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Stocks slump as Germany contracts, Balfour bucks trend

CMC Markets

European equity markets have been clobbered today as the German economy contracted in the second-quarter, and the US yield curve inverted too. 


Germany is the powerhouse of Europe and now that the economy suffered negative growth of 0.1%, there are major concerns the country is heading for a recession. The German manufacturing sector has been in contraction throughout 2019, and the US-China trade spat has played a role in its downfall, and the prospect of a no-deal Brexit is hanging over the industry too. There is a view that if Germany is feeling the pain of the global slowdown, things must be even worse in the rest of Europe.               

Balfour Beatty posted a solid set of first-half results as pre-tax profit jumped by 14.2% and revenue was fractionally higher too. The order book increased by 5%, and the net cash position surged by 80% - which underlines the success of the tough restructuring programme. The group issued a string of profit warnings in the 2014-2015 era, but the group took the tough medicine by cutting costs and being prudent when bidding for contracts, and it has paid-off. The interim dividend was upped by 31%, and the full-year net cash guidance was lifted too. The infrastructure and construction services sector is filled with firms that spread themselves too thin, but Balfour Beatty is great example of turnaround story thanks to the overhaul of the business under Leo Quinn’s leadership. The stock is higher today.

Admiral Group revealed respectable figures today. In the first six months revenue increased by 6% and pre-tax profit ticked up by 3.6%. The underwriting business posted a profit, but the level of profitability dipped. Admiral said its client base increased by 8.1%, and that was largely driven by a jump in the international business. The firm announced an interim dividend of 41.8p and a special dividend of 21.1p, and that should help keep shareholders onside. 

Firstgroup have a 70:30 joint venture with First Trenitalia on the new west coast partnership which will service the London to Glasgow train line. The announcement caught the attention of JPMorgan who upped their price target for the stock to 145p from 133p.   


The inversion of the US 2 year yield and the US 10 year yield has sent shockwaves through the markets, and that has forewarned recessions in the US, and traders are running scared. The major indices sold-off sharply for fear the US is heading for a recession. The underlying fundamentals are solid as the jobless rate is at multi-decade lows, and average earnings are outstripping inflation, but for now dealers are focusing on the yield curve, and equities are taking a hammering.

Macy’s shares sold-off heavily today as the group posted poor second-quarter figures. EPS came in at 28 cents, which undershot the 45 cent forecast. Same store sales on an owned plus basis increased by 0.3%, while the consensus estimate was for a 0.4% increase. The group admitted that it needed to slash costs in order to get rid of old stocks too. The full-year EPS outlook was lowered to between $2.85 and $3.05, while the previous forecast was for between $3.05 and $3.25.       


EUR/USD is in the red today due to fears the German economy is heading towards a recession on the back of the GDP update. Germany is driving force of the eurozone and a weaker German economy is likely to ripple out across the region. Ongoing political uncertainty in Italy and the possibility of a no-deal Brexit are also hanging over the single currency.

GBP/USD is largely unchanged on the session despite the firmer UK firmer inflation. The headline CPI rate edged up to 2.1%, and the core reading ticked up to 1.9% ,and both point to an increase in demand, which bodes well for the UK economy. Today’s positive numbers add to the respectable unemployment data and earnings figures that were revealed yesterday, but sterling can’t catch a break because of Brexit jitters.     


Gold is back in demand today as traders are seeking assets that are perceived to be lower risk. The exodus from equities has seen funds flow into gold. Gold is higher today, but when you consider how far stocks have fallen, the upward move in gold hasn’t been that much. If the metal breaks above the $1,520 mark, it might pave the way for $1,555 to be tested.     

WTI and Brent crude have suffered greatly today on account of the fears about the state of the global economy. China posted disappointing industrial production and fixed asset investment data overnight, and the latest German GDP update fuelled fears the world economy is slowing down. Oil saw jump in volatility on the back of the latest Energy Information Administration report, which showed that oil inventories increased by 1.58 million barrels, while traders were expecting a draw of 2.77 million barrels. Gasoline inventories fell by 1.41 million barrels and that counteracted the jump in oil stockpiles.      


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