05.10.12 Friday Morning

European financial markets ended the first day of the final quarter of the year on a brighter note, rallying strongly on an upbeat tone of economic data from both sides of the Atlantic. The euro was firmer against the dollar as sovereign bond yields continued to cool off. Investors welcomed the news that Spain’s bank stress tests revealed the country’s ailing banking sector needed a little less than what the markets were expecting. Both U.S. & eurozone manufacturing data contributed to the gains seen, with the eurozone PMI revised up to 46.1 from a preliminary estimate of 46 (although below 50 implies contraction, it was the second consecutive month of improvement). US ISM manufacturing data rebounded sharply to 51.5 from 49.6 in August.

Hopes that Spain would seek a full sovereign bailout as early as next week were dented by the news that Germany would prefer that Spain waited for the opportunity to bundle their bailout deal with those for Cyprus and Greece. The Spanish PM however denied German opposition to an individual bailout deal but did say that the country won’t be requesting aid this week. Spanish 10-yr bond yields climbed lower, demonstrating the improved mood surrounding Spain.

Banking stocks had their ratings slashed by brokers, notably UBS cutting UK banks Barclays, Lloyds and RBS to neutral from buy, citing increased regulatory risk. SocGen meanwhile cut fellow French bank Credit Agricole to hold from buy. A lack of U.S. data means that gains earned towards the beginning of the week were under threat as markets struggled to find direction.

Wednesday saw European markets push higher, mainly due to better than expected U.S. ADP job data and ISM non-manufacturing reports. Wall Street stocks advanced as a result of the reports, buoying European markets. Concerns over the U.S. economy definitely still remain despite Wednesday’s strong economic data as policies from the Romney/Obama debate were sure to garner much attention in the following trading session. Midweek eurozone, UK and Chinese PMI services reports were all pretty dismal, but eurozone retail sales offered some positivity by showing growth.

Thursday saw European markets surrender morning gains ahead of the BOE and ECB monthly policy meetings. As was expected, both the ECB and BOE kept policies unchanged, causing little or no price action after the announcements. Solid auctions by Spain and France failed to lift markets; Spain and France sold bonds at the top end of their target range with considerable demand. Bond yields are cooler for both countries following the auction, but stock markets are still somewhat pensive ahead of today’s non-farm payrolls. Spain will remain the main topic of conversation as the ball is placed in their court in regards to financial assistance. Whilst bond yields edge down it becomes less and less clear when or if Spain will accept the ECB’s bond buying plan.

Stateside, markets were enjoying a healthy rally following their better than expected weekly jobless claims. Yesterday’s labour data follows Wednesday’s market-beating ADP and ISM non-manufacturing report, all of which began with raised expectations for a stellar non-farm payrolls report.

On the final day of the trading week, European financial markets began with mild gains amid growing optimism that U.S. non-farm payrolls would exceed market expectations, And indeed they did, with the results coming out a little bit stronger than expected with the report showing a figure of 114,000 jobs added with an expected figure of around 110,000. September private sector jobs were up 104,000 compared to 97,000 for August. Unemployment rate is currently at 7.8%the lowest since 2009.

Meanwhile, Bowleven was up 8% on Wednesday following the return of bid speculation as of 10:30 this morning Bowleven is trading at 80.5 – 80.75. On Monday rumours of a takeover bid for ITV were resurfacing. KKR the co-controller of Germany’s ProSieben, are one of the rumoured bidders. Speculated takeover rumours are also currently surrounding Rentokil, with a cash share bid from private equity sources at 145p. Rentokil is currently trading at 88.5 – 88.55 as of 10:30 this morning.

Next week’s focus will be on the struggling Euro nations and whether or not they are prepared to take the ECB’s offer of a bond buying bailout. Spain in particular will interest investors who will be looking to see if they feel that current measures in place are enough to prevent further declines and recession in the country. In regard to U.K shares, Next Tuesday will see the release of Vedanta Resources Q2 production earnings along with the UK Mail Groups pre-close trading update. Thursday will see WH Smith release their preliminary Earnings, Greggs will release their Management Statement for the 14 weeks to the 6th October and Burberry Group will issue their trading update.