Market buzz: US data lifts stocks despite trade friction concerns
1700:Close Stocks finished the session on a strong note, with better-than-expected readings on UK and US services sectors helping to lift the mood.
Industrial stocks fared best in London, on the back of supportive comments from Goldman Sachs that gave shares of DS Smith and Smurfit Kappa a boost.
That was despite worries about trade frictions following the White House's push on steel and aluminium tariffs.
And on a related note, perhaps, Ultra Electronics led the downside after announcing the US DoJ had put the kybosh on its ERAPSCO JV with Sparton, after raising competition concerns that led Ultra and Sparton to call off their proposed tie-up.
That came amid news that US-based chip designer Qualcomm had filed a request for America's CFIUS to look into its potential acquisition by Singapore-based Broadcom and a thinly-veiled threat from the US president against European carmakers, with Trump complaining about the significant trade deficits the country was running in its trade with other countries, including Canada and Mexico.
In the background, strategists at JP Morgan sounded a positive note on European and Japanese equities, but stuck to an 'underweight' stance on UK stocks.
1606: The pound is higher after PM May says the US is close to agreeing terms for transition period after Brexit. She told in parliament there are three issues remaining: an implementation agreement, which we'll "try to get done in March"; the withdrawal agreement, which "we're hoping to have completed by October"; and now "we're looking at future economic arrangement".
"We are close to an agreement on the terms of a time-limited implementation period to give governments, businesses and citizens on both sides time to prepare for our new relationship," May said. "I am confident we can resolve our remaining differences in the days ahead," she said.
"There will be no second referendum. We’re going to deliver for the British people and we’re going to make a success of it,” she adds.
The pound is up 0.4% on the euro to 1.1247 and up 0.5% on the dollar to 1.3872.
1536: Paper gains for top flight index on Monday, led by DS Smith and Smurfit Kappa who are leading the advance on the Footsie on the heels of positive commentary for the European Paper & Forest Products space out of Goldman Sachs, who reiterate 'buy' on Billerud, Mondi and Smurfit.
"This is combined with most of our pulp-exposed coverage trading at or close to peak multiples despite pulp prices being at all-time highs, and our top packaging exposed picks screen inexpensive in comparison while having a more positive outlook," notes Goldman. M&A multiples (15% weighting) for Billerud, DS Smith, Mondi, Smurfit and SCA, included in Goldman's target prices to reflect the potential of becoming an acquisition target.
Goldman may also lie behind the rise in British American Tobacco, after raising its organic revenue growth forecast for the outfit to 6.3% in 2018 (up from 5.2%), thanks to strong market share trends for Glo in Japan. Yet it cuts its target for the shares by roughly 8%.
1505: IAG has put out its latest traffic stats for February. Traffic, measured in revenue passenger kilometres, increased 5.8% versus the same month last year, while capacity increased 3.5% available seat kilometres.
1416: Shareholders in CRH may be interested in this note from BoA-Merrill Lynch, which writes that while home prices in the States have risen by 45% since the first quarter of 2012 - the current overvaluation (relative to household incomes or rents) is still "well below" levels seen during the bubble period and do not imply a correction is imminent.
For its part, Cannacord Genuity is weighing in saying that: "CRH substantially lagged the wider market and sector in 2017, with the share price down by c.10%. We believe the shares continue to look interesting with some positive drivers expected in 2018 and assuming that higher US interest rates do not de-rail the US construction cycle."
And ahead of Rolls Royce's results, on Wednesday, Deutsche Bank notes that its tarcking estimate for ASK growth in the company's installed base was running at 6.1% for the first three months of 2018, versus 6.9% for the final three months of 2017. "A key theme from EU A&D results to date has been the strength of Civil after-market rev growth in 4Q17 [...] This suggests that it too has likely experienced a strong underlying trend into year end, which ought to have helped cash generation."
1111: Mortgage providers are pulling their best deals amid speculation the Bank of England will hike interest rates in coming months. Swap rates, the level at which mortgage lenders expect to be able to borrow and lend in future, have jumped, while Coventry Building Society, Halifax, Nationwide and NatWest have all withdrawn some of their top deals from the market.
The two-year swap rate climbed above 1% mark this year to reach its highest level since 2015.
