Mixed start for Europe ahead of US jobs report

CMC Markets

Markets in Asia were able to carry over the gains seen in US markets overnight on optimism that the trade talks announced yesterday might help to draw the recent sting of uncertainty that has hampered investors sentiment the past few weeks.

The big question is whether this exuberance, irrational or otherwise can carry stock markets even higher in the coming days with US markets closing at one month highs last night. A big sell off in bond prices and sharp jump in yields appears to have helped propel this recent equity market rally, however one can’t help thinking that the selloff in bond markets is merely some position readjustment ahead of next week’s European Central Bank rate meeting, as well as the latest Fed meeting a week later.

Equity markets here in Europe have opened somewhat mixed with the FTSE100 once again underperforming as a stronger pound acts as a drag on the US dollar earners in the index. The DAX is modestly higher with Deutsche Bank making small gains after announcing more job losses this time in its fixed income division.

The pound has continued to make decent gains over the past few days particularly against the euro where it hit its highest levels against the single currency since 25th July, as well as it hitting one month highs against the US dollar.

While the weakness of the US dollar is part of the story here, it also appears that recent political events have encouraged markets in the belief that a “no deal” Brexit is much less likely. This seems a little premature in the current febrile political environment.

The share price of UK house builder Berkeley Group has managed to hold up fairly well so far this year, up over 10%, and this morning’s trading statement didn’t contain anything to really undermine these gains. Management announced that market conditions in the UK housing market remained consistent with the view reported in June. Forward sales remain above £1.8bn and the company maintained its estimates of over £3.3bn in pre-tax profits over the next six years to 2025. The company also said it remained mindful of any potential Brexit risks.

Scottish engineering company Weir Group has had a rough couple of years after its share price peaked last year at four year highs above 2,300p.

The slide in the oil price through 2018 had a lot to do with that sharp decline given its expertise in oilfield services. In order to address this over reliance on oil and gas the company decided to buy mining tool producer Esco for $1.3bn last year in an attempt to diversify this expertise away from the oil and gas sector. This decision appears to have paid off handsomely after the company announced the landing of a record £100m order for a magnetite ore project in the Pilbara region of Western Australia.

In its most recent trading statement at the end of July the company said profits were already 5% higher for the year, with revenues up 17% to £1.4bn, so this deal is likely will be a welcome boost to what is already looking like a very astute acquisition. Investors also appear to like the look of the deal, even if initial share price reaction has been a little on the subdued side with the share edging higher in early trade.

On 19th August pubs group Greene King announced that it was being acquired by CK Noble, a property offshoot of Hong Kong’s richest man Li Ka-Shing for £2.7bn, a move that sent the share price up sharply. This morning’s latest Q1 trading statement rather begs the question as to why he thinks the business is worth that much.

Like for like sales for the first 18 weeks came in a little weaker to the tune of 1.8%, though they have picked up a little in the last 7 weeks. Total beer volumes were also lower to the tune of 6.5% for the 18 weeks and own brewed volumes even worse at a 7.9% decline. Management have said they remain on track to dispose of up to 90 pubs this year generating disposals of between £45m and £55m.

With US manufacturing apparently in recession and yet ADP payrolls growth showing reasonable levels of strength across small, medium and large business, its difficult to gauge whether the US economy is heading towards a recession next year or merely a slowdown. A better than expected August ADP payrolls report of 195k yesterday, along with a similarly positive non-farm payrolls report today is likely to pose a headache for Fed officials later this month, when they meet to discuss what to do with interest rates at their next meeting.

With markets still pricing in the absolutely certainty of a rate move at the next meeting it is becoming increasingly difficult to know where the level of the bar for a Fed rate cut in September is, in terms of whether it will be 25bp or 50bps.

Current expectations are for an 79% probability of a 25bp cut, irrespective of whether today’s August payrolls report continues the trend of decent jobs growth of circa 100k numbers, along with wages growth of around 3%. Anything that falls short of those expectations could well fuel heightened expectations that the Fed may cut by more than 25bps, however these expectations could well be influenced by how aggressive the European Central Bank is next week, when it meets and if as expected embarks on a further aggressive easing policy.

While Fed chair Jay Powell’s comments at Jackson Hole gave no indication that the Fed is even considering a 50bp cut in rates, despite pressure from President Trump to be more aggressive, any deterioration in the economic data could well cause that calculus to shift.

We’ve already seen St. Louis Fed chair James Bullard shift his stance to the possibility of a 50bp cut, however he might find that position rather lonely if today’s payrolls numbers match the strength of yesterday’s 195k ADP report, and sees jobs growth that beats expectations of 160k and wages growth of 3%. As things stand there are no signs that the two dissenters at the last meeting of Boston Fed Eric Rosengren and Kansas City Fed Esther George that they have shifted from their July positions, and yesterday’s ADP and ISM numbers have only served to reinforce that.

While the headline payrolls numbers will be key we’ll also be hearing from Jay Powell later today when he speaks in Zurich with investors looking for clues as to whether he’s shifted position from his Jackson Hole position of being data dependant and a 25bp cut.

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