Closing market summary
The FTSE 100 is trading 15 points higher at 7,205.35, putting it on track for yet another all-time closing high. Germany’s Dax and France’s CAC are broadly flat, while the Dow on Wall Street is slightly down, trading just below the historic 20,000 mark.
With this, we are closing the blog for the day. We’ll be back tomorrow.
Dennis de Jong, managing director at online forex broker UFX.com, was quick to react to the survey data.
The US services industry accounts for two-thirds of the country’s economic output, so the above-expectations ISM non-manufacturing PMI for December will please Janet Yellen and her colleagues at the Fed, especially as it comes on the back of broadly encouraging financial data of recent weeks.
The US economy was remarkably resilient in the face of growing uncertainty during 2016, and the markets reacted positively to Donald Trump’s election in November. With the president-elect now just weeks away from the White House, the challenge is to deliver the growth he has promised.
The Dow Jones is still in negative territory, but has improved slightly from the open. It is now down 8 points at 19,934.68.
US ISM non-manufacturing PMI stronger than expected
The closely watched ISM survey for the US has come in stronger than expected. The non-manufacturing sector PMI, from the Institute for Supply Management, rose to 57.2 in December from 57.2 in November. The new orders sub-index jumped from 57 to 51.6, the highest since August 2015.
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US jobless claims fall to near 43-year low
Another piece of labour market data from the US, ahead of tomorrow’s key non-farm payrolls: the number of Americans filing for unemployment benefits dropped 28,000 to 235,000 last week, according to the US Labour Department – close to the 233,000 touched in November, a 43-year low.
Wall Street opens lower; FTSE up
On Wall Street, the Dow Jones has opened nearly 14 points lower at 19,928.41, as expected – its first lower open in 2017. It got tantalisingly close to the historic 20,000 mark yesterday. The S&P 500 and the Nasdaq have both slipped a couple of points.
Here in London, the FTSE 100 is now more than 10 points ahead at 7,201.18, a 0.16% gain, and could get to another record close today. It would be the sixth in a row. The longest run of all-time closing highs (eight in a row) was in May 1997.
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The Haldane event has now finished.
Back to the Bank of England’s chief economist Andy Haldane, who is answering questions at the Institute for Government, a think tank.
He said the central bank was keeping an eye on the recent strong growth in consumer lending but saw no need for alarm.
You’ll have seen and read from our Financial Policy Committee that this is something that they’re keeping a close... eye on. And they are right to do so.
Nonetheless, we need to put all this in a bit of context. Aggregate borrowing by households isn’t tearing away right now. We’ve gone through a long period where borrowing, both by companies and households, has actually been rather subdued.
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Wall Street set for first lower open of 2017
US stocks are set for their first lower open of the year, following the weaker-than-expected jobs data and the minutes of the last Fed meeting. Almost every Fed policymaker thought Donald Trump’s promises of tax cuts and infrastructure spending could stoke higher inflation, which could force the central bank to step up rate hikes this year.
The Dow Jones has been flirting with the 20,000 mark for weeks but future markets suggest it will open 15 points lower today. It has never broken through that level before. It closed at 19,942.16 yesterday.
Over in the US, the ADP National Employment Report (from payrolls processor ADP) indicated that employers in the private sector created 153,000 jobs last month, below Wall Street forecasts of a job gain of 170,000. The figures come a day before the government’s key non-farm payrolls data.
US Treasury bond yields slipped on the news.
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Haldane reiterated the Bank of England’s view that economic growth will slow a little while inflation will pick up materially this year, following the sharp fall in the value of sterling since the EU referendum.
That [higher inflation] will in turn produce something of a squeeze on the spending power of consumers and may lead them to throttle back somewhat in their spending plans.
It might not happen, they might choose to run down their savings. But it’s possible, indeed I’d say likely that there will be something of a slowdown.
You can watch the Haldane event live here. The Bank of England’s chief economist is answering questions at the Institute for Government.
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More from Andy Haldane. He sees a “very interesting disconnect” between the political uncertainty caused by the Brexit vote and the strength of the stock market and the economy.
Regarding the surprising strength of household spending, Chris Giles, the Financial Times’ economics editor, wrote this piece yesterday.