"Rates remain extremely low, but the writing looks to be on the wall and rates are only likely to be on an upward trajectory," said David Hollingworth of mortgage brokers London & County, quoted on Moneywise. "As a result, borrowers will have little to gain from holding off from a switch now. The heightened expectation of an increase in base rate is already beginning to have an impact on rates. Swap rates reflect market expectation for interest rates and are a good indicator of rising funding costs for lenders."
1054: House-building stocks are mostly higher this morning as Theresa May delivers her speech on new planning laws.
Based on leaked copies of the speech, analyst Robin Hardy at Shore Capital was not sure the speech will benefit the big listed builders, however. "Overall, expect more talk than action but it is clear again that policy is shifting away from demand-feed to supply-feed and that has to be less than good news for the house builders as it means more competition and more pressure on the supply chain - once again we would conclude that the supply chain companies will be the winners. As we continue to suggest reduced weightings in the house builders, the supply chain for materials and for home improvement spend still looks more."
It's really bothering me that the bricks aren't the same size on the lectern and the wall pic.twitter.com/luEaAQRuiG— Jonathan Haynes (@JonathanHaynes) March 5, 2018
Uncanny. pic.twitter.com/BrDhCbI9jK— Peter Smith (@Redpeter99) March 5, 2018
1034: RBC sticks to 'outperform' on Rentokil, saying: "FY results were in line at the operational level, but guidance around interest and central costs, along with forex, triggers downgrades. Whilst unhelpful for a highly related stock in a nervous market - we don't think this changes the equity story and remain positive with a 350p target."
1033: Early losses in some European bourses have been quickly erased this morning, as the uncertainty caused by Sunday’s hung parliament in Italy did little to move the dial outside of Milan.
"Following a week of substantial downside for stocks, bulls will be encouraged by the strong rally into the open," says market analyst Joshua Mahony at IG.
"A surge in support for the anti-establishment and right wing Northern League parties represents a heightened degree of risk for the Italian economy, with stocks suffering as a result. With the prospects of a coalition between these two alternative parties forming a coalition, it comes as no surprise that we have seen the euro falling in response."
1024: Not good news for certain commodities from China as the state planner pledges to cut more steel and coal production capacity this year, putting the country on track to beat its long-term targets and reinforced the vow to beat smog and make “skies blue again”.
The National Development and Reform Commission ‘NDRC’ reported it will reduce steel capacity by around 30mt and coal output by about 150mt this year. The cuts, note analysts at SP Angel, would put the world’s top steel maker and coal miner on track to meet its 2020 targets in the government’s five-year plan about two years ahead of schedule.
Global spending on metals exploration expected to rise as much as 20% this year to an estimated $8.4bn (£6.1bn), according to S&P Global Market Intelligence's latest World Exploration Trends report. A large part of the lift comes from miners hunting for lithium and cobalt to support electric battery demand, with Canada and Australia attracting the most spending.
SP Angel notes copper prices down to $6,886 per tonne from $6,924/t last week. Aluminium up slightly to $2,143/t vs $2,137/t last week. "US president tariff’s on steel and aluminium haven’t even been formally introduced before consumers are already stung by rising premiums."
Rio Tinto is down more than 1% but BHP, Anglo and Antofagasta are up more than 1%, while Glencore is slightly above the flatline.
1014: Growth in the fourth quarter is likely to hold back the Bank of England from raising rates any time soon, suggests economist Sam Tombs at Pantheon Macroeconomics. His weighted average of the UK PMIs in Q1 so far points to GDP growth slowing to 0.3% -- one-tenth below the forecast from the Monetary Policy Committee -- from 0.4% in Q4, despite the rise in this services PMI.
"The case for the MPC to hold back from raising interest rates in May remains strong, despite the rise in the business activity index in February. Both the activity and orders indices only are in line with their 2017 averages," he said.
1010: White House trade adviser Peter Navarro over the weekend clarified that no countries will be excluded from upcoming steel and aluminium tariffs set to be imposed by the Trump administration, including the United States' greatest allies.
Navarro said there could be "exemption procedure for particular cases where we need to have exemptions so that business can move forward, but at this point in time, there will be no country exclusions". He expects President Donald Trump to sign the measures by the end of this week or early in the next.
