“Stocks Sell-Off …”

Stocks Sell-Off

More than $6.7 trillion in value has been wiped off the global equity-market capitalization since late September, according to data compiled by Bloomberg, compared with $7.8 trillion in the February correction.  The increase in selling from Wall Street escalated into heavy sell off in Asia before hitting Europe.  Europe was facing a fifth day of uninterrupted declines.  Techs posted the worst performance as AMS plunged 17 percent as its outlook triggered alarm bells.  The pan-European Stoxx 600 was near a two-year low with almost half of its stocks now in bear-market territory down 20 percent from their peak.  The DAX fell to late 2016 lows and the FTSE was down near April lows, while the MSCI world share index was just two points of a one year low.  On Wednesday, European shares tried to recover after five straight sessions in the red, with disappointing results in the banking sector weighing on indexes.  The banking sector which is the worst performing one in Europe so far this year, lost 0.45 percent with Deutsche Bank shares down 4.2 percent after a steep decline in third quarter profit.  Earlier in the session, luxury stocks were recovering after they were recently hit by worries over a slowdown in growth in China.  On Wednesday Wall Street stocks tumbled as investors ran for safety amid global economic and political worries. Meanwhile US Treasury prices climbed and the Dollar surged.  The CBOE volatility index registered its highest close since February.  The S&P 500 and the Dow Jones Industrial Average erased their gains for the year while Nasdaq confirmed a correction. On Wednesday the S&P 500 Index also closed down 3.1 percent with October being the worst month for the US benchmark since February 2009.  The issues that have unnerved investors include disappointing earnings reports, uncertainty over Brexit, Italy’s budget and tensions with European Commission, the mid-term congressional elections and pressure on Saudi Arabia over the killing of the journalist.

The ECB

As was expected the European Central Bank kept its policy unchanged on Thursday, staying on course to claw back the stimulus despite a gloomy growth outlook and the political turmoil in Italy.  The ECB reaffirmed that the EUR 2.6 trillion asset purchase scheme will end this year and rates could rise after the next summer.  It continued with its guidance unveiled in June and at every other meeting since then.

Eurozone Business Growth

A survey showed that Eurozone business growth slowed much faster than expected this month, dragged down by declining orders that had an impact on confidence.  The disappointing October survey is a sign of concern to policymakers at the European Central bank who are expected to end their bond-buying program in less than three months, despite political and trade war concerns.    The economic slowdown comes amid escalating trade war between the United States and China, spiralling debt dispute in Italy, deadlock in the Brexit negotiations and the prospect of tightening financial conditions.  IHS Markit said if the survey levels were maintained they pointed to fourth quarter growth of 0.3 percent.  That would be the slowest pace in 2 ½ years and below the 0.4 percent predicted in a Reuter’s poll earlier this month.  IHS Markit’s Flash Composite Purchasing Managers’ Index for the Eurozone tumbled to a 25 month low of 52.7 from a final September reading of 54.1.  Anything above 50 in the survey is regarded as good guide to growth.  The future output index which gauges optimism fell to a near four-year low of 59.4.  Furthermore a similar reading from manufacturers fell to a level not seen in almost six years.  Manufactures suffered with their PMI sinking to 52.1 from 53.2, as factory orders contracted for the first time since late 2014.  The services PMI plummeted to a two-year low of 53.3 from September’s figure of 54.7.    After the survey release, both the euro and the European government bond yields dropped on Wednesday with the euro falling half a percent to $1.1417 to its lowest since 20 August.

Moody’s Downgrades Italy’s Debt Rating To Stable

On Friday Moody’s cut Italy’s sovereign debt rating to “Baa3” from a previous “Baa2” which is a one notch above junk status.  The reason for the cut is the concern over the recently announced government budget plans which forecast a deficit of 2.4 percent of gross domestic product (GDP) next year, which is three times higher than the previous target.   In a move to calm investor anxiety, it said the outlook was stable.  The expensive budget plans have weighed heavily on Italian government bonds in recent weeks, with the spread between German and Italian benchmark 10-year paper, hitting 5 ½ year highs on Friday last week.

