UK and Europe
It was a day of decent gains across Europe yesterday, with stocks back in demand following improved corporate earnings and a drop in bond yields. Stocks came off the highs in the afternoon when a sell-off in oil prices took the energy sector from near the top to the bottom of the FTSE 100.
For once, UK stocks and the British pound headed in the same direction. Data showing the highest inflation in the UK for two years catapulted sterling higher but factors other than the currency drove stocks higher too.
Impressive earnings from British clothing retailers Burberry (LON:BRBY) and ASOS (LON:ASOS), banks getting a positive read across from rising profit at Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) and a rise in mining shares helped the FTSE 100 recover the 7000 mark.
The Official of National Statistics said there is no explicit evidence the decline in the pound has affected inflation. Where the effect of the devalued pound has been more explicit, is in today’s corporate profit guidance. There are clear winners and losers from the fallout in the pound. Clothing retailers Burberry and ASOS have raised profit targets whilst Ryanair (LON:RYA) has issued a profit warning, all citing the GBP exchange rate as an important factor.
The profit warning from Ryanair was not unexpected given its discount airline rival EasyJet PLC (LON:EZJ) did the same in September. It’s not just the pound behind the misery at the airlines. Ryanair was forced to slash ticket prices in response to waning tourist demand following various terrorist attacks in Europe this year. It was CEO Michael O’Leary saying the cutback airfares will increase market share that helped Ryanair shares recover early declines to gain as much as 3%.
US
US stocks opened higher yesterday, following well-received results from Netflix (NASDAQ:NFLX) and Goldman Sachs as well as inflation data showing higher prices and another reason for the Federal Reserve to raise rates this year.
Shares of Netflix jumped over 18% to the highest in eleven months on the open of US trading. Surprisingly strong subscriber growth both in the US and overseas has reinstalled confidence that Netflix can still see strong growth despite rising competition, especially from Amazon (NASDAQ:AMZN). Netflix have long argued that having more competitors will just raise awareness of streaming as an alternative or addition to cable TV, and these numbers bear that out.
Goldman Sachs shares rose as much as 2% after it reported a rise in third quarter profits.
FX
A faster than expected rise in UK inflation and the potential for a bigger role of parliament in Brexit proceedings helped the British pound gain as much as 1% on Tuesday. GBP/USD briefly topped 1.23 whilst EUR/GBP dropped 100 pips.
Prominent government lawyer, James Eadie indicated that parliament will “very likely” have to sign off on any agreement Britain reaches with Europe when leaving the bloc.
UK inflation jumping by the most in two years has spooked concerns of a cost of living crisis. If prices continue to rise then they could soon offset the average rise in wages, leaving people with less disposable income. Alarm bells ringing at 1% inflation is at odds with the Bank of England’s inflation target of 2%, and demonstrates the Brexit-effect on opinions towards the UK economy.
The drop in the pound should eventually be inflationary but the ONS has said there is ‘no explicit evidence the lower pound is pushing up the prices of everyday consumer goods.’ This makes sense in that Eurozone inflation also hit a near-two year high in data reported this week. At the moment. Inflation is increasing because of a rise in fuel costs and clothing prices no longer falling. Once the impact of the lower pound is passed through from a rise in the cost of imported goods, inflation is likely to exceed 2%.
Dovish comments from the Fed’s Stanley Fischer created some early softness in the US dollar but this was unwound when US inflation data came in as expected. US CPI rose to 1.5% y/y in September with core prices moderating slightly to 2.2% y/y.
Commodities
Oil prices were turbulent on Tuesday with the US dollar strangling the direction ahead of API inventory data. Prices are carving out a triangle pattern underneath one-year highs.
The price of gold reached a one-week high of $1264 per oz on Tuesday before erasing most of the gains following US inflation data that keeps a December rate hike on the table.
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