European shares gained ground on Tuesday morning. A rare positive economic surprise from Germany is setting a happier tone. A warning that global growth may come in lower than the World Bank’s previous estimates according to its President has not come as a huge surprise.
The FTSE 100 is putting more distance above the key 7,000 level with a 4-day high on Tuesday. The gains in UK markets are in keeping with a pickup in optimism by stock investors since last week’s hefty sell-off. The UK index has been supported by losses in the British pound following a warning from the Institute for Fiscal Studies (IFS) that a No-Deal Brexit would push UK debt to its highest level since the 1960s. The warning serves as a reminder to the potential costs of a no-deal exit at a time when traders were starting to price out the possibility it could happen.
London Stock Exchange Group (LON:LSE) shares dropped 6% at the open after rival Hong Kong Exchange and Clearing Ltd (HK:0388) scrapped its takeover bid. Another year another failed bid for the LSE. Still, we look forward to next year’s attempt. Of course there is always the issue of valuation, but we think the HK bid failed for much the same reason the previous effort from Deutsche Borse did. A clear unwillingness to sell from LSE management and most shareholders. There is a well known sideline issue that may be contributing to this anti-sale attitude. At a time of financial uncertainty before the UK leaves the EU, few British shareholders want to see the nation's stock exchange in foreign hands.
Germany’s DAX is aiming for a 4th consecutive daily gain. While factory orders stirred talks of a German recession yesterday, today industrial orders have raised the possibility recession could be avoided. Industrial orders rose by 0.3% m/m vs expectations of a -0.1% fall. Whether Germany’s economy is ends up with +0.1% or -0.1% growth in the third quarter is really neither here nor there. It’s still a difficult economy by modern German standards. The avoidance of recession is purely a psychological benefit that could lift animal spirits for the coming quarters.
Dow and S&P 500 futures suggest a flat to lower open on Tuesday. Traders are taking a cautiously optimistic approach to trade talks later this week. The prelude to the talks has not been without difficulty. Overnight the US widened its list of blacklisted Chinese companies to include top surveillance and artificial intelligence start-ups. The move from the US is symbolic in two ways. 1. A response to China reportedly trying to shrink the areas covered by a trade deal 2. A reminder that technological security and intellectual property are top of the US agenda. At this stage, it feels like we are just taking solace in the talks even taking place despite the clear differences on the two sides.
US opening calls
Dow Jones to open -10 points lower at 26,468
S&P 500 to open -1 point lower at 2,937