The EU Rejects Italy’s Budget

The European Commission rejected Italy’s 2019 budget on Tuesday in view of its breach with EU rules and asked Rome to submit a new budget within three weeks or else it would face disciplinary action.  The Commission said that the revised budget expected to be received from Italy should be in line with the recommendation of EU finance ministers from 13th July. In July, EU ministers asked Rome to cut its structural deficit, which excludes one-offs and business cycle swings by 0.6 percent of GDP.  The plan rejected by the Commission increases the deficit by 0.8 percent of GDP.  On Monday, Italy sent a letter to the Commission acknowledging that the draft budget was in violation of EU rules, but insisted it would still go ahead with it.  Commission Vice President for the Euro, Valdis Dombrovskis, noted that unless Rome changes its draft budget in the next three weeks, the Commission was ready to open a disciplinary process against the country, called the excessive deficit procedure, based on the lack of progress in cutting debt, an obligation under EU law.

Currencies

The Euro rallied on Monday as Italian borrowing costs fell, while the promise of more Chinese stimulus helped offset broader political worries.  Deputy Prime Minister Luigi Di Maio said that the government was ready to sit down with the European Union amid the ongoing showdown over the budget which boosted the demand for Italian debt after a sharp selloff in recent weeks.  The EUR rose to $1.155 hitting the day’s high and away from the recent lows of $1.1433.  The dollar rose versus the Japanese yen and fetched 112.71 down 0.2 percent on the day and off from the one-month high reached on 15 October at 111.61.  The Yen benefitted from the rising risk around Brexit, Italy’s budget plan and trade tensions, because investors tend to buy the Japanese Yen in times of uncertainty.   On Tuesday the euro fell towards a two-month low and Italian bonds struggled before a European Commission meeting about Italy’s budget. On Wednesday the Dollar rose sharply against the EUR to its strongest since August after PMI data showed business growth in the Eurozone decelerated faster than expected due to declining orders.  The Japanese Yen and the Swiss franc rose on Thursday as investors looked for safety, amid the selling of stocks across the markets although moves in currency markets were modest.  The euro also gained, recovering from a two months lows that hit on Wednesday.  On Thursday, the euro rose after the European Central Bank chief Mario Draghi said wage increases were not temporary and expressed confidence about inflation reaching the bank’s target.  The euro increased to a day’s high of $1.1433 trading up almost 0.4 percent.

The Pound And Brexit

On Monday Sterling slipped, as the Irish border issue and disagreements within the UK ruling party over Brexit, overshadowed signs that Britain and the European Union had settled most the differences over a divorce deal.  Theresa May was expected to tell parliament that 95 percent of the UK’s divorce deal has been settled.  Sterling had slipped to $1.303 as the dollar climbed back into positive territory.  The pound stayed off two-week lows touched on Friday.  Meanwhile against the euro the pound fell a quarter percent to 88.3 pence as the single currency was supported by Moody’s decision  to  rate Italy’s credit rating outlook stable.  Uncertainty over Brexit talks kept pressure on the sterling, but the currency gained half a percent versus the dollar and euro on Tuesday, after a media report that the European Union could offer British Prime Minister Theresa May a UK-wide customs union to reach a Brexit deal. The report by Ireland’s RTE News followed a Reuters story on Monday that EU negotiators were looking at ways to promise Britain a customs deal.   EU diplomats told Reuters that the bloc is examining ways to solve the Irish border problem by keeping the whole of the United Kingdom and not just Northern Ireland, inside the EU’s customs territory.  This would be fully settled only in post-Brexit negotiations and the EU would set stricter terms than May offered.  The EU still wants some element of special protection for Northern Ireland in the treaty although it may only be hypothetical.  On Thursday the pound rose above $1.29 after a show of support for British Prime Minister Theresa May from her Conservative party at a meeting in parliament that reduced the fears  of an immediate leadership challenge over her Brexit strategy.

Yields

On Tuesday Italy’s bond yields fell before the meeting of the European Commission.  Wednesday saw US Treasury debt prices rising as investors were wary of volatile equities and the benchmark 10 year note yields fell to three-week lows.  On Thursday Eurozone government bond yields fell amid a global equity sell-off that made investors rush to debt whilst awaiting a European Central bank meeting.  Concerns over the correction of the equity markets drove US Treasury yields to their lowest since early October. Meanwhile, a mood for less risky investments supported bond prices and drove down yields. The 10-year German government bond yield, which is the benchmark for the region, hovered around 0.388 percent, a six-week low and down for the third straight day later reaching 0.403 percent.  Likewise, the French 10 –Year and Dutch Bond yields were flat to two basis points lower in early trade. Italian bond yields also fell six to seven bps across the curve after Deputy Prime Minister Luigi Di Maio reiterated that Rome did not want to exit the euro, although he said Italy’s 2019 budget deficit target of 2.4 percent should not be trimmed.  Spanish and Portuguese bond yields were also down as much as five bps with the Spanish 10 year bond yield falling to a two-and-a half-week lows at 1.591 percent.  The Italy/Germany bond yield spread touched a one week high of 323 bps, its second widest since 2013 but later narrowed to 310.3 bps.  The risk sentiment was meanwhile seen improving which boosted support for higher-yielding Eurozone bonds before the European Central Bank meeting.  Meanwhile on Thursday, during Mario Draghi’s comments, Italian government bond yield rose to three basis points.  The 5-year government bond yield was last at 2.84 percent from 2.81 percent.  Germany’s 10-year government bond yield, which is the benchmark for the bloc also rose and was up two basis points at 0.41 percent.

