Markets Overview

The markets are focused upon two key stories thus far.  First was yesterday’s news out of the U.K. after the local close.  The House of Commons voted 328 to 301 to implement the first step blocking a “No Deal” Brexit.   Those in favour (not a typo) included a number of Tory member’s from PM Johnson’s party.  In turn, PM Johnson is expelling said members from his party.  The House of Commons will now consider the bill to quash the No Deal scenario.  If that occurs, PM Johnson threatens to call for snap elections on Oct. 14th.   Bottom line, the Brexit issue remains as clear cut as it did following the initial referendum vote 3 years ago.

The second item has generated the most reaction.  The South China Morning Post reported Hong Kong Chief Executive Lam will formally withdraw the bill permitting extradition to China.  She made the official announcement after the Hong Kong session ended.  This is pure speculation on my part; however, I can’t imagine she would make such a move without Beijing’s blessing.  We shall see.

The SCMP report prompted Hong Kong equities to surge during the last two hours of trading.  The MSCI Hong Kong index ends the day better by 5.4%.  That is the largest gain since 2011.  Most of the rest of the Asian markets also end the day higher.  Although the story broke after most of them had closed.   The mainland Chinese markets benefited from strong Caixin Service and Composite readings.  Most sectors end to the day to the upside.  Real estate improves close to 3% with telcos and financials higher by c. 1.5%.  Defensives lagged.  Well after the region was closed, China’s cabinet made several statements including prudent, timely reserve ratio cuts when needed to support the economy.

European equities have been higher since the open.  The markets had pared some of their gain but started ticking higher post the Chinese rrr statements noted above.  Italy is leading the way.  Lost among some of the other headlines. Giuseppe Conte could be sworn is as PM today.  All major sectors are green.  Autos lead better by close to 2%.  Several others are improving by at least 1% including banks, insurance, retail and basic resources.  Media and healthcare lag.

The currency markets are seeing the £ higher following the U.K. news.  The € is also gaining ground.  German and Eurozone Service and Composite PMIs are ahead of projections.  Those in the U.K. are light but still above the key 50 level.

In the debt markets, JP Morgan declared Chinese bonds will be included in benchmark indices.

Corporate Headlines

• Samsung Elec. +2.0% is making headway replacing Japanese chip supplies that have been cut off post the removal from Japan’s preferred trading partner list.
• WH Group +7.9% and peers benefit from Chinese incentives to boost hog production.
• China Vanke +3.0% and Shimao Property +3.6% August contract sales change -0.23% y/y and 39.0% y/y, respectively.
• The gains in the European auto sector are being driven by JP Morgan comments.  The broker sees the potential for a rally by year end especially for the parts makers.  This follows several meetings with management within the sector including Valeo +5.5%.
• RBS +1.0% is increasing provisions due to its mortgage protection sale transgressions by £900m.  That brings the total to £6.2b.
• In a blow to Vivendi +0.3%, Mediaset +2.3% shareholders approve company’s plan to roll Spanish and Italian assets into a Dutch holding company.
• Barratt Development -3.5% sees volume growth at the lower end of its medium term target: 3-5%.  Several brokers are raising concerns about margins.
• Both Revenues and EBIT at Thales +6.6% are positive surprises.  The shares trade well despite the company trimming its FY organic growth outlook.

On Our Side of the Pond

• Tyson Foods is cutting its FY adj. EPS forecast to the range of $5.30 – $5.70 vs. the prior guidance of $5.75 – $6.10.  That is below the lowest estimate on the Street.
• Citing a decline in Caribbean travel in part due to Hurricane Dorian, JetBlue warns on Q3 RASM (Revenue per Available Seat Mile).  It now sees the measure at -2% to flat from prior expectation of +0.5% to +3.5%.
• Lumber Liquidators founder Thomas Sullivan is attempting to take the company private.
• North of the border, the Bank of Canada is expected to hold rates steady at 1.75%.
• Way south of the board, Chile cuts its benchmark rate by 50 bps to 2%.  The unanimous decision make after yesterday’s close was anticipated by most analysts.  The central bank indicated it will maintain a dovish stance with the potential for more reductions to come.
• We now await the Fed Beige book.

Markets & Macro