Little is more fashionable at the start of 2017 than criticising UK economic expertise. A sizeable majority of the profession expected a vote for Brexit would rapidly hit Britain’s economic performance and we now know this to be wrong. For some, such as Michael Gove, the prominent Brexiter, the error is sufficient proof of politically motivated groupthink to justify dismissing economists almost entirely. For others, the error requires economists to confess they know very little about the macroeconomy.
Both responses are dangerous non sequiturs. A far better response is to admit to the error, understand what went wrong and learn lessons.
Excuses should be avoided. It is not good enough to say most forecasts were based on an assumption of an immediate UK notification of Article 50 and the Bank of England leaving policy unchanged. Brexit uncertainty exists regardless of when the UK informs the EU of its intention to leave — and monetary policy operates with a long delay.
In fact, we know the predominant source of error. It stemmed from underestimating the strength of household consumption after the vote for Brexit. Economists expected a vote to leave would increase household savings in the short term, both as precautionary insurance against uncertainty and to begin an adjustment to a less prosperous future.
These were reasonable guesses, based on recent household behaviour — for example, at the time of huge banking uncertainty early in 2008. But rather than rising, household savings fell throughout 2016. The savings ratio dropped to an exceptionally low level in the third quarter as consumers went on a borrowing and spending binge not seen since before the financial crisis.
But why has consumer spending been so strong?
The interesting question is why households acted in this way. There are three plausible reasons. First, households correctly thought Brexit would improve their personal finances and borrowed and spent accordingly. Second, they were deceived into expecting economic gains from Brexit and still went out to spend. And, third, households watched sterling tumble, understood the likely effect on prices and brought forward their consumption, so they were spending in the knowledge their money would buy less in future.
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BOE's Haldane: 2017 harder for consumers than 2016
Some Reuters flashes on Haldane: He said there are “reasonable grounds” to think this year will be harder for consumers than 2016, and that higher UK inflation would likely lead to slowing consumer spending, although he added that was not inevitable.
He also said that consumers last year behaved almost as though the Brexit vote had never happened.
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Andy Haldane, the Bank of England’s chief economist, is speaking about productivity and other matters at the Institute for Government. The Bank of England hasn’t released a text, but here are some tweets from journos and others who are there.
Haldane @bankofengland says is "long tail" of underperforming companies which are low wage, low productivity, low profits - affects growth
— Kamal Ahmed (@bbckamal) January 5, 2017
#ifgeconomy Andy Haldane emphasizes importance of numeracy to future of UK productivity and pay.
— Tim Leunig (@timleunig) January 5, 2017
Bank of England's Haldane says UK numeracy skills especially poor for a rich country, on a par with Albania @ifgevents @ReutersUK
— David Milliken (@david_milliken) January 5, 2017
Economics profession is to some degree in crisis due to methodological monoculture says Andy Haldane #ifgeconomy @ifgevents
— Hetan Shah (@HetanShah) January 5, 2017
@ifgevents BOE Haldane focus on oddity of most UK firms seeing low productivity growth; oddity of them not closing gap with top quintile
— David Robinson (@DavidRobinson2K) January 5, 2017
Mike Ashley said:
Keith has my full backing and will be continuing in his role on the basis that he has the unanimous support of the board. I note that many of those who voted against Keith have acknowledged that we have made positive progress since the AGM.
At the group’s annual meeting in September, 53% of the votes cast by independent shareholders opposed the chairman’s re-election. Ashley wasn’t allowed to vote at that meeting.
The crisis at Sports Direct was triggered by a Guardian investigation in 2015, which revealed that workers at its giant Derbyshire warehouse were paid less than the national minimum wage.
The scandal prompted a parliamentary inquiry last year, in which MPs likened the depot to a Victorian workhouse, reigniting long-held concerns about the level of control Ashley enjoys at the company.
Sports Direct chairman re-elected to board
News just in from the Sports Direct shareholder meeting at its Shirebrook headquarters. Chairman Keith Hellawell has survived another shareholder vote, despite growing opposition from investors such as Aberdeen Asset Management.
The former chief constable been re-elected to the board with 80.9% of investors backing him and 19.1% voting against. Company founder Mike Ashley, who owns 55% of the company, was able to vote this time.
However, nearly 54% of independent shareholders voted against Hellawell’s re-election, and only 46% backed him.
My colleague Simon Goodley had previewed the meeting.
