus cheques, would spark a rise in the level of weekly claims.

It would appear that this spike in claims could well be operating on a lag, and perhaps there is now an expectation that this delayed spike in claims levels will shake US politicians out of their complacency in delaying a new stimulus plan, and nudge them to pass new measures to cushion the possible effects of what is increasingly looking like a levelling off, or in a worst case outcome, a sharp slowdown in the US economy.

Asia markets have taken their cues from the positive finish in the US; however, it hasn’t been enough to stop them finishing the week in negative territory.

After yesterday’s big falls markets here in Europe have opened in positive territory, with the FTSE100 underperforming its European counterparts, probably hindered to some extent by the continued weakness of the US dollar against the pound. These gains proved hard to sustain after the latest flash PMIS from Germany and France pointed to a slowdown, particularly in services, as recent positive momentum ran up against concern about recent rises in coronavirus infection.     

This US dollar weakness looks set to translate into a ninth successive weekly decline, hitting its lowest level against the euro since April 2018 earlier this week, as concerns about the US economy and increasingly negative real rates undermine the attractiveness of the greenback. In spite of its current weakness, there are some signs on the margins, that it might be near a short-term base.

On the flip side it’s been a decent week for the pound despite early indications that the restart of EU/UK trade talks has seen little in the way of progress. EU chief negotiator Michel Barnier is expected to give a press conference later this morning with an update on progress, however expectations are so low to the point that markets don’t care that much about what he has to say, given they usually consist of the same self-serving soundbites that have come to characterise so many of his press conferences, blaming the UK for not being flexible enough, while the UK counters with a similar narrative. You could almost pre-script the comments.

This week’s economic data has continued to point to a UK economy that is continuing to shake off its post lockdown hangover. The staggered restart of the UK economy appears to be standing it in good stead with lower infection rates than its European counterparts, and this could well be helping with respect to a steadier recovery in some of the broader economic data.

July retail sales rose 3.6%, a better than expected rise, marking the first time since the beginning of 2019, we’ve seen three successive months of gains.

These numbers are encouraging, despite the challenges facing UK economy, of which there are many, particularly around sustainability of the furlough. Online retail sales have been a particularly strong area, not altogether surprising given the challenges facing high street retailers in reopening, along with the higher costs, and a reticence on the part of UK shoppers to venture out in the same way as before. The warm weather in July is also likely to have played a part in these July numbers.  

On the public finances, borrowing has continued to rise sharply, however by not as much as perhaps most people would have estimated, when the Chancellor first rolled out his stimulus program. In July the UK government borrowed another £25.9bn, on top of an adjusted £28.8bn in June. In each of the last three months the amount of money borrowed has been adjusted lower. In April it was adjusted down by £13.6bn, by £9.8bn in May and by £6bn in June. Make no mistake these are huge sums of money, with UK government debt now above £2trn, but without some of the furlough money that has been repaid by a host of UK companies they could have been much higher. This might give the Chancellor some wriggle room as we head into the autumn, especially if this morning’s August flash PMIs continue to support the narrative of a rebound in the UK economy.  

The latest flash PMI data for August in France and Germany would appear to point to a plateauing in economic activity, particularly in the services sector, where rising infection rates here could well be tempering economic activity on the margins.

In France services flash PMI came in at 51.9, down from 57.3 in July, while in Germany we also saw a moderation to 50.8, from 55.6. Manufacturing also slowed coming in at 49 for France, though in Germany it improved, coming in at 53.    

German company Bayer has said it will pay $1.6bn to resolve another litigation case, this time over a now withdrawn contraceptive device which was said to cause pelvic pain and unwanted pregnancies in a number of cases. This comes on top of the already $12.1bn plan it announced in June over its Roundup weedkiller, as a result of its rather ill-fated takeover of Monsanto. This particular case still has room to run with further bills likely.  

Rolls Royce shares are amongst the better performers today after the company reported that it had signed a new strategic agreement with Reaction Engines to develop new high-speed hypersonic propulsion systems for civil and defence purposes, as it looks to design new greener solutions for air travel propulsion. The company is overdue some positivity ahead of next week’s latest H1 numbers which aren’t expected to be particularly comfortable reading.  

US markets look set to continue their recovery from their post FOMC minutes lows with the S&P500 looking to open flat, while the Nasdaq could well go on to set another record.

The latest US flash PMI’s for August are expected to show modest improvements in both manufacturing and services, to 52 and 51 respectively.  

On the earnings front we have the latest Q3 numbers from US agricultural equipment company Deere and Co. In Q2 management said they expected global sales to fall by up to 30% to 40% in Q3, despite beating revenue expectations in Q2. While revenues beat expectations, this was mainly because of the varied measures to cut costs which has included the laying off of hundreds of workers, replacing higher paid more experienced workers with younger and lower skilled employees. Since those Q2 numbers back in May the US economy has continued to open up, and the shares have risen solidly from their March lows to be trading at one-year highs. Expectations are for profits to come in at $1.21c a share.


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