High Speed Rail, Construction

Europe

It’s been a fairly weak and lacklustre session for European equities today, in the absence of the US for Martin Luther King Day, with a couple of corporate stories dominating the headlines.

With the euro at three year highs against the US dollar and with the potential to make further gains the DAX and CAC40 have come under some mild selling pressure on top of the small losses seen last week.

The FTSE 100 has also slipped back albeit from last week’s new all-time highs with the collapse of the UK’s second biggest construction group Carillion grabbing most of the headlines.

It is still unclear how the collapse of this company will impact the broader UK economy, particularly further down the supply chain in terms of the smaller businesses who rely on the revenue from its sub contracted work. We’ve already seen some contagion in the share prices of sector peers Balfour Beatty and Galliford Try who both reported that they were setting aside significant provisions for extra costs as a result of this morning’s news.

Balfour Beatty, who went through their own woes back in 2013 announced in a brief statement that it would set aside a sum of between £35m and £45m as an exceptional underlying charge in its 2018 income statement, in respect of its joint ventures with Carillion.

It is likely that a lot of the company’s government work will be re-tendered where possible, or in the case of joint ventures its project partners will step into the breach.

Kier Group, who are also co-partners with Carillion on a number of major projects announced it had already made contingency for a possible collapse and that it didn’t anticipate any material disadvantage as a result.

As a result the share prices of Balfour Beatty and Galliford Try are at the bottom of the FTSE 250, while Kier’s share price is higher.

European aerospace giant Airbus is also in the news after the company announced it may have to end the production of its A380 double decker Airbus plane as the number of new orders for the 600 seater aircraft continues to decline.

While the market for big long haul planes appears to be struggling the market for smaller aircraft on shorter haul routes appears to be holding up well. 

US

US markets are closed today

FX

The US dollar index has continued its slide, hitting three year lows against a basket of currencies, as speculation about tighter monetary policy elsewhere in the world weighs on the greenback. It has now declined four weeks in succession and more losses this week would translate into its worst losing sequence since April 2011.

The euro has hit a three year high just shy of 1.2300 on optimism about the prospect of political stability in Germany in the coming weeks, and the prospect of a quicker slowdown in asset purchases by the ECB in the coming months. A lack of inflation might puncture some of this expectation ahead of tomorrow’s EU CPI number for December which is expected to be confirmed at 1.4%, with core prices below 1% at 0.9%.

The pound has also found further support trading above the 1.3800 level for the first time since 24th June 2016, the day after the Brexit vote, despite concerns about the effects that Carillion’s collapse might have on the UK economy.

Commodities

The weakness of the US dollar is acting as a tailwind for commodity prices with copper rising again towards last month’s three year highs, ahead of this week’s China Q4 GDP data and industrial production numbers.

Gold prices are also benefitting from the weak US dollar rising back to its highest level since last September, while Palladium prices have continued to outperform, hitting new record highs before slipping back as it continued to trade further away from Platinum prices.

Crude oil prices are treading water just below last week’s highs helped by the weakness of the US dollar but capped by a rise in US rig counts on Friday

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