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The FTSE 100 has had a great run recently, thanks to the weakness of sterling, which has benefited all the dollar earners in the index. London’s leading shares recorded all-time closing highs on the final three trading days of 2016 and continued their rally this week, closing at new peaks on Tuesday and Wednesday. (The market was closed on Monday, a Bank Holiday).
The five consecutive record closes mean the FTSE is inching closer to the longest run of record closes in May 1997, when it notched up eight consecutive all-time closing highs.
However the FTSE is trading over 3 points lower again at the moment.
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Lunchtime round-up
Time for a lunchtime round-up.
European trading is somewhat lacklustre, as expected. The FTSE 100 in London hit another all-time high, of 7,211.96 this morning but is now barely in positive territory – trading 3 points higher at 7,192.68. The Dax in Frankfurt has slipped just over a point to 11,582.64 while the CAC in Paris is nearly 4 points ahead at 4,903.31.
The final batch of UK PMI survey data was stronger than expected, and suggests the economy grew by a healthy 0.5% in the final three months of the year – down slightly from 0.6% in the previous quarter.
Higher taxes and jitters over the EU referendum pushed down high-end London property prices last year as sellers accepted more “realistic” offers, according to upmarket estate agent Savills.
The Bank of Cyprus has fully paid back the emergency funds it received from the European Central Bank during its crisis in 2013. The country’s biggest lender said it had repaid the entire €11.4bn emergency liquidity assistance funding.
Crude oil prices rise as Saudi Arabia discusses output cuts
Crude oil prices are rising again after reports that Saudi Arabia had embarked on discussions with customers about lowering crude sales by up to 7%, in an attempt to support efforts by the Opec cartel to reduce the global oil glut.
The news swept away doubts that Opec wasn’t serious about its November agreement to reduce production and wouldn’t cut as much as promised.
Brent crude is 28 cents ahead at $56.74 a barrel, a 0.5% gain.
One source told Reuters:
Aramco [The Saudi Arabian Oil Company] is approaching all its customers for possible cuts from February and discussing likely [supply] scenarios.
Saudi Arabia, the world’s biggest oil exporter, agreed to cut output by 486,000 barrels per day. This amounts to 4.6% of its October production of 10.5m barrels.
The new year is starting well for people working at Aldi: The German discounter is giving more than 3,000 staff a pay rise in an attempt to leapfrog rival Lidl to become the highest-paying supermarket in the UK. My colleague Rob Davies writes:
Employees at the fast-growing supermarket chain will earn £8.53 per hour and £9.75 if they live in London, starting from 1 February.
While Aldi’s hourly rate in the capital will be the same as the new minimum announced in November by Lidl, staff outside London will earn 7p an hour more.
Both supermarket chains have now matched or bettered the the voluntary minimum pay suggested by the Living Wage Foundation.
The weak performance of UK hotels and restaurants recorded in today’s services survey is at odds with other data. New figures from VisitEngland out just now show that Brits spent £45.3bn on day trips across England in the first 11 months of 2016, setting a new record for the survey. Spending is up 7% on the previous year.
The number of day trips was also the highest ever, rising to 1.35bn, up 14% on the same period in 2015.
VisityEngland is promoting day trips to Hull, the UK city of culture this year; the women’s cricket world cup final at Lord’s cricket ground; and the British Music Experience, which has moved from London to Liverpool and opens at the Cunard Building in February.
My colleague on the economics desk Katie Allen has taken a close look at the strong UK services survey.
... and it’s back in positive territory, just.
Persimmon is leading gains this morning after a strong trading update, along with fellow housebuilders Taylor Wimpey and Barratt. Persimmon shares are nearly 6% ahead at £19.13.
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The FTSE 100 has just turned negative, slipping just over 2 points to 7187.57. Much of its recent strength – it’s had a run of five consecutive record closes – has been underpinned by the weaker pound, as many companies on the index are dollar earners.
On the currency markets, sterling has recovered some ground against the dollar since the strong PMI data came out, to $1.2311.
The dollar is also being knocked by a surge in China’s yuan, prompted by a rise in overnight borrowing costs in Hong Kong. That triggered a broad round of profit taking on the greenback, Reuters reported – sending the dollar down by more than 1% against the yen and past $1.05 against the euro.
Scotiabank’