UK grew 0.5% in the third quarter

Indices softer but losses limited
by Brenda Kelly

All is well with the world, or at the very least a degree of déjà vu has returned. The Shanghai Composite closed down 5.5% after various major brokerage firms announced that they were being probed over possibly breaking securities market rules. Despite a 28% rebound form the lows in late August the index is once again under pressure and remains some 34% below the highs posted back in mid-June.

Commodities continue to look soft. Gold is looking set to plunge even further depths in the near term should the $1064/oz level break. It would seem that rising geopolitical tensions are no match for the rising US dollar and the ‘flight to safety’ seems somewhat confined to the negative yielding bond market. German 2Y notes now offer a yield of 0.42% and the trend and outlook would indicate that this may not yet be the lows.

Copper, fresh from a rebound earlier this week is also starting to come off its highs of the day while oil remains in limbo with a downside bias following comments from the IEA’s Birol that the global price at $50/bbl is the new normal. Again, the record high inventories and the burgeoning greenback appear to be cancelling out any real concerns regarding material threats to Middle East oil facilities.

It seems that investors rather than seeking safe havens are, judging by the rush to defence related stocks, being that bit more opportunistic in their investment decisions. Rolls Royce has gained 0.83% while Babcock International has seen a gain of 0.5% min early trade.

Following yesterday’s quiet session and the low trade volume, we have a little more macro data to work with today, none of which is inspiring the equity market. French consumer spending fell 0.7% in October against expectations for a small rise of 0.2% but this only serves to underpin the market’s expectation that the ECB will pull out all the stops in respect of monetary stimulus in the near term. The euro is still above the $1.06 level despite dipping below it earlier in the week. One could say that at this juncture, a 10 bps cut to the deposit rate is well and truly priced in and unless Draghi surprises with a more aggressive cut and/or some imaginative and unprecedented changes to the present QE programme, a short squeeze cannot be ruled out.

Miners once again lead the FTSE lower this morning. Down 0.6% in early trade.

Anglo American (-3.1%) Glencore (-2.2%), Rio Tinto (-1.7%), BHP Billiton (-1.4%).

Severn Trent (+0.3%) higher on the back of a broker upgrade to hold vs sell from Investec.

RIO TINTO (-1.74%) Approved a $1.9bn Bauxite Project to Meet China Demand. Credit Suisse are neutral short term and believe the move to be a ‘sensible project with good returns’’

STANCHART (-1.59%) The Standard Chartered CEO has tapped investors for $5.1bn, scrapped dividends and shed toxic assets since joining the bank in June. On Dec. 1, investors will find out if the London-based lender has done enough to weather the latest round of stress tests, based on end-2014 data, as regulators step up scrutiny on exposure to emerging markets.

HSBC (-1.33%) - said to shut down its private banking business in India but there will be no loss to the 32,000 jobs there.

Easyjet (1.23%) is the top gainer on the FTSE. The airline has suffered the trials and tribulations of the downside following the cancellation of all flights to Egypt until next year, its seeing a slight recovery this morning on the news that it will open 30 new routes in France. The lower oil price is likely helping here too.

UK grew 0.5% in the third quarter
by Ipek Ozkardeskaya

In line with the market expectations, the UK’s gross domestic product printed a 0.5% expansion on the third quarter second read, the year-over-year expansion steadied at 2.3%. The government accelerated its spending to 1.3%q/q, the capital expenditure increased by 1.3%q/q and the total business investments grew by an encouraging 2.2%q/q.

On the back of the coin, the stronger pound had a visible impact in narrowing trade terms. Exports slowed to 0.9%q/q from 1.9%, while imports reversed course and surged to 5.5%q/q from -2.7%.

Referring to Chancellor Osbourne’s Autumn Statement, the improvement in the UK’s economic recovery is on the right path and the UK is a front-runner in comparison to developed economies including the US, Europe and Japan. We have seen the 2015-2016 growth forecast being revised up to 2.4% from 2.3% on Wednesday. In 2017, Tories see the GDP growing at a firm pace of 2.5%.

Although Osborne’s spending review has lent some support to the market this week, the stagnant growth figures pulled the pound lower against the majority of its G10 peers in London, except the commodity currencies (CAD, AUD and NZD).

The pound is trading very close to 1.50 handle against the US dollar and 70 cents against the euro. We may expect to see a cheaper pound against the US dollar by the end of the year, yet the appreciation against the euro is certainly not over.

Japan needs to finance a potential corporate tax cut

In Japan, the national CPI (ex-fresh food) contracted at the steady pace of 0.1%y/y in October, the jobless rate did not improve as expected (3.4% in Oct) and the household spending has contracted. Japan Finance Minister Aso has been instructed by PM Abe to compile an extra budget to sustain and enhance the corporate activity, yet stated that Japan ‘won’t cut corporate taxes without securing funding resources’. Economy Minister Amari highlighted that the goal remains halving the primary budget deficit.

The yen was better bid against the US dollar in Tokyo, the USDJPY slid to 122.31 on mixed macroeconomic data. We now know that the government is looking to cut the corporate taxes – yet we still do not have many details on the financing leg. Talks of supplementary budget and better US yields on Fed tightening prospects are lending some support to the USDJPY within 122.40/122.00 (Fib 38.2% -50% retrace on last month’s rise). If broken, a further slide to 121.50 (weekly pivot) could be considered. Option orders are mixed at about 123.00 for today’s expiry. Resistance is expected to come into play pre-123.75/124, stops are eyed above.