UK & Europe
Stocks in Europe did a little bit of nothing on Thursday ahead of highly anticipated minutes from September’s Federal Reserve rate setting meeting. The expectation that the Federal Reserve may not raise rates until 2016 has been one of the catalysts for the rally in stocks over the past four days. The minutes have the potential to confirm the expectation of low rates for longer or turn it on its head.
The Bank of England rate decision and minutes simply served to reinforce the central bank’s message of cautious optimism for the UK economy. The unchanged voting amongst policy-makers for a third month running of 8-1 with only Ian McCafferty voting for a rate hike meant it was largely a non-event. A first rate rise in the first half of next year still seems about right.
The accounts from the September policy meeting of the European Central Bank didn’t add much more to the already dovish press conference held by President Mario Draghi. The general feeling amongst rate-setters seems to be that more time is needed to assess the risks of the EM slowdown before taking any action.
Enduring low UK interest rates helped the FTSE 100 outperform sluggish European indices that were weighed down by the worst drop in German exports since 2009.
A rise in Air France KLM SA (LONDON:0LN7) passenger figures gave airlines EasyJet PLC (LONDON:EZJ) and IAG (LONDON:ICAG) a lift while recently beaten-up healthcare shares Shire PLC (LONDON:SHP) and AstraZeneca PLC (LONDON:AZN) rose on signs of a letup in Wall Street’s biotech sell-off.
Shares of Deutsche Bank (XETRA:DBKGn) rose, reversing early losses after the German bank shocked markets by saying it will lose €6bn in the third quarter, its worst loss in over a decade. The update came ahead of its scheduled earnings release on October 29.
New Deutsche chief John Cryan is making his mark by kitchen-sinking his first quarter in the role. Having already announced Deutsche Bank will cut a quarter of its workforce; the bank has announced massive write-downs. The write-downs are largely goodwill/intangibles from its investment banking business triggered by regulatory changes. There has also been a write down on the sale of its ‘Postbank’ division and its stake in China’s Hua Xia Bank and another €1.2bn provision to cover litigation.
The reason DB shares haven’t reacted more negatively is that the bank has said the write-downs will not substantially impact regulatory capital ratios. Deutsche Bank trades below its tangible book value because investors think the bank is undercapitalised. By selling assets, making provisions and likely cutting its dividend Mr Cryan will hopefully avoid capital-raising through a rights issue.
US
US stocks opened in the red on Thursday, leaving the Dow Jones lower for the first time in five days as investors booked profits ahead of the release of FOMC minutes.
Tech stocks led declines with Apple (NASDAQ:AAPL) dropping over 1.5%, clearly unimpressed with reports that Dell plans a leveraged buy-out of EMC Corporation (NYSE:EMC) for $27 per share, perhaps needing as much as $40bn in financing.
FX
Action was a little flat in currency markets ahead of the release of Fed minutes with the dollar mostly unchanged.
The euro got a little boost as the off-chance that ECB accounts would provide further clues of easing was undone. EUR/USD retook 1.1250 while EUR/GBP recouped some of yesterday’s drop but remained below 0.74.
The British pound slipped after MPC votes remained 8-1 in favour of keeping rates on hold. There was an outside chance Martin Weale could have joined Ian McCafferty and called for a hike given the strong wage growth, so the sterling drop reflects that idea coming out of the market. GBP/USD slipped back through 1.53
Commodities
Crude oil retrieved some of Wednesday’s losses caused by weekly US oil inventories rising more than expected. The price of crude is set for its biggest weekly rise in six weeks as the IEA forecasts lower US output and Russia looks to communicate more with other oil producing nations.
The price of gold was unchanged before Fed minutes. Silver prices sunk by more than 2% while copper fell under $2.40 per lb as Chinese markets came back online.
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