A disappointing reading on US wholesale sales and worries about an impending federal government shutdown meant that US stocks rapidly gave up gains following the opening bell.
While European markets opened solidly higher, equities in the US have been knocked by fears regarding the consequences of a closure of all federal government operations. It is a cliché that markets hate uncertainty, but uncertainty on this scale is going to keep investors from making substantial commitments on the stock market.
Wholesale inventory data
US wholesale inventories rose during February, while sales of wholesale goods fell to their lowest level in almost two years. Inventories rose 1% in line with expectations, but sales declined by 0.8% against expectations of a 1.8% gain, in the largest drop since March 2009. The drop was also the first since June 2009, and the sales-to-inventory ratio (which measures the amount of time it would take to clear shelves at the current pace of sales) fell to 1.16 months from 1.14 in January.
Federal government shutdown
The much-feared government shutdown in the US appears to be very close to becoming reality, as Congressional leaders failed to reach agreement with President Obama. The President said that he was not wildly optimistic about striking a deal, but did add that the talks had seen some progress. If a solution is not found by midnight on Friday, then federal services will be forced to close for the first time since the mid-1990s. This disruption will only serve to highlight the budgetary issues facing the US economy, and will remind investors that US lawmakers have yet to agree any meaningful deficit reduction plan. The consequences for the US dollar will be dire, with the American currency likely to weaken even further as investors shun the ultra-loose monetary and fiscal policies of the Obama administration in favour of higher-yielding currencies. On the plus side, a weaker US dollar will help US stocks and commodities, some of which has been seen in the market today.
US equities – Expedia
By 3.30pm (London time) the Dow Jones had dropped 1.06 points (0.01%) to 12408.43, the S&P had edged up 0.63 points (0.05%) to 1334.14, and the Nasdaq 100 technology index had shed 2.38 points (0.1%) to 2330.50
Expedia, the online travel agency, said that it plans to split into two companies via a spin-off of its TripAdvisor business. The move seems to be popular with investors, since the shares jumped 11% today once the market opened, to $24.88. Analysts commented that the plan could unlock value for shareholders, since TripAdvisor will have more room to grow outside the Expedia brand. Expedia has lagged behind rivals such as Priceline.com as it looks to invest in its business.
UK afternoon – Rio Tinto, Games Workshop
The weak start in the US knocked some of the shine off the FTSE 100's performance for the day, but the index managed to maintain most of its composure. By 3.30pm (London time), it was up 38.84 points (0.65%) to 6046.21. Mining titan Rio Tinto has finally managed to gain control of Africa-focused company Riversdale, after a long-running struggle to convince enough investors to support its bid. Although its current holding of 49.5% is just shy of 50%, it is larger than the combined shareholding of Tata Steel and CSN, which own 27% and 20% respectively. Rio shares were up 2.6% at 4500p.
Wargames retailer Games Workshop advanced 15% to 425p following its statement that pre-tax profits for its current year will be ahead of expectations. This profit upgrade, which has become something of a rarity for British high street firms, comes as a result of cost savings and healthy cash generation, and the company appears so overflowing with funds that it has decided to boost its interim dividend from 4.95p to 20p, an uplift of over 300%!
Portuguese bailout takes shape
The procedure to take Portugal under the gentle administrations of the EU has begun, with the country being asked to implement significant privatisation measures and a stricter austerity programme as part of its financial rescue programme. Olli Rehn, the EU economic and monetary affairs commissioner who has become the EU's troubleshooter during the sovereign debt crisis, said that Lisbon would be offered a three-year deal and that the cost would be around €80 billion. In an ominous development, Mr Rehn said that there would be a specific allocation aimed at ensuring stability in the Portuguese banking sector, but he did not provide any details on the cost.
Portugal's plea for help has reignited fears that its neighbour Spain will be the next country to take a bailout, but the country may escape becoming the next victim of contagion since it has taken to its problems with a will. The socialist government has rammed through reforms to pension entitlements and has cut wages and raised taxes in order to improve the nation's finances. As a result, Spanish ten-year bonds currently trade on a yield of close to 5%, compared to Portugal's 10%, a good indicator that investors have more faith in Spain's financial stability than they did in that of its Iberian neighbour.
