Market Commentary | Markets lower on European outlook

Europe

European indices ended yesterday’s session in negative territory after the European Union reassessed its economic growth forecasts and emerged with lower estimates.  The benchmark Euro Stoxx 50 closed off at 3034.24, sliding 1.56%.  The CAC 40 slid by a similar margin of 1.52% to 4130.19.  The IBEX 35 recorded the largest losses from the main indices as it slid 2.12% to 10154.40.  The German DAX curtailed its losses amongst the comparative indices as it dropped slightly under 1% to 9166.47.  

The drops experienced yesterday extended the European indices decline for a second consecutive day this week.  This movement was fuelled by lower growth expectations for the European members even though company earnings continue to come in at better than expected levels.  The European Commission said that GDP for the EU region is expected to rise by 0.8% this year and 1.1% in 2015; significantly lower when compared to the previous forecasts of 1.2% and 1.7% respectively.  The commission said that inflation, one of the ECB’s main targets, will also be weaker than expected.  According to the head of the EU commission’s economic department, Marco Buti, “slack in the EU economy remains large and is weighing on inflation, which is also being dragged down by tumbling energy and food prices.”  That said however, the continued decrease in the price of oil may be an effective driver in turning this negative expectations into a positive reality.  Should the drop in oil prices continue, positive effects on companies’ bottom line should materialise, possibly revitalising the GDP figures towards the end of this year.  If lower production costs are reflected into the final prices paid by consumers, an increase in demand may   propel higher inflation figures.  The European Commission expects inflation to increase to 1.5% in 2016, whilst the ECB forecasts the reading to be 1.4% for the same period. 

Meanwhile unemployment figures are expected to remain significantly high towards the end of the year as well as the following two years.  The Commission is expecting an average rate of 11.3% by year end 2015 and 10.8 by 2016.  This will record only marginal improvement from end 2014 figures where the expectation is of 11.6%, confirming the slack that exists in the European economy at present.

US

US indices followed their European counterparts into negative territory yesterday.  The S&P 500 slid marginally to 2012.10, trimming 0.28% whilst the Nasdaq slid 0.33% to 4623.64.  The Dow Jones was the only winner yesterday adding 0.1% to end its session at 17383.84

US trade deficit increased by 7.6% over the August level reaching $43 billion.  Economist were expecting a slightly lower reading, that of $41.1 billion.  This increase was fuelled by weaker exports to European economies, China and Japan, whilst imports remain relatively unchanged.  

Indices are expected to open higher later this afternoon as US projections show Republicans added the six seats required for their first Senate majority in almost a decade.  SPX futures expiring in December climbed 0.2%.

Meanwhile most S&P companies are beating the Street’s expectations on their earnings and this should continue to have a positive impact on US indices.  Labour market and consumer sentiment is also expected has also showed continued improvements.

Asia

The Nikkei 225 added 0.07% to valuations ending its trading session overnight at the 16874 level whilst the Hang Seng slipped half a percent to 23723.58.  The Shanghai Composite Index also dropped 0.49% to 2418.84.  The HSBC China Services PMI slid to 52.9 from 53.5 in September, possibly leading to a negative open in today’s European trading. 

Data Expected Today

The Spanish and Italian Services PMI figures are expected to be published today.  Both figures are expected to add onto the previous monthly figures.  The Spanish is expected at 56.2 from 55.8 whilst the Italian Services PMI is expected to come in at 49.6; adding to its previous 48.8.  The US ISM Non-Manufacturing PMI is to be published later this afternoon together with the ADP Non-Farm Employment Change.  The latter is expected to increase.

Crude Oil Inventory figures are also expected to be released today.  More attention is expected given the most recent price fluctuations in oil.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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