DE30: Relief rally in Italian bond market, stocks higher as new week gets started

09:18 29 October 2018

Summary:

  • Stocks in Europe start the new trading week higher despite gloomy moods in China

  • Italian bond yields come down following a S&P rating agency decision on Friday

  • Weak sales reported by companies listed in the SP500 a possible reason behind their underperformance

European investors have seen a good start to the new trading week defying dismal moods in China where stocks in Shanghai were 2.2% down while those in Hong Kong shed 0.5% exceeding their last week’s slide. In part, it could have been a response to the bloody end of the past week on Wall Street where we saw widespread falls ranging from 1.2% (Dow Jones) through 1.7% (SP50) to 2.1% (NASDAQ) even as GDP during the three months through September beat expectations producing a 3.5% annualized rate growth. However, the breakdown of this increase was not so encouraging for several reasons. First of all, inventories added as much as 2.1 percentage points to growth signalling some difficulties in demand nevertheless it was almost fully offset by a 1.8% negative contribution from net exports, the lowest since 1984. In general, such the structure implies that consumers imported much more compared to previous quarters and it could be tied to an increase in demand before more tariffs came into effect. On the other hand, there were no investments at all and basically their contribution was negative (-0.04 percentage points), the worst result since the last quarter of 2015. Finally consumption accounted for as much as 2.7 pp of a 3.5% rate of GDP growth suggesting relative huge reliance on consumer spending in the last quarter. Therefore, the upcoming quarters could be affected by potentially lower consumer expenditure if the stock market meltdown continues. Under such circumstances one may imagine that an additional income coming from further tax cuts (the GOP promised to pursue a 10% tax cut for the middle class next year if it holds a majority in both chambers though) could be saved rather than spent.

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The DE30 is trying to recoup its losses at the beginning of the new week but bulls are running into a notable obstacle in form of the bearish gap drawn last week. This gap needs to be broken out in order to allow the price to keep on rising at least toward 11400 points. A tad above this level another gap is localized suggesting that buyer will have rather a tough road ahead. Source: xStation5

The Friday’s decision of the S&P rating agency to slash Italy’s outlook to negative from stable met with a burst of optimism among bond investors in Europe. The 10Y Italian bond yield is trading roughly 10 basis points lower this morning with the spread to the German bund falling below 300 basis points. Either way, the negative outlook suggests that the S&P could downgrade Italy in the months to come if some adverse scenarios materialize. Now it seems that the paramount point for the South European country is a battle with the European Commission over a budget. The country needs to resubmit a new version of the budget draft within two weeks.

Merck (MRK.DE) is the best while BASF (BAS.DE) is the worst performing stock within the German DE30 in early European trading on Monday. Source: Bloomberg

Looking around stock markets in Europe one may notice that the index in Italy is standing out the most surgiging 1.4% at the time of writing in the wake of the above-mentioned S&P rating review. Elsewhere, the German DE30 is adding 0.4%, the EuroStoxx50 (EU50) is rising 0.3% while the FTSE100 (UK100) is gaining 0.7%. Relative outperformance of Merck stems from the fact that the stock was upgraded to outperform from neutral by Credit Suisse. In turn, a 1.5% drop seen in BASF could be still a product of the disappointing third quarter earnings. On top of that, the company informed today that it will build a new ethylene plant in Nanjing, China  in cooperation with Sinopec (a Chinese oil and gas enterprise based in Beijing).

At the end let us present a possible reasons behind underperformance of the US stock market in recent days. Note that almost a half of companies listed in the SP500 (US500) have already reported their earnings for the past quarter and most of them have managed to beat expectations by a large margin in case of net profit. However, it has not been actually the case when we mean revenue where the average beat has totalled 0.7% so far being well below the levels seen in the prior quarters. If this trends keeps unfolding, it could not bode well for the future signalling that demand in many companies begins stuttering.

The average beat in terms of sales in the SP500 has been weakish so far. Almost 250 stocks have reported their financial results as of yet. Source: Bloomberg

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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