Turkey Lira

On Tuesday the Turkey Lira was nearly 2 percent weaker against the dollar after the nationalist MHP party said it would not seek an alliance with President Tayyip Erdogan’s AK Party in the 2019 local elections, raising fears of political instability.  The MPH Party leader Devlet Bhaceli said his party would not team up with the AK Party due to a disagreement over the MHP’s call for an amnesty for some convicted criminals.  The MHP helped Erdogan secure a narrow win in the first round of presidential elections in June.  The lira later recovered some of the day’s losses after Erdogan and Bhaceli said their parties would continue to cooperate in parliament.  The currency has lost nearly 35 percent of its value against the dollar this year due to concerns over the central bank’s ability to rein in double digit inflation faced with criticism from Erdogan and a rift with Washington.  The central bank increased its policy rate by 6.25 percent to 24 percent in September to stem inflation.  Since then, inflation hit nearly 25 percent in September, which questions whether the central bank would deliver another hike.

US Business Spending On Equipment

New orders for key US made capital goods fell for a second straight month in September and the goods trade deficit increased further amid rising imports, suggesting a modest economic growth in the third quarter.   Other data on Thursday showed gains in both wholesale and retail inventories last month.  The economy is underpinned by a tightening labour market which is gradually boosting wage growth.  According to the Commerce Department, orders for non-defense capital goods excluding aircraft, which is a closely watched proxy for business spending plans, dipped 0.1 percent last month due to weakening demand for fabricated metals and electrical equipment, appliances and components.  This followed a drop by 0.2 percent in core capital goods orders in August.  Spending on business equipment is slowing after an acceleration for more than a year, arising from the implementation of $1.5 trillion tax cut package by the Trump administration that included a sharp reduction in the corporate tax rate.  Lower taxation is being however offset by the imposition on tariffs.   For example companies such as Caterpillar Inc and Ford Motor Co have complained about rising manufacturing costs as a result of duties on imported steel and other raw materials.  In its Beige Book report which was published on Wednesday the FED said, “Manufacturers reported raising prices of finished goods out of necessity as costs of raw materials such as metals rose, which they attributed to tariffs.”

Oil

Oil edged above $80 a barrel on Monday, amid a worsening diplomatic crisis between Saudi Arabia and the West.  The Saudi energy minister said that his country had no intention of unleashing a 1973 style oil embargo on Western consumers but rather was focusing on raising output to compensate for supply losses such as Iran.  Benchmark Brent crude oil futures rose 45 cents on the day to $80.23 a barrel while US crude futures rose 31 cents to $69.43 a barrel. US sanctions on Iran’s oil sector will kick in on 4^th November.  On Tuesday, oil prices slumped 5 percent on concerns about a weaker economic outlook.    On Wednesday oil prices increased modestly rebounding after several days of weakness amid bigger than expected drawdown in US gasoline and diesel inventories indicated a seasonal increase in refining demand.  Brent crude settled at $76.17 a barrel, down 27 cents or 0.4 cents.  The global benchmark is more affected by the outlook for world supply and Saudi Arabia says it plans on boosting output may reduce buying interest in Brent.  According to the US Energy Department gasoline stocks fell 4.8 million barrels to 229.3 million barrels last week, which is the lowest since December 2017.  Data from EIA also showed that US crude inventories rose 6.3 million barrels.  On Thursday oil prices stabilized and bounced back from an early sell-off as Asian and European stock markets plunged in the wake of Wall Street’s biggest daily decline since 2011.  Brent crude oil fell 1.1 percent to a low $75.35 a barrel before rallying up to $76.37.  The global benchmark has lost more than $10 a barrel since it hit a high of $86.74 on 3^rd October.

