Earnings Dismay Send European Equities Lower

Daily Analysis - 26/10/2016

Challenging Earnings Environment Sees Momentum Higher in Equity Benchmarks Take a Pause


European markets opened in the red following a lacklustre batch of earnings from European major multinationals. The pan-European STOXX 600 was down -0.20% at the start of Wednesday trade after the GfK German Consumer Climate index pointed to German consumer sentiment losing steam in November as an emerging banking crisis clouds the outlook.

Airbus, Peugeot, Lloyds Quarterly Results Disappoint

Airbus’s most closely watched earnings metric plunged -21.00% in the third quarter as the plane maker continued to bleed cash, underscoring the financial difficulties the company is facing as it strives to boost production. Also in France, major automaker PSA Peugeot Citroen posted a -5.00% decline in third quarter revenue, hurt by a deeper than anticipated drop in car sales in two of its main markets, Europe and China. Across the English Channel, UK bank Lloyds PLC said net income sank during the third quarter, as it earmarked close to GBP 1 billion to compensate customers who were sold insurance products they did not require.  After a spectacular rally last week on the heels of better inflation data and remarks from ECB President Draghi, the Euro Stoxx 50 pan-European equity index is back on the retreat, sustaining the prior session’s pullback.


Crude Under Pressure After US Stockpiles Rise

Crude oil prices fell in early Asian trade as a sharper than expected growth in onshore US crude inventories renewed oversupply concerns amid the backdrop of OPEC members squabbling over the timing and extent of the proposed production cut deal.  Data from the American Petroleum Institute, released late Tuesday, showed US crude stockpiles surged higher by 4.8 million barrels during the week ended October 21st. Though analysts attribute the unexpected surge to tepid demand from refineries due to seasonal maintenance, investor fears about supply growth outstripping demand for much longer than expected. Furthermore, Russia threw more cold water on the deal after IFX reported OPEC envoy Vladimir Voronkov remarking that cutting production is “not an option for us.”  NYMEX crude oil futures fell to three-week lows after the data and remarks, trending back below $50.00 per barrel.


Australian Inflation Concerns Weigh on Asian Markets

Equity markets in Asia were broadly lower early Wednesday after inflation in Australia came in higher than expected. Sentiment was also soured by the weak close on Wall Street following a spate of disappointing quarterly earnings reports.  Australia’s headline consumer price index rose 0.70% during the third quarter, topping forecasts of a 0.50% gain. Higher vegetable, fruit and electricity charges more than offset the lower fuel costs to lift the quarterly inflation figure. Consumer prices continue to trend well below the Australian central bank’s desired 2.00% to 3.00% target band, increasing the likelihood of further rate cuts over the medium-term. Following the release of the data, ASX 200, the country’s leading equity index, fell to its lowest level in a month.  Meanwhile, the Australian dollar gained 0.60% against the greenback, rising over 80 pips off of intraday lows to above 0.7700.


Gold Extends Rise

The surge in gold prices was extended in early Wednesday trade after the metal approached a 3-week high during the previous session.  One of the key drivers of the latest rally has been growing physical demand ahead of the start of a busy festival season in the world’s second biggest bullion consumer, India. Gold is the most sought after Indian gift during two of the most important Hindu festivals, Diwali and Dhanteras, which will take place during the weekend. Also adding to the current bullish sentiment was data from the International Monetary Fund on Tuesday that showed Russia and Kazakhstan continuing to boost their gold reserves last month. Even though gold normally shows a stronger inverse correlation to the US dollar, rising US rate hike speculation and a rallying currency have failed to dislodge recent strength in gold, highlighting the importance of the latest physical buying spree.


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