Oil drops, markets await Fed, Cobham takeover in doubt
All eyes are on the Fed and what guidance it offers on
additional rate cuts this year, with a 25bps cut to the main fed funds rate all
As detailed in our preview, the Fed is highly likely to
cut interest rates by 25bps. The question facing the market is how many more
there are to come. Are we at the end of the mid-cycle adjustment, or the early
stages of a full-blown easing path? Will we get yet another flip-flop? Traders
are increasingly less confident in the number of cuts the FOMC will carry out
this year. A hawkish cut is a firm possibility, albeit the median projected fed
funds rate from the dot plot should come down a touch.
Oil has dropped sharply after Saudi Arabia said
oil supply was up and running again. Whilst WTI fell about 5% on this
development, prices remain elevated largely because of an increase in
geopolitical risk premium. WTI was last holding at $59, off the bottom of this
week’s range, with the lows around $58.25, and still well north of Fridays
close at $54.85. Markets are still attaching a decent risk premium following
In FX, the pound was bid and euro slightly higher versus
the dollar. GBPUSD has firmed around the 1.2450 level and pushed on up
to threaten 1.2520, where’s it encountered resistance and come back 50 or so
pips to trade a whisker around 1.2470 again. We now look for a sustained breach
of the 1.2520 level to maintain momentum and take out the next bastion at
1.2550, however we may likely see some consolidation now around 1.25 first.
This whole region offers a big test for bulls as the pair exits the bottom
formation. Juncker today saying that no deal remains a real risk but is hopeful
of a deal – same old.
After a flat and indecisive day on Tuesday, European
markets are looking for direction and probably cannot be expected put on
fireworks given we have the Fed this evening. The FTSE 100 was a touch higher
while the DAX was flat.
Asia was mixed. Overnight data showed Japan’s exports
tumbled 8.2% in August, the ninth straight decline, although the number was not
quite as bad as feared. Imports slid 12%. Global trade is crumbling as the
tariff war between the US and China tumbled on.
Wall St eked out a small gain, with the S&P 500
recovering the 3,000 level. FedEx was disappointing as slowing global trade hit
earnings and forced the company to lower its full year guidance.
The takeover of Cobham by Advent is now in doubt,
with the British government intervening on national security grounds. This was
always a risk as regulators and politicians are more sensitive to foreign
takeovers, although we thought that the message from the government until now
was that it was quite relaxed about this one. However, an intervention notice
on the grounds of national security has been issued and the CMA will
investigate, with findings to come by Oct 29th. Shares though are
down just a fraction, with COB slipping 0.9% to £1.59, still well north of the
pre-bid price and suggesting that the market does not think the government will
block. I think the risk of the government preventing this deal going through is
higher than the market is indicating. Shares may be exposed.
Time for a Kingfisher version of Brexit? It’s a
huge task for incoming CEO Thierry Garnier as he tries to overhaul Kingfishers
fortunes. Profits slipped 12.5% and it was just more of the same in terms of
the split as France and B&Q were the main culprits for the malaise that
left group LFL sales -1.8%. A retreat from European ambitions may not be a bad
idea – it’s already exited Germany and France is the major drag. Sometimes you
just have to leave your European friends behind…Pressure on management to
come up with a new plan is mounting and this could well include a look at
breaking up this company into smaller parts. Sometimes you are not greater than
the sum of your parts.
UK sales -0.7% reflected softness at B&Q and offset
to some extent by continued good progress at Screwfix. Screwfix total sales
were up 10% while LFLs were up at a decent clip of 5%. B&Q is a bit
disappointing after in May signalling that LFLs there had risen 2.8% thanks to
a strong performance from weather-related items UK profits slipped 1.7%.
France is the real rotten apple making the whole bunch
bad. Both Castorama and Brico Depot registered sales drops of more than 4% on a
total and like for like basis. Profits slumped over 12%. Time to offload
France. Elsewhere, Romania and Poland are solid. Russia and Iberia were soft,
Germany exited. KGF shares fell 1% in early trade as a result.