The FTSE 100 is up 1.4% in early trade once again led by the basic resource stocks. The rally in US indices overnight fed into the upside in Asian markets this morning and the negativity seen in the earlier part of this week seems to have waned for the time being. The FTSE is still down 6.47% year to date and has been struggling to surpass the 6270/6300 level since the end of August. In fact the only European index hanging on a YTD gain is that of the FTSE MIB which has added 7.16%.
Given that the rout in equities has been fairly substantial and not merely confined to cyclical stocks an element of bargain hunting is underway. Both copper and oil prices have seen a bounce over the past couple of days with the former adding 6.8 % from Monday’s lows which is ultimately helping to buoy sentiment also.
The Chinese manufacturing PMIs came in at consensus although the contraction continues with the official number printing 49.8 and the Caixan PMI coming in at 47.2 versus the 47 expected. We may now be reverting to the ‘poor data equates to additional stimulus’ mode in equity markets but given that the recent moves have been volatile, both upwards and downwards, it’s difficult to find a reason for the gains to be sustained until the fundamentals begin to add up.
Economic growth in emerging economies has weakened substantially this year and China may well see its growth slow to 6.8% this year from 7.3% and the PMI data tends to confirm this. Beijing is changing tack and trying to wean itself off its dependence on exports led investment growth towards domestic consumption so it’s little wonder its manufacturing and industrial production is slowing.
Nevertheless, the transitional period will impact globally and there is a strong likelihood of additional rate cuts in the medium term which should suffice to a point.
Eurozone manufacturing PMI was for the most part disappointing with only France managing to beat estimates, but this coupled with the fact that the euro area officially fell into deflation only boosts the notion that the ECB will provide additional monetary stimulus and potentially extend the current programme beyond September 2016.
In the UK, PMI fell to a 3 month low of 51.5 – manufacturing has really not been Britain’s strongest suit but this was one of the weakest quarters in 2 years and new order growth looks worrying in terms of a lack of pace. The pound has slipped as low as $1.5108 and the euro continues on the front foot against sterling despite the perception that divergent monetary policies are afoot. We may well see expectations for a BOE rate hike pared back but services PMI, due for release next week, and of far greater importance to the UK economy may well counteract this.
Equity highlights:
BP (LONDON:BP) +2.37%: A rise in the price of crude has helped buoy the stock. Declining US crude stockpiles has helped but there remains a supply glut globally which is essentially the reason we have seen the price of oil decline by half in the past 12 months.
Glencore (LONDON:GLEN) +3% - the reassurance from management seems to be aiding equity investor sentiment although the price has stopped shy of taking the 100p marker so far. Bond investors are a little less confident and this is reflected in the inverted CDS curve. Prices for longer-term debt has fallen as investors began to assess the potential recovery values for Glencore debt, most of which is unsecured.
Pearson (LONDON:PSON) +2.66%: the company is said to be buying the e-assessment division of Learn Direct. Purchase apparently in the tens of millions of pounds.
BT +2.15% : According to the FT, the UK minister overseeing the telecoms sector has poured cold water on the idea of separating BT from its broadband network, dismaying rival companies who want to break up the former national monopoly. BT is fighting for its future as rival companies have ramped up calls for the split of its fixed line network, which they argue causes a conflict of interest given its own retail internet business.
Rolls Royce (LONDON:RR) +2.14%: Reinstated to buy at Goldman Sachs (NYSE:GS). The stock is down 24.2% YTD but the average broker target price (12month) implies circa 18% upside to 766p.
A number of stocks go ex-dividend today on the Stoxx600. Including Centrica Plc (LONDON:CNA) (-0.61%) DS Smith PLC (LONDON:SMDS), British Land Company PLC (LONDON:BLND) (+0.54%), Inmarsat PLC (LONDON:ISA)(0.15%), WM Morrison Supermarkets PLC (LONDON:MRW) (-0.66%), Intertek Group PLC (LONDON:ITRK).
We are calling the Dow higher by 105 points to 16395.