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The Early

22 Feb 2019 07:18

Markets: timely reminder

A bumper day of bottom-up corporate news proved unhelpful for European equity indices yesterday, and they closed moderately lower on balance. Health care -0.6% and financials -0.5% led the declines for the Euro Stoxx industry groups.

In the UK, the mega cap sectors were largely a drag: banks -2.0%, mining -1.9% and pharmaceuticals -1.5% together ensured a down day for the FTSE 100 index, in the face of a continued advance by the pound, as hopes for a last minute Brexit compromise are intact. Stock-specific hits featured Centrica -12% and BAe Systems -8%. The mid/small caps managed their traditional outperformance when sterling firms, with travel & leisure +1.0% the best of our PHySiCS sectors.

Overnight. US indices were unable to extend their winning run in the face of a selection of weak economic activity readings, reminding investors of the headwinds to growth remain. The Atlanta Fed's GDPNow estimate for Q4 2018 has been trimmed to an annualised +1.4% QoQ rate. Volumes were light by recent standards as energy -1.6% and health care -0.9% struggled, while the outperformance of utilities +0.7% confirmed a more defensive mood. Asian equities turned mixed, as investors await further news from Washington. The main currency cross rates and commodities were little changed and European opening calls are little changed.

Early numbers. Dow -0.40%, S&P -0.35%, NASDAQ -0.39%, VIX 14.46; US 10-yr 2.68%; Nikkei -0,18%, Hang Seng -0.06%, Shanghai Comp +1.07%; £=$1.3031, £=€1.1490, Brent $67.09/bbl, Gold $1325.23; FTSE 100 indication +14 (at 6.30 UK).

Macro: fuller coffers

A timely boost for the Chancellor as the UK recorded its largest ever monthly budget surplus of close to £15bn in January. Income tax and CGT receipts were stronger than usual, +14% YoY or £3.1bn. Borrowing for the first 10 months of fiscal 2018/19 is some -47% lower than last year, and remains on track to come in below the OBR target of £25.5bn. There should be scope to provide additional fiscal stimulus to the UK economy if needed, dependent on the Brexit outcome. The Spring Statement is due on 13 March.

February's flash PMI releases for the Eurozone confirmed that the region has ground to a halt, with the manufacturing sector largely responsible. The sector PMI fell into contraction at 49.2, the weakest since mid-2013, and the new orders balance was just 46.2. The balance for Germany was 47.6, offsetting an improved services index of 55.1, while the opposite was true in France, where the anti-government protests had a greater impact on the services industry. The overall composite PMI of 51.4 (from 51.0) ticked up slightly, but remains consistent with GDP growth of just +0.1% QoQ.

US durable goods orders suggest that weaker business investment could undermine growth . The core non-defense ex-aircraft reading fell by -0.7% MoM in December, while November's reading was revised lower; the shipments measure did pick up slightly. Meanwhile, the Philly Fed index turned negative for the first time since May 2016, slipping to -4.1 (from 17.0) as the new orders and shipments contracted. Completing a day of US disappointments, existing home sales fell by -1.2% MoM in January to an annualised 4.94m units, a three-year low, despite the recent fall in mortgage rates.

Today's events. Germany Feb IFO survey (9.0) 99.0; Eurozone Jan CPI (10.0) -1.1% MoM, +1.4% YoY, core -1.5% MoM, +1.1% YoY; UK Feb CBI Distributive Trades survey (11.0).

Ian Williams
Economics & Strategy
020 7418 8819

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