0937: Ultra Electronics is the biggest faller in the FTSE 350 this morning after its agreed takeover of US-based rival Sparton was called off on antitrust grounds. The defence technology group also reported a damp squib set of annual results, with EPS down 20%. But on the plus side for investors the company has promised to return cash via a buyback.
Bovis Homes is one of the biggest risers as Downing Street is reported to be poised to unveil changes to planning rules to boost house building.
0935: The IHS Markit services sector PMI picked up to a four-month high of 54.5 in February after falling to a 16-month low of 53.0 in January from 54.2 in December.
After a slight manufacturing slowdown and still-lacklustre construction update reported last week, this means the composite PMI output index bounced back from January's 18-month low of 53.1 to 54.2 in February, which indicates UK gross domestic product growth of not-quite-0.4% for the first quarter.
0856: In China the National People’s Congress has begun in Beijing, with Premier Li Keqiang presenting a draft of his work plan for 2018, where he announced a 2018 growth target of around 6.5%. For the next two weeks, there will be a series of major bills for parliament to pass, including the budget. Li also said China will keep the macro leverage ratio “basically stable,” and that regulatory supervision of shadow banking and internet finance will be boosted, while local defence stocks got a slight boost on the announcement that China would increase its military budget by 8.1%.
0833: The London open market report shows the FTSE 100 has started the week on the front foot after falling more than 200 points or around 3% last week. The blue chip index is up 26.95 points or 0.38% at 7,096.85 after half an hour of trading.
An interesting equities strategy note from JPMorgan Cazenove this morning says investors have become complacent about the global growth outlook and that even though cyclical stocks are trading at multi-year highs and looking "outright expensive" while defensive bond proxy sectors are now trading at relative lows, this suggests "from here the much bigger risk for the current market positioning is of growth missing than of bonds selling off".
However, the strategists are "unexcited by defensives, as we still believe that bond yields are more likely to move up, rather than down, from here, and as we stay bullish on the overall market direction". On UK stocks they are also underweight. "UK is a defensive, high-dividend yielding market which might have a problem if bond yields move sustainably higher. Growth–Policy trade-off is poor for the UK, with higher rates and inflation, but softer activity. Stronger GBP is a problem for FTSE100 as it derives close to 70% of revenues from abroad."
Financials are their preferred stocks, both banks and insurance. "Banks remain attractively priced, and have relatively depressed earnings base. Euribor curve is steepening, which is a help for banks’ earnings and NIMs. Loan growth is improving. NPLs are moving lower. Banks remain the best hedge against further move higher in bond yields."
0739: European stocks are seen opening higher on Monday after a weekend that saw German premier Angela Merkel returned to another stint at the top of a 'grand coalition' and a results in Italy that points to a hung parliament.
Italy's FTSE MIB will open 237 points lower at 21,675 and the FTSE is expected to open 35 points higher at 7105, according to the prediction of London Capital Group, while traders at IG saw a small 4.5-point decline for the Footsie on Monday.
LCG also has the DAX opening 31 points higher at 11,944, France's CAC up 17 points higher at 5153 and
0729: Italy’s election saw no group getting enough seats in the Lower House to form a government. The final results aren’t known yet, but the biggest group appears to be a center-right coalition backed by the ex-premier Silvio Berlusconi and his Forza Italia party, with Forza also overtaken by its main ally, the anti-immigration Northern League.
"Worst though from the market’s point of view was that the anti-EU, anti-euro Five Star Movement seems to have come in a close second, and indeed seems likely to be the largest single party, making it the dominant force in Italian politics," says analyst Marshall Gittler at ACLS Global. Meanwhile, the market-friendly, reform-minded Democratic Party of former premier Matteo Renzi saw its support collapse, meaning it’s probably out of the running for forming a government.
"In short, the right-wing, populist parties appear to have won over half the votes. It will probably take weeks to form a government. That’s not necessarily a bad thing, because who knows what combination will ultimately succeed? It could be worse than no government at all! The market’s big fear is that the nightmare combination of the Five Star Movement and the Northern League get together to form a government.
Overall, the euro was up slightly despite the Italian election. It climbed on Friday on USD weakness and gained in early Asian trade, perhaps due to the German vote, but then started turning down as the results from Italy began coming in.
"I’d expect it to weaken further today as the market absorbs the results of the Italian election," Gittler says.