US GDP smashes forecasts: 3.2% vs 2.1% exp
Equities recover from early weakness
FTSE set for weekly decline
Deutsche Bank falls as merger talks collapse
Oil slides on waiver rumours and Trump comments
The latest growth figures from the US serve to reaffirm the notion that the world’s largest economy continues to outperform its peers, with an annualised growth rate of 3.2% seen in the first quarter. This figure is well above the 2.1% expected and shows that despite the government shutdown, trade tensions with China and slowdown in other major economies the US remains a pillar of relative strength. Looking more closely at the breakdown of the growth, there are some factors that make it appear not as strong as it first looked, even if it is still fairly pleasing on the whole. Firstly, a decent chunk of the growth (0.65%) came from a build up in inventories which reflects a temporary boost that will likely revert while imports were fairly weak - this contributes to higher GDP from net exports but could be seen to indicate less domestic demand.
In terms of market reaction, US yields and the US dollar both jumped higher initially, but they have since reversed to trade below where they were on the release. The main reason for this seems to be the GDP deflator component which showed a print of +0.6% vs +1.3% expected. Lower inflation is negative for both these assets but overall is seen as positive for the stock market with US indices receiving a double boost from both this and the strong headline figure.The S&P500 has reacted positively to the release and moved above a falling trendline from the recent highs of 2940. Bulls may have the all-time high of 2947 in their sights as we head into the final session of the week.
Despite rallying to a 6-month high on Tuesday, the FTSE is set to end lower for a second successive week as the benchmark continues to wrestle with some resistance around the 7500-7550 region. The worst performing blue-chip in London this morning is RBS, with shares in the bank falling more than 4% as it reported a drop in profits and reiterated its Brexit warning. While profits for the first quarter fell to £707M, this was actually better than consensus forecasts of around £546M, but weak revenues and forward guidance that could be described as cautious at best have caused the adverse reaction. Revenues of £3B were flat on the year, but lower than the £3.3B predicted and comments from RBS that this is unlikely to improve imply are not what investors wanted to hear. With the government still owning a 62% stake in RBS, the news isn’t good for public finances and with CEO Ross Mcewan announcing just a day before that he is stepping down there’s heightened levels of uncertainty around the stock going forward - and that’s without even looking at potential impacts from Brexit!
Looking at the DE30 breakdown one may notice that Deutsche Bank are standing out the most declining as much as 3.3% in early trading hours. This underperformance is a result of a collapse of merger talks with Commerzbank. Namely, after experiencing its ninth consecutive quarter of contraction, Deutsche Bank chose to cut its full-year revenue. What’s more, a lack of merger also gave some reasons to cut the outlook for the remainder of 2019. The German lender informed that it expects business to be flat this year. Let us recall that its first quarter income from securities trading declined 19%, the result proved to be weaker compared to an average result registered by its US competitors. Other numbers from the first quarter statement showed a 9% decline in revenue, a 48% rise in net income. In terms of the talks themselves, Deutsche Bank informed that a historic deal with Commerzbank would be too difficult to execute. Having in mind a ubiquitous fight with “too big to fail” financial institutions it seems that the merger talks break-up could be positive. Keep in mind that Deutsche Bank is already a gargantuan company with many cross-border connections.
One of the biggest moves in the markets today has come in the crude oil space with both Oil and Oil.WTI tumbling lower by more than 3%. The drop began this morning on now readily apparent catalyst, however as the declines persisted there are a couple of fundamental reasons that support the technical break. Firstly, there is some speculation that the US is set to grant China waivers to import Oil from Iran, and seeing as Beijing account for around roughly half of all Iranian exports this would roughly half the supply side shock. Secondly, according to reports from Reuters US president Trump has “called OPEC” and asked them to lower prices. It’s hard to determine the merits of each of these really, but one thing is clear that the market has had a large-sell off today and after the strong rally year-to-date there could be a further pullback ahead.