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DOW dropped further, banks to report Q3 earnings - EMEA Brief 12 Oct

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DanielaIG

  • The Dow Jones continues its tumble, losing more than 1,300 in two days, as worries over interest rates and trade barriers continue. 
  • The S&P dropped 2%, bringing its October losses to 6%
  • The sell off in the US also saw sell offs in Europe, with FTSE down 1.9%, DAX 1.3%, CAC 1.8% and EU STOXX 1.95%.
  • The VIX rose almost 9%, reaching it’s highest levels since February this year
  • Despite rising interest rates and a booming economy, bank stocks are trading lower, reaching bear market, ahead of earnings reports
  • XRP and Etherum lead the cryptocurrency downfall which has lost $6 billion in a day.
  • Gold hits its highest price in two months on Thursday after a rough 6 months. As a typical safe haven asset, people have turned to gold in the last few days as world stocks tanked.
  • Despite the ongoing trade wars with the US, China has reported a trade surplus of $34.13 billion in September, which economists believe is due to increase orders before the tariffs are enforced, which is likely to have an impact on the months to come. 

Asian overnight: A degree of recovery has been seen in Asian markets, with a general rebound in risk appetite. US markets were more mixed, but futures have begun ticking higher ahead of bank earnings later today. Oil prices also recovered, after suffering sharp losses earlier in the week.

Regarding the downfall in cryptocurrencies, although the direct cause is unknown, the recent negative sentiment towards cryptocurrencies from important financial institutions could have led to the downfall. Alternatively, it could be a market triggered sell-off, where people are looking to move cash into safer assets. Meanwhile, BitFinex has suspended fiat deposits and stopped accepting bank transfers despite initial denials. The suspension raises fundemental questions about its operations.

UK, US and Europe: Dow dropped a further 545 points on Thursday, bringing its 2 day loss to 1300. The S&P dropped 2%, bringing its October losses to 6%. Tech sector is worst performer, losing 4.5%, while financial sector is 2nd worse.

Global equity markets are today rebounding from the selloff we have seen this week, rebounding to around 25500 from the market low of around 25000 at the close yesterday. With the underlying global risk catalysts remaining in play, markets will be assessing whether todays move is one which is sustainable or not. Metal prices are modestly lower this morning after staging a rebound yesterday which gained significant traction into the afternoon. The dollar is softer, while the Euro and British Pound are the better performers amongst the majors today as  Brexit discussions show signs of progression.

Bank Earnings season kicks off today with three big players standing out: JPMorgan, Wells Fargo and Citigroup. Analysts are forecasting that banks will post their highest profits since the financial crisis as they are said to enter a “golden age”, fuelled by rising interest rates.  According to the FT, "JP Morgan is expected to post a 30 per cent increase in third-quarter profits year-on-year, according to analysts polled by Bloomberg". Across the broad sector, earning are expected to rise 17.7% and revenue increasing by over 7%.

When interest rates increase, banks should have more room to increase the rates they charge on loans, relative to the rates they pay out on deposits; this would allow banks to increase their interest margins. But if the increase in rates is deterring customers and businesses from borrowing, then that would hinder bank profits.

This means that, despite the general positive outlook regarding the US economy, there are some investors that are becoming sceptical about how long this continued earnings growth can be sustained. They believed that the reason why banks’ profits have been strong throughout the year has more to do with corporate tax cuts than with rising profitability. One of the biggest worries is a weak loan growth, being led mostly by mortgages.

South Africa: The rand has continued to claw back strength. Tencent Holdings is up nearly 7% this morning suggestive of a strong start for major holding company Naspers. BHP Billiton is up 1.3% in Australia, suggestive of a positive start for local diversified resource counters.

Economic calendar - key events and forecast (times in BST)

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Source: Daily FX Economic Calendar

3pm – US Michigan consumer sentiment (October, preliminary): expected to fall to 98.5 from 100.1. Market to watch: USD crosses

Corporate News, Upgrades and Downgrades

  • Man Group reported a small rise in assets under management for Q3, to $114.1 billion from $113.7 billion. The firm will establish a new holding company in Jersey in order to help deal with growth in the US.
  • Ashmore saw a 3% rise in assets under management for the three months to 30 September, to $76.4 billion, as clients responded to increased volatility across emerging markets
  • Tiger Brands:  the Ekurhuleni Department of Health issued a Certificate of Acceptability to the Company for the Germiston processing facility. This endorses the factory’s standards and operating procedures for the safe production of food products. Production of ready-to-cook products, comprising bacon and frozen sausages, is expected to commence on 12 October 2018. Salami production will also commence on this date.  

Kvaerner Upgraded to Buy at SEB Equities
Siltronic Upgraded to Hold at Berenberg
Covivio Upgraded to Add at AlphaValue
Paddy Power Upgraded to Hold at Berenberg

Magnolia Bostad Downgraded to Sell at SEB Equities

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