EU stocks gain as US pulls back; UK wage growth beats

Summary:

• DE30 rises to new 6 week high on fiscal hopes

• US500 pulls back in notable divergence with EU

• Wells Fargo subject to broker downgrade

• GBP still supported as UK wage growth tops estimates

We some diverging move this Tuesday as US indices move clearly lower yet the German DE30 fires higher for the 5th trading day on stimulus hope. Investors expect action from both the ECB and German government, the latest suggesting that it could tap cheap borrowing to revive the economy but only in case of a recession. There’s also a big question whether expectations ahead the ECB aren’t too elevated as investors want to see both rate cuts and QE program. Technically DE30 faces a resistance at 12330 points where we see equation between the current rally and a similar impulse from June.  

Wall Street is set for what has been pretty rare phenomenon today with the 3 major stock benchmarks all starting lower and on course for a second consecutive daily drop. The declines themselves are far from drastic and at present amount to little more than a pullback after a strong run higher in the past couple of weeks.  The drop so far could be seen as a possible “C” wave in an A-B-C correction and so long as the market doesn’t move below 2946 then the breakout remains valid.

Wells Fargo is one individual stock in the news for the wrong reasons after UBS cut its rating on the bank to “neutral” from “buy”. The reasons behind this decision were a view that Wells still lacks visibility on profitability improvement and as such the earnings estimates were also cut on the prospects for lower net interest income. Wells has enjoyed a decent run higher in recent weeks but still remains towards the lower reaches of the trading range seen in the past couple of years. Shares are trading marginally lower by less than 0.5% at the time of writing. 

For the second day running we’ve seen some better than expected data from the UK, with the unemployment rate, claimant count change and wage growth all topping analysts’ estimates. An increase in 3M/Y terms of 4.0% for average weekly earnings is not only well above the 3.7% forecast but also the highest reading since June 2008. The prior reading was also revised higher by 10 basis points for good measure to now stand at 3.8%. Stripping out bonuses, which can give a misleading view due to their volatile nature, and the figures are still good, with ex bonus weekly earnings increasing more than expected at 3.8% 3M/Y.