Mixed open for Europe, Amazon dips, Barclays PPI shame, luxury boost
Will we have a yuletide election or will we be left in
purgatory for longer?
It was a mixed open for the main bourses in Europe today although the Euro Stoxx 50 started to move lower along the DAX as the morning progressed. Luxury stocks doing well after Moncler and Kering’s Gucci brand posted strong growth despite the trouble in Hong Kong. Burberry road on the coat-tails of its Italian pals to rise 1.5%. Utilities off a touch – could be General Election risks re Labour nationalisation plans. Scottish Mortgage Investment Trust down off the back of the Amazon drop as it makes up 9% of the fund.
European and US equity markets rose yesterday, but that was
before the Amazon numbers dropped
Asia has been weaker after a fairly hawkish speech on China
by Mike Pence that’s not going to do much to soothe trade jitters. He attacked
China’s ‘destabilising’ influence as well as their human rights record in Hong
Kong, and attacked US corporates for becoming Chinese lap dogs – singling out
Nike in particular, saying they check their conscience at the door or some such.
Amazon shares got whacked in after-hours trade following a big earnings
miss. Operating income declined to $3.2bn from $3.7bn the same quarter a year
ago. The massive investment in next-day delivery is dragging on profits,
although it’s an essential move for the firm. Amazon expects to spend $1.5bn on
delivery costs – double the last quarter. The company is clearly back in the
investing for growth and future profitability mindset, so investors may need to
be patient. Although revenues missed a touch, net sales ballooned 24% to $70bn.
This doesn’t feel like it’s all that bad. The drop in income is down to
investing. AWS profits were $2.3bn.
Intel though beat expectations easily and returned to growth. EPS came
in at $1.42 vs $1.24 expected, and management raised the FY guidance to $4.60.
It’s been an interesting week so far. US stocks have really struggled for
direction amid a deluge of earnings. Whilst earnings have been broadly positive
with a c80% beat rate of S&P 500 firms reporting so far, there’s been some
outliers and that’s the worry for investors. The bar’s been set very low so
misses are leapt upon. The main misses for Boeing, Caterpillar, McDonalds,
Texas Instruments and now Amazon are the sort to weigh on sentiment as these
are kind of bellwethers.
It’s different in Europe, where the receding threat of a no-deal Brexit (though
vanished) has seen the major bourses set the pace. We’ve seen breakouts in the
DAX and Euro Stoxx 50, which have risen to the highest in almost two years.
Eurozone PMI data has been mixed, but it’s not getting worse, and that may
suggest the worst is over. Meanwhile investors do, as we suggested at start of
the week, seem to be buoyed by the prospect of EU-US trade talks replacing auto
tariffs due to hit soon.
The FTSE has also enjoyed a fine week, albeit the index remains within
pretty well-worn ranges. We’ll see if it make ground up to 7400. It’s currently
around the Oct 1st close – if it break north from here then the late
Sep highs around 7400 are within touching distance.
On Brexit, today should produce an out one of sorts. We should know
whether Boris Johnson gets his election, slated for Dec 12th. They say turkeys
don’t vote for Christmas so it remains unclear whether Labour will go for it,
given what the polls say.
Sterling sold off sharply on the prospect of an election and the high degree of
fresh uncertainty that introduces. From trading as high as 1.2940 GBPUSD sank
briefly below 1.28 before coming back. At send time, the pair was softer in
early trade at 1.2830.
If Boris doesn’t get his election, what then? The key now one feels is whether
no-deal risks come back and bite us. There’s a clear sense in the market it’s
off the table, but we are in very strange and uncertain times.
EURUSD has come back down in the wake of the ECB meeting/Draghi farewell
event to test support on the 1.10 round number. Gold followed the cue for a
breakout to move north of $1500 yesterday.
Ouch – another big PPI hit for Barclays. The
bank swung to a loss after taking an extra £1.4bn provision for PPI claims. As
we’ve said before, the complete lack of visibility all of these banks have had
on the cost of PPI claims is a scandal in itself. We noted in September: The
other great PPI scandal is how shareholders have been consistently low-balled,
fobbed off and undersold the impact of the redress, leaving them with lower
capital returns and lower dividends than they would have expected. Barclays has
now spent £11bn on settling PPI claims. However, the line has been drawn under
this and banks can move on at last.
The good news for Barclays is in the investment banking
division. No doubt Ed Bramson will be dismayed, but for other shareholders the
performance is greatly encouraging. The corporate and investment bank posted a
77% rise in pre-tax profits to £882m. In trading, fixed income revenues rose
19%, while equities rose 5%.
The PPI charge left the bank nursing a loss of £292m.
Profitability targets now look tricky. The return on tangible equity target of
9% in 2019 is still on track with the YTD number at 9.7% despite turning
negative in Q3, but it’s clearly going to be a lot harder to hit the 10 goal
for 2020. Shares rose over 2% on the open despite the soft numbers – the PPI
claims might be bad but they are by and large a thing of the past.