Mixed open for Europe, Amazon dips, Barclays PPI shame, luxury boost

Morning Note

Will we have a yuletide election or will we be left in purgatory for longer?

It was a mixed open for the main bourses in Europe today although the Euro Stoxx 50 started to move lower along the DAX as the morning progressed. Luxury stocks doing well after Moncler and Kering’s Gucci brand posted strong growth despite the trouble in Hong Kong. Burberry road on the coat-tails of its Italian pals to rise 1.5%. Utilities off a touch – could be General Election risks re Labour nationalisation plans. Scottish Mortgage Investment Trust down off the back of the Amazon drop as it makes up 9% of the fund.

European and US equity markets rose yesterday, but that was before the Amazon numbers dropped

Asia has been weaker after a fairly hawkish speech on China by Mike Pence that’s not going to do much to soothe trade jitters. He attacked China’s ‘destabilising’ influence as well as their human rights record in Hong Kong, and attacked US corporates for becoming Chinese lap dogs – singling out Nike in particular, saying they check their conscience at the door or some such.

Amazon shares got whacked in after-hours trade following a big earnings miss. Operating income declined to $3.2bn from $3.7bn the same quarter a year ago. The massive investment in next-day delivery is dragging on profits, although it’s an essential move for the firm. Amazon expects to spend $1.5bn on delivery costs – double the last quarter. The company is clearly back in the investing for growth and future profitability mindset, so investors may need to be patient. Although revenues missed a touch, net sales ballooned 24% to $70bn. This doesn’t feel like it’s all that bad. The drop in income is down to investing. AWS profits were $2.3bn.

Intel though beat expectations easily and returned to growth. EPS came in at $1.42 vs $1.24 expected, and management raised the FY guidance to $4.60.

It’s been an interesting week so far. US stocks have really struggled for direction amid a deluge of earnings. Whilst earnings have been broadly positive with a c80% beat rate of S&P 500 firms reporting so far, there’s been some outliers and that’s the worry for investors. The bar’s been set very low so misses are leapt upon. The main misses for Boeing, Caterpillar, McDonalds, Texas Instruments and now Amazon are the sort to weigh on sentiment as these are kind of bellwethers.

It’s different in Europe, where the receding threat of a no-deal Brexit (though vanished) has seen the major bourses set the pace. We’ve seen breakouts in the DAX and Euro Stoxx 50, which have risen to the highest in almost two years. Eurozone PMI data has been mixed, but it’s not getting worse, and that may suggest the worst is over. Meanwhile investors do, as we suggested at start of the week, seem to be buoyed by the prospect of EU-US trade talks replacing auto tariffs due to hit soon.

The FTSE has also enjoyed a fine week, albeit the index remains within pretty well-worn ranges. We’ll see if it make ground up to 7400. It’s currently around the Oct 1st close – if it break north from here then the late Sep highs around 7400 are within touching distance.

On Brexit, today should produce an out one of sorts. We should know whether Boris Johnson gets his election, slated for Dec 12th. They say turkeys don’t vote for Christmas so it remains unclear whether Labour will go for it, given what the polls say.

Sterling sold off sharply on the prospect of an election and the high degree of fresh uncertainty that introduces. From trading as high as 1.2940 GBPUSD sank briefly below 1.28 before coming back. At send time, the pair was softer in early trade at 1.2830.

If Boris doesn’t get his election, what then? The key now one feels is whether no-deal risks come back and bite us. There’s a clear sense in the market it’s off the table, but we are in very strange and uncertain times.

EURUSD has come back down in the wake of the ECB meeting/Draghi farewell event to test support on the 1.10 round number. Gold followed the cue for a breakout to move north of $1500 yesterday.

Equities

Ouch – another big PPI hit for Barclays.  The bank swung to a loss after taking an extra £1.4bn provision for PPI claims. As we’ve said before, the complete lack of visibility all of these banks have had on the cost of PPI claims is a scandal in itself. We noted in September: The other great PPI scandal is how shareholders have been consistently low-balled, fobbed off and undersold the impact of the redress, leaving them with lower capital returns and lower dividends than they would have expected. Barclays has now spent £11bn on settling PPI claims. However, the line has been drawn under this and banks can move on at last.

The good news for Barclays is in the investment banking division. No doubt Ed Bramson will be dismayed, but for other shareholders the performance is greatly encouraging. The corporate and investment bank posted a 77% rise in pre-tax profits to £882m. In trading, fixed income revenues rose 19%, while equities rose 5%.

The PPI charge left the bank nursing a loss of £292m. Profitability targets now look tricky. The return on tangible equity target of 9% in 2019 is still on track with the YTD number at 9.7% despite turning negative in Q3, but it’s clearly going to be a lot harder to hit the 10 goal for 2020. Shares rose over 2% on the open despite the soft numbers – the PPI claims might be bad but they are by and large a thing of the past.