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Lloyds swings to Q3 loss, as Peugeot and Fiat confirm merger deal

CMC Markets

European markets have opened cautiously mixed after the US Federal Reserve signalled that they were down in terms of rate cuts for the time being, as another 25bp rate cut saw yet further dissent from Kansas City Fed President Esther George and the Boston Fed’s Eric Rosengren.

What was notable was the optimism of Fed chair Jerome Powell with respect to US, China trade, as well as the deferral of disruption of a no deal Brexit. It is certainly true that the US consumer remains fairly resilient after yesterday’s Q3 GDP numbers showed personal consumption rise to 2.9%.

This optimism about the next few months certainly appears to be being reflected in the latest market expectations about a December rate cut, which are currently at a low 22%, however that optimism may well not survive first contact with tomorrow’s October payrolls report, which is expected to show a fairly weak number, of 85k, largely due to labour market disruption caused by the General Motors auto workers dispute. A weak payrolls number is also likely to prompt further undignified presidential social media interventions from Donald Trump about the Federal Reserve’s competence, however in seeking to draw a line under rate cuts for the time being it would appear that the US central bank is sending a message to the US President that they will conduct policy their way.

Fiat Chrysler and Peugeot this morning confirmed their plans to merge in a 50/50 merger of equals, suggesting that any concerns the French government may have had have been allayed. The lack of pushback by the French government may be down to assurances on job losses, which could well be bad news for car plants, outside of France and Italy, with the UK an obvious target. Any deal will still need to be scrutinised by regulators, but there remains little in the way of overlap outside of markets in Europe.

The deal is certainly welcome news for Fiat whose shares have been in slow decline since the start of 2018, in contrast to Peugeot whose shares have gone from strength to strength since the last of two bailouts in 2014. The reaction in the respective companies share price would suggest that Fiat have got the better deal here, with Peugeot’s share price falling sharply, while Fiat Chrysler has risen further. It’s not hard to understand this reaction when you consider the job done by Peugeot management over the last five years, while Fiat Chrysler management have overseen a tired product line and little in the way of innovation, in response to the challenges that are facing the sector as a whole, which include, but aren’t confined to, electric and driverless cars. 

At its last set of numbers Lloyds Banking Group found itself on the wrong end of yet another PPI provision, taking the total provision to £650m this year alone. In this morning’s Q3 numbers this has more than trebled with another £1.8bn provision, taking the total for the year to £2.45bn.

This provision came in at the higher end of expectations and has taken the total provision that Lloyds has set aside in the last decade up to an eye watering £20bn. On the actual numbers themselves in Q3 net income declined 6% on the quarter and was down 3% year to date.

Statutory profits, unsurprisingly have fallen year to date by 47% to £1.9bn, dragged down by the loss of £238m in Q3, with the return of PPI an unwelcome reminder of the legacy of poor decision making over a decade ago. 

In terms of overall business loans and advances to customers have risen 1%, though a large part of this was down to a decent rise in its mortgage book, with the acquisition of the Tesco portfolio helping here. Everywhere else there was modest increases

Having head from BP earlier this week, Royal Dutch Shell has followed up today with its latest Q3 numbers, posting profits of $4.77bn, well above expectations of $3.92bn, however as was the case with BP, it would appear that in guiding expectations lower the bar was easier to beat. Compared to a year ago the numbers still represented an 15% decline, as lower oil and gas prices trimmed margins.

With the election campaign set to get underway in earnest today with headlines focussed on the Labour Party “going after” the 1%, the pound has edged higher as the October 31st Brexit date comes and goes and investors start to focus on the political noise coming from the UK over the next five to six weeks. With Labour currently trailing in the polls there is likely to be little in the way of cut through for this type of narrative, however if the polls were to narrow in Labour’s favour then that would be quickly reflected in sterling weakness.  

US markets look set to open at a new record high for the S&P500 in the wake of last night’s FOMC decision, and more positive earnings updates, this tome from Apple and Facebook.

Apple posted another decent quarter ahead of the launch of its TV Plus service next month. In terms of revenue iPhone sales came in lower, declining 9%, however services hit a new record of $12.5bn, with over 450m paid subscriptions, up from 330m a year ago. The company also upgraded its expectations for Q1, saying that it expected to pull in over $85bn on an expectation that Thanksgiving and pre-Christmas sales will provide more of a boost than normal.

Facebook also posted a decent quarter for Q3 with revenue coming in at $17.65bn, a 29% rise year on year, while monthly active users also rose 7.9% to 2.45bn. Advertising revenue rose 28% helping drive profits to come in at $2.12c a share, beating expectations $1.91c a share. Instagram was a key growth area, with income here expected to contribute a much bigger share of overall income over the next 12 months.