U.S. equity markets declined as the U.S. dollar strengthened ahead of Friday’s non-farm payroll data on continued speculation of a rate hike by the end of 2016. Nine out of the ten S&P 500 sectors declined with the only positive sector being financials which gained +0.82% as these companies benefit from increased margins from higher rates. Both the S&P500 & Nasdaq 100 declined -0.20% & -0.31% respectively while the U.S. dollar index strengthened +0.50%.
Fed Vice Chair Stanley Fischer re-iterated in an interview with Bloomberg that the economy was close to full employment however the Fed remains data dependant and any hike will need to be justified by the incoming data. Elsewhere data showed that the U.S. housing market continues to strengthen with prices increasing 5.07% year-on-year in June from 5.05% previously as shown by the S&P/Case-Shiller US Home Price Index.
The strengthening housing market will continue to help support consumer sentiment and flow through into consumer spending as it increases the wealth effect, a phenomenon that causes people to spend more as the value of their assets rise. This was also reflected in a U.S. consumer confidence survey on Tuesday that surpassed expectations of 97 with an actual reading of 101.1.
The big headline overnight was regarding Apple Inc. (NASDAQ:AAPL) which dropped only -0.77% , chart one below, following a European Commission ruling that said Ireland had given the company illegal state aid through two tax rulings in 1991 and 2007 where it allowed Apple to shift profits to a “head office” which was effectively stateless and therefore did not pay tax. The ruling by the commission orders that Apple repay Ireland 13 billion Euros (US$14.5) plus interest to cover the period of taxes owed between 2003 and 2014. As of last month Apple has US$232 billion in cash so paying the money is no issue however it will now go through a lengthy appeals process against the decision over the next two to three years.
The decision highlights the bigger issue of the imbalance within the EU single market due to different corporate tax rates where companies move to countries with lower corporate tax rates, such as Ireland's 12.5% compared to France's 33.3% rate and Germany’s effect 30-33%. This also raises issues around countries that provide favourable tax treatment to companies yet were bailed out in the wake of the European sovereign debt crisis placing unfair burden on other countries such as Germany and France.
European equity markets were broadly higher on Tuesday with the Euro weakening -0.4% following German CPI data that showed prices rose less than expected (YoY Aug), up +0.4% against estimates of a +0.5% increase and remaining unchanged month-on-month. The Euro Stoxx 600 finished +0.45% higher, as did the DAX up +1.07%. The GBP/USD finished modestly lower, down -0.18% as the FTSE100 slipped -0.25% as the market reopened following Monday’s banking holiday.
In Japan both the Nikkei & Topix finished relatively flat after rallying strongly on Monday, down just -0.07% & -0.03%. The second chart below shows the USDJPY which gained 1.07% overnight (Yen weakening) so we expect Japanese equities to outperform today benefiting from the weaker currency.
Commodity prices were broadly weaker as a result of the strengthening dollar, both WTI & Brent crude oil closed -1.34% & -1.91% lower, as did copper -0.27%, natural gas -2.38% and the Reuters/Jeffries CRB index -0.87%. Precious metals spot gold & silver also declined, down -0.93% & -1.46% respectively.
The S&P/ASX 200 slightly higher on Tuesday up +0.17% as the Australia dollar fell -0.85%. Meanwhile the market is set to open modestly higher this morning with ASX SPI200 futures up just 6 points in overnight trading.
- U.K. Consumer Confidence Survey (MoM Aug) 9:05am AEST
- Japanese Industrial Production (YoY Jul) 9:50am AEST
- Australian Private Sector Credit (YoY Jul) 11:30am AEST
- U.K. House Prices (YoY Aug) 4:00pm AEST
- German Retail Sales (YoY Jul) 4:00pm AEST
- German Unemployment (MoM Aug) 5:55pm AEST
- Euro-zone Unemployment (MoM Jul) 7:00pm AEST
- Euro-zone CPI (YoY Aug) 7:00pm AEST
- US ADP Employment Change (MoM Aug) 10:15pm AEST
- Canadian GDP (QoQ, MoM & YoY Jun) 10:30pm AEST
- U.S. Pending Home Sales (YoY Jul) 12:00am AEST
- U.S. Crude Oil Inventories (Aug 26th) 12:30am AEST
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd