European bourses soar; GBP mixed as new PM announced

Summary:

• Dax leads rally in European indices

• Auto stocks boost German benchmark

• S&P500 also gains to revisit 3000 handle

• Pound little changed as Boris announced new PM

European equity markets are among the biggest winners on Tuesday pushed by rising rate cut hopes ahead of the ECB meeting (Thursday) and solid performance of the auto sector, especially on the German market. What’s driving the German DAX higher today? In short, auto stocks, however, we do not have one reason justifying such a broad-based increase. Therefore, let us move through news regarding the leaders. BMW and Daimler have both posted solid daily gains but they have been overshadowed somewhat by Continental which ended up almost 6.5% higher on the day. 

This splendid performance has arisen in spite of the fact that the company slashed its earnings outlook for the full year due to shrinking vehicle production in its key markets including China. Now the company targets adjusted EBIT to be between 7% and 7.5% this year compared to “at least 8%” previously. However, it looks like shareholders were prepared for even a deeper downward revision given the fact that we are seeing decent take-up for Continental shares.

The major US benchmarks are trading higher on the European close, although the gains are not as big as the ones seen on the Continent. The S&P500 has moved back up to the 3000 level and while a S-H-S may be forming on shorter time frames, the longer term perspective seems to suggest the uptrend remains in tact for now. A pullback to the 21 EMA yesterday once more attracted buyers and from both perspectives the 2974 region could be seen as key support. All-time highs of 3023 remain less than 1% away.

As was widely expected Boris Johnson has been announced as the new UK PM, winning the Tory leadership contest with 66% of the vote. Given that he’s been the frontrunner for quite some time the immediate market reaction has been fairly quiet with the pound remaining under pressure and not far from its lowest level since April 2017 against the US dollar. There has been a sustained weakness in sterling of late with the currency depreciating for much of the past few months largely due to concerns surrounding Boris’s victory and the subsequent approach he will take on Brexit. 

His bluster on delivering Brexit is arguably the main reason for his victory, but it would not be too surprising if he softens his stance now he is in power. The fate of the new PM’s tenure and of the pound for the coming months will be almost solely determined by Brexit developments but in the coming days it would not be too surprising to see some sort of relief rally now that the news is out.