FTSE Stocks On Slippery Ground

The European stocks are subject to heavy headwinds this morning. The FTSE is down by 1.20%, EasyJet, Intercontinental and Pearson (L:PSON) are leading losses.

The UK miners pair losses in London news that the copper producers would expand their production in order to fight the falling revenues on cheapening prices. The new production plants would increase the profitability of new miners even with a copper at $2/lb. We remain cautious on the new game plan, as without the pick-up in demand, a deeper oversupplied market in copper could then drag the copper prices well below $2/lb and jeopardise revenues expected form the most efficient miners. In addition, pumping up the production may not be the best solution for highly leveraged companies, as Glencore (L:GLEN), in their efforts to restructure debt.

As the UK gets involved in war against the IS…

PM Cameron announced an additional £12 billion to push the defence budget to £178 billion in 10 years. The additional government spending should in theory steepen the future inflation path and push the Bank of England to kick-off the policy normalisation earlier than previously anticipated. Higher government spending is also expected to give a bump to the UK’s GDP in the coming quarters. In this context, BoE Governor Carney’s testimony is under close watch today.

Fed hawks watch the US GDP

The US will publish its 3Q second GDP estimate today and the consensus is an optimistic upside revision to 3.2%q/q annualised, from 2.1% last printed; the core PCE is expected to stagnate at 1.3%. Any positive surprise will reinforce the Fed hawks’ stance for a December rate hike. Presently, only a very bad surprise could dent the appetite walking into the December FOMC meeting.

Heavy unwind in Turkish lira

Turkey has it all for making the headlines today. The central bank decision, the new cabinet announcement and a Russian jet shot by its Syrian border to add some more colour to the picture.

The deep opinion divergence between the President Erdogan and PM Davutoglu delays the formation of the new cabinet. The political uncertainty is a source of stress in the Turkish stock and bond markets. The BIST 100 index has given back the two-thirds of post-election gains and stepped below the 80000 mark for the first time in November. The BIST is still in the bullish consolidation zone off its August lows (69797). A slide below 78793 (Fib 38.2% retrace) could signal a further weakness, if especially the US dollar adds on strength before the FOMC’s December meeting.

The lira is 0.83% lower this morning. Turkey’s Central Bank will give policy verdict today and is expected to sit on its hands as there is little incentive to move before the formation of the cabinet and more clarity on Turkey’s political and fiscal path.

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The rising geopolitical tensions in Turkey’s Syrian border are will dent investor appetite for Turkish assets. In fact, the recent fall in the FX volatility has been beneficial for carry traders parking their cash in the lira. In return, the appreciation in lira has given a bump to Turkish stocks, because of their high level of foreign debt. With the rising volatility in the lira, the aversion in regards to Turkish stocks and bonds may increase. Investors are naturally demanding a higher premium to match the country risk. Central Bank’s retention on action could again accumulate tensions and require a bigger move in the future.

The rising US yields could accentuate the capital outflows out of the Turkish stocks as the Fed walks decidedly toward hiking its rates in December.

Written By: London Capital Group