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Cautious open expected ahead of US ADP
00:00, 04 December 2013
A third successive day of losses on US markets yesterday appears to confirm the prognosis that with markets near multi year highs prudent investors appear to be availing themselves of the opportunity to lock in some gains ahead of this week’s key data announcements from the other side of the Atlantic, though we could well see a slight rebound into the European open this morning. Some of the recent resilience shown in US data has shifted the odds towards a probability that we might see a token indication from the Fed that a paring back of asset purchases may come sooner rather than later. This is certainly being reflected in the bond market with 10 year yields approaching 2.8%. While a December taper remains very much an outlier, any cautious portfolio manager would be remarkably imprudent if they didn’t lock in some gains in a month where liquidity traditionally starts to slip back the nearer we get to Christmas. We will get an early indication into how the US employment market is performing this afternoon with the release of the November ADP employment report. This particular report gave markets a false steer in regard to the official BLS October report when it showed a disappointing 130k, well below expectations, so its reliability as a leading indicator for Friday’s numbers should be taken with a significant degree of caution. Be that as it may, a good or bad number here will provoke a reaction in the US dollar, as well as the bond markets. Expectations are for a number around 170k, which will certainly be enough for taper tension to be maintained. Other data due for release today includes the October trade balance numbers which is expected to show a $40bn deficit and services ISM for November which is expected to decline slightly to 55, from 55.4. Later on in the evening the latest Fed Beige Book survey is expected to give clues as to economic activity in the various Fed regions. Before all of that in Europe we have the small matter of a host of services PMI data from Germany, France, Italy and Spain to follow up on Monday’s manufacturing PMI data. Monday’s data was notable for an out-performance from Germany and Italy, while France continues to give grave cause for concern it is slipping back into recession, while Spain suffered a bit of a setback. Markets will be particularly focussing on France, given its role as second biggest economy and its continued economic divergence away from Germany’s economic performance. Expectations are fairly low with a final services PMI reading of 48.8, while Spain will be hoping Monday’s disappointing manufacturing number doesn’t translate into a similarly disappointing services performance for November. Expectations are for a reading of 50.7. Germany is expected to post a November reading of 54.4 and Italy a reading of 50.4. We are also expected to see a revision of Q3 EU GDP which is expected to come in unchanged at 0.1%, while retail sales for October are expected to rise 0.1%, up from the 0.6% decline seen in September. There is potential for a negative surprise here given last weeks surprise decline in the German number for the same month. Finally, the UK economy continues to go great guns with yesterday’s construction PMI blowing away expectations with a block busting 62.6 reading. If today’s services PMI posts a similarly positive number then we could be well on the way to seeing Q4 outperform the Q3 GDP number of 0.8%. Given that last month the services sector posted the best reading for over 6 years expectations are starting to run riot a little. Estimates for the November number are for a slight decline from 62.5 to 62, but even if we do miss slightly it will still mean that services has posted a number above 60 for five months in a row. At this rate we could see 7% unemployment sometime next year, which should make the forward guidance discussion a lot more interesting at tomorrow’s Bank of England rate meeting. Quite a busy day today with 7 companies reporting. First up is Tesco with their Q3 Trade figures. The general view is rather negative with Goldman Sachs giving them a ‘sell’ rating and HSBC analysts cutting their target price from 400p to 340p, below today’s opening at 340.9p. Since 2012 they have been losing market share and there is a general consensus they need to change their strategy from the 5.2% operating margin they are sticking to for 2013/14 and instead focus on undercutting competition. Fears of such a price war have contributed to Sainsbury’s recent share price drop. However on the positive side Tesco Chief Philip Clarke believes he’s onto a winner with the Hudl tablet and it is expected he will also expand their online shopping arm, highlighting their comparative digital dominance in the market. Contrary to the depressing prognosis on Tesco, International Consolidated Airlines Traffic figures are set to soar with 22 investment analysts giving this share a ‘buy’ rating. Credit Suisse released an ‘outperform’ rating on their shares predicting the continuation of their share price rise from their open a year ago at 169p to the current close at 365p. Also in focus today is Brewin Dolphin (Prelim), Consort Medical (Interim), Elekta (Q2), Sage Group (Prelim) and Standard Chartered (Trading). CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.