Morning Commentary: Old School Companies Face New Realities

Foreign Exchange - Morning Commentary

Old School Companies Face New Realities

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David Atkinson
David Atkinson
Foreign Exchange Sales Manager
The U.S. dollar is the sideline story for at least today as global equities are center stage.  The Shanghai composite is down 2.26 percent in its overnight session after its energy drink from government support wore off after a 4+ percent gain on Monday.  That set the tone for 2-3 percent losses from other Asian equity markets; European equities lost around 1 percent and U.S. equities opened down over 1.5 percent, with the DJIA off over 400 points at the open.
We have been talking about how the U.S. earnings season will tell a global story.  Two bellwether companies that released earnings today get us going on that.  Caterpillar beat earnings estimates and had its best 3rd quarter ever, but shares are down 7.7 percent.  The company noted increasing concerns over cost and notified deals of price increases from 1 to 4 percent worldwide starting in January.  The company's statement noted that "material costs were higher primarily due to increases in steel prices and tariffs."
Another company of note, 3M cut its annual forecast as its 3rd quarter sales fell and costs are on the rise.  3M already warned of higher raw material costs but surprised investors by revealing that it expects foreign exchange rates to be a drag on earnings.  As recently as last month, the company said FX would have no effect and earlier in the year expected FX to be a 10 cent benefit to earnings.
The point of the stories above and equity markets as a whole is getting a clear-eyed view of how FX and trade skirmishes are affecting companies and which ones are able to distinguish themselves as being able to work through it.
  • Italian officials took a softer tone on their fiscal plans, promising the EU that it will take steps to prevent a breach of the limit of -2.4% of GDP.  Nevertheless, it is still not there and the EU has told Italy to resubmit its budget plans.  Italy has three weeks to do so and if it is seen breaking EU budget rules, it could be subject to penalties of up to 0.2% of GDP.  This is one of those inevitable conflicts that will eventually end up with concrete numbers telling the final story.  How Italy balances its obligations between the EU and the voters it promised to take care of will be akin to a good magic act. 
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