Traders bet on Euro rate cut to send stocks soaring after German PMI disappointment
PMI data out of Germany this morning initially disappointed traders, who dragged indices back from their highs early in the session. The tone quickly changed however, with the consensus view seeming to be that data of this nature makes an imminent European rate cut more likely. This perverse ‘bad data is good’ rationale has been a feature of US markets for some time now as investors rely on the back stop of quantitative easing, but for bears unable to reconcile a bleak macro picture with perpetual equity market enthusiasm, these are frustrating times indeed…
Amongst UK blue chips, technology group ARM stole the headlines early on, carried to double digit gains on earnings numbers that surpassed market expectations. Concerns that an overdependence on demand for Apple products would weigh on their bottom line proved unfounded, with wider demand for smart phones and tablets keeping ARM’s ships flying off the shelves. The iPhone manufacturer are themselves due to publish earnings after the closing bell tonight, and whilst a slow-down in profits is widely expected, the recent price action in the stock is such that there is room for an upside surprise…
Associated British Foods are also marked higher after their first-half update saw profits rise 26% due largely to exceptional performance at their Primark brand. Analysts at Societe Generale described the numbers as ‘sparkling’ but continue to rate the stock only a ‘hold’, with the shares trading only just beneath all-time highs.
In the midcap space software group Aveva are top performer, up over 5% on a reported strong second half, as well as comments from Numis citing current levels in the share price as an excellent buying opportunity. Their 2550p price target reflects 19% of potential upside in their calculations.
US markets received a boost at the open as European bulls came out to play and further signs that the US housing market is improving hit the wires. Overall home sales improved to 417,000 from 411,000 in February, also narrowly beating Bloomberg estimates of 416,000. As earnings season continues, according to figures released by Bloomberg 73% of the 131 S&P 500 companies that have reported quarterly results to date have beat analysts’ estimates.
Of today’s earnings releases, US insurer Travelers reported operating profit of $2.31 per share setting a new quarterly record and beating estimates of $2.02 which together with an increase in dividend saw the stock trade higher by more than 3%.
Netflix gave investors reason to cheer today after reporting Q1 profits of $0.31 per share, well above analyst forecasts of $0.19, sending the stock soaring by more than 20% in early trading. Since infiltrating the domain of more traditional US network TV channels in recent months by delivering original content and the addition of 3 million new worldwide subscribers since January this year, the stock has recovered to September 2011 highs around $218 per share.
All eyes after the bell will be on Apple Inc. shares as the tech behemoth reports what many analysts predict may be the companies first profit decline in a decade, as expectations have built in last few weeks that iPhone sales growth has slowed in the face of increasing competition and innovation from the likes of Samsung. The stock traded marginally higher in early trading, treading water above the $400 level ahead of earnings after receiving a favourable ruling from the International Trade Commission is a patent dispute with Google.
The macro environment for the single currency took a further hit today as a report showed that services and manufacturing for the Eurozone shrank for a 15th month, adding fuel to speculation that the European central bank will cut interest rates in an attempt to spur growth into a floundering economy. The Euro dropped to a two-week low against the Dollar as the shoulders that have been carrying the hopes of the region, Germany, saw their PMI data miss market expectations. Elsewhere in Europe, the Swedish Krona dropped to a four month low against the US dollar as an unemployment rate got revised up.
The currencies from two countries that benefit most from a strong Chinese economy, Australia and New Zealand, had a drop today against most of their major counterparts as China released a report which suggested they were experiencing a slowdown in manufacturing. This move is unlikely to worry the Reserve Bank of New Zealand Governor who has stated, as recently as mid-March, that he felt their currency was overvalued which had become a weight too large for the economy to rise through.
Following last week’s bounce for precious metals, today has seen recent service resumed with both Gold and Silver posting considerable losses after data revealed manufacturing growth is slowing in China, the premier consumer of metals worldwide. Silver was the biggest loser, shedding up to 3.5% on the day.
It was a similar picture for copper and energy markets, falling foul of the same figure from the far east. The manufacturing number, coupled with a GDP figure light of expectations last week, further indicates that investors may not be able to rely on Chinese optimism to prop up commodity markets in the short term. The news has also prompted Goldman Sachs to cut its near term outlook for commodities from Overweight to Neutral.
In soft commodity markets, Cocoa was well bid in today’s session following rumours that major producers from west Africa have sold the bulk of their crops, leaving them to buy back some of the short hedge trades often held against stockpiles.
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