Nuclear Arms Pact

President Donald Trump said Washington would withdraw from a landmark Cold War era treaty that eliminated nuclear missiles from Europe because Russia was violating the pact and started a warning of regulatory measures from Moscow.  The Intermediate-Range Nuclear Forces Treaty which was negotiated at the time by President Ronald Reagan and leader Mikhail Gorbachev in 1987, required elimination of short-range and intermediate-range nuclear and conventional missiles by both countries.  Trump told reporters that “Russia has not unfortunately honoured the agreement so we are going to terminate the agreement and we are going to pull out”.  US authorities believe Moscow is developing and has deployed a ground-launch system in breach of the INF treaty that could allow it to launch a nuclear strike on Europe at short notice.  Russia has consistently denied any such violation.  On Monday Russia said it would be forced to respond in kind to restore military balance with the United States if President Donald Trump continued with the threat to quit a nuclear arms treaty and began developing new missiles.  Meanwhile, Moscow signalled that it may be willing to give some ground where a senior official told Trump’s National security adviser John Bolton, that Russia was ready to address US concerns about how the 1987 Treaty was being implemented.  Trump also said that China should also be included in the accord.

Company News

Barclays

Barclays beat third quarter profit forecasts on Wednesday and reported higher revenues at its investment bank which is under pressure although its costs increased.  The bank reported a profit before tax of 1.6 billion pounds excluding litigation and misconduct costs.  Barclays group profits for the first nine months of 2018 fell in comparison with the same period last year as it booked a 1.4 billion pound settlement with the US Department of Justice over mis-selling of mortgage backed securities.     The cost-income ratio or Barclays International rose to 69 percent from 62 percent in the first quarter.  Barclays is targeting a ratio of below 60 percent at group level over time.  Barclays reported a better than expected core capital ratio of 13.2 percent at the end of the third quarter.  This had been depleted by fines and misconduct costs in recent years and was a source of concern for investors.  The bank reiterated it was on track to pay a dividend of 6.5 pence per share for 2018.  Barclays also said that the Irish Central Bank had given its permission to expand its Irish operations, as it transfers the ownership of all of its European branches to the entity ahead of Brexit on 29^th March, 2019.

Boeing

The world’s largest plane maker reported stronger than expected quarterly profits and cashflow, helped by soaring demand from airlines and solid defense sales and services, the company raised its 2018 sales and profit estimates.  Boeing said the stronger cash flow was primarily driven by the timing of receipts and expenditures as well as planned higher commercial airplane production rates.  Core earnings which exclude some pension and other costs, came in 11 cents above analysts’ average forecasts at $3.58 per share in the quarter ended 30^th September.

AT&T Inc

AT&T Inc’s quarterly profit for the latest quarter rose less than expected amid a decline in the satellite TV business sending the company’s shares down more than 6 percent.  Total operating revenue rose 15.3 percent to $45.74 billion, beating analyst’s expectation of $45.65 billion. Excluding some items, the company earned 90 cents per share missing analyst’s estimate of 94 cents per share.

Twitter Inc

Twitter Inc, the social media company has easily beat Wall Street revenue and profit estimates by selling more ads even though it lost users after removing millions of fake accounts.  Twitter’s advertising revenue jumped 29 percent to $650 million in the third quarter from a year earlier, boosted by ad sales on broadcasts from media companies including Live Nation Entertainment, Major League Baseball and Major League Soccer.  The company reported adjusted profit of 21 cents per share, well above the average estimate of 14 cents.  Twitter shares are still down 42 percent from their 3 ½ year high of $47.79.

Deutsche Bank

After three years of losses, a failed stress test, attempts to restructure, a leadership shake-up and a ratings downgrade, many investors have lost faith in Germany’s biggest bank whose shares have fallen 43 percent this year.  Although Deutsche Bank said that it was on track to make a profit this year, it posted a steep fall in third quarter profit as it restructures under its new chief executive.   Its shares went down by 4.5 percent after the bank said it expected revenue this year to fall from 2017.  Net profit in the third quarter fell by 65 percent to 229 million euros, down from 649 million euros a year ago.  Revenue in the quarter was 6.175 billion euros, which is 9 percent down from a year ago.  The quarter continued with its weakness in its key trading business, with revenue in its bond trading division falling by 15 percent while revenues from equities-trading were also down 15 percent.

Malta:  General Government Registered A Surplus

In 2017, the General Government registered a surplus of EUR 392.7 million.  When measured as a percentage of GDP, the General Government balance was equivalent to a surplus of 3.5 percent, an increase of 2.6 percentage points when compared to the surplus of 0.9 percent that was registered in 2016.

Malta:  Registered Unemployed – September 2018

In September, 2018 the number of persons registering for work stood at 1,813 decreasing by 26.7 per cent when compared to the corresponding month in 2017.

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