Europe
Markets in Europe rebounded from last week’s steep sell-off today as investors bought the dip rejuvenated by the near-completion of the latest takeover bid from AbbVie Inc (NYSE:ABBV) for Shire Plc (LONDON:SHP) at the beginning of US earnings season.
The FTSE 100 pushed back to a three day high, well above the broken 6,700 level in last week’s sell-off. Basic Material stocks led by Johnson Matthey (LONDON:JMAT) were top performers with consumer goods including Sabmiller (LONDON:SAB) not far behind. Oil and Gas shares particularly BG Group (LONDON:BG) were weakest on the day as relative calm in Iraq’s south subdues oil prices.
Shares in Shire were up another 2% on news the company is prepared to recommend a new £53.20 per share offer to shareholders from US rival AbbVie. It now just remains for AbbVie to agree to the proposal which shows a strong willingness on the part of Shire to come together and agree on a price.
Across the wider market, the Shire deal could make UK companies appear even more attractive for US firms looking to spend untaxed foreign earnings and switch tax jurisdictions out of the US, especially in the light of the government interference faced by General Motors Company (NYSE:GM) in France.
Also potentially supportive of future deals is a new UK government proposal by business secretary Vince Cable to fine companies who do not adhere to promises made, particularly over jobs in takeover deals. Cable’s rule can't stop firms laying-off workers after a deal but the extra cost would be an additional disincentive from doing so.
A surge in M&A could be what’s needed in the UK to put the FTSE 100 over the difficult 6,900 level that has blocked price advances for over a year.
EU industrial production was slightly better than expectations; declining -1.1% over the month against -1.2% expected. It's still not a good number and doesn't bode well for the European economic recovery. With economic data from Europe now significantly underperforming the US, absent any quantitative easing from the ECB, European indices including the German DAX can probably expect to underperform the US, including the S&P 500 and the Dow 30.
With aerospace stocks under scrutiny at the beginning of Farnborough air show; IAG and Easyjet (LONDON:EZJ) were both lower on the announcement of new orders for planes and engines respectively.
Sports Direct (LONDON:SPD) was a top gainer on news it is expanding into Australia and New Zealand
US
Stocks in the US put aside their European woes today; the Dow Jones Industrial Average hit new intraday highs with investors encouraged that earnings from Wells Fargo & Company (NYSE:WFC) and Citigroup (NYSE:C) bode well for second quarter US corporate earnings.
The drop in stocks last week appears to have favoured a more positive reactions to earnings today since investors have bought on the dip rather than having to buy more overbought markets near the highs.
Tomorrow will be the more significant day for US economic data with the release of retail sales and beginning of the congressional testimony from Fed Chair Janet Yellen.
Absent any contagion effect from Portugal’s Banco Espirito Santo’s problems last week, the main focus of the week is likely to be the numerous Dow and S&P 500 companies reporting earnings in the US.
Citigroup got the earnings week off to a strong start, the bank beat both revenue and earnings estimates comfortably excluding the newly announced $7bn fine for mortgage securities fraud. Including the $3.8bn charge relating to the agreed $7bn fine, earnings would be 0.03 per share instead of $1.24.
The results are being taken positively as the bank was able to beat estimates and investors can now put the uncertainty surrounding the fine over miss selling mortgage securities behind them. Before getting over exuberant, it's important to keep in mind that the fine is a massive hit to profits for this and the next quarter and the numbers excluding the fine still represent a huge fall over the year.
FX
The US dollar was mixed today with the Japanese yen coming under pressure as investors unwind last week’s safe-haven trade.
We heard ECB member Nowotny say over the weekend that he sees “no need for further ECB action in near future” because inflation expectations are well anchored and exchange rate have been stabilised.
We are quite possibly going to hear a more nuanced version from Mario Draghi in his speech tonight, possibly saying the bank is waiting for the results of the June 5 meeting to take effect while emphasising that the central bank is ready to take further action.
If the market chooses to take him at his word that QE is on the way if needed; the euro could tumble but if his comments are taken with a little more scepticism, the euro could rally further especially if stock market risk sentiment remains turned on.
Commodities
Gold and Silver came under intense selling pressure today. The precious metals have had a strong rebound on safe-haven and inflation fears since May. After hitting some technical levels, both are falling heavily as stock markets rebound before the first big week of US earnings.
US earnings reports and China's GDP report could be key for investor's appetite for risk taking; strong earnings and economic growth could be positive for stocks and negative for gold. Likewise disappointing earnings and data could see gold and silver extend their recent rally.
Brent crude saw a slight recovery today, at this stage it is largely profit taking but the commodity could extend gains if China can print a number this week close to the stated 7.5% annual GDP target for the second quarter.
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