Banking worries suppress risk appetite

The bullishness seen in European indices of late was given a reality check today.

Worries about prospects of a Chinese bank default and suggestions that some European banks would need to raise fresh capital weighed on risk appetite.

European markets

The FTSE 100 was caught in tight range and, unable to gain a foothold through the 6700 level, has fallen back by 0.5%. ARM Holdings continued to invite selling, and has now lost 10% over the past two days. Its neutral rating from Barclays has also served to bring in the profit-takers, which was inevitable after a 40% surge in the past four months.

The reputation of GlaxoSmithKline is still reeling from the bribery scandal in China, evidenced by the fall-back in its Chinese sales, which dropped 61%. Core earnings per share of 28.9p beat the consensus, but flat worldwide sales at £6.51bn for the quarter missed expectations. The stock fell 1.92%.

Spain technically exited its recession, showing growth of a meagre 0.1% in the quarter. Employment levels were also seen to be improving. Nobody seems to have told Spain’s benchmark index, however, and it underperformed its European counterparts, shedding 2% as the banking sector weighed.

US markets

If Caterpillar is a harbinger for the US recovery story, the fact that the earnings for the world’s largest machinery-maker have failed to meet consensus expectations over the past five quarters should be telling. The company reported a 44% drop in Q3 earnings and cut its full-year sales forecast to $55bn. This is significant given that sales in 2012 were around $66bn. The decline in mining sales – a sector that has failed to inspire this year – has been blamed. Shares took a 6% hit.

Conversely, Boeing, helped by a lift in commercial jet sales, topped analyst expectations for the eighth consecutive quarter and raised its profit forecast for the year. This is an impressive earnings report considering that the Dreamliner model was grounded for almost four months this year, afflicted by battery overheating issues. The stock has presently added 5.5%.

The Dow is currently trading at 15,415, down 52 points from yesterday’s close.

Commodities

The spread differential between the Brent and US light crude oil price contracts has widened to $12, with the WTI contract falling below the 200-day moving average and trading at its lowest level since July. The effects of the disappointing payrolls number continue to weigh, and the expectation that inventories would show a surplus was borne out this afternoon. US inventories showed a surplus of 5.2m barrels against an expectation of 2.7m.

FX

In what has been a complete 180-degree turn from yesterday’s performances, the Japanese yen has been the outperformer of the day on the back of flow to the safe haven, resulting from the caution seen in Asian trade.

The euro is now trading at levels last seen when Jean Claude Trichet was at the ECB helm. Attempts from Mario Draghi to talk down the single currency were brushed off despite his claims that any banks with unhealthy balance sheets would be allowed to fail.

The pound fell back from the 1.6250 level against the US dollar despite a fairly upbeat tone emanating from the Bank of England, and a unanimous vote to keep both accommodative policy and rates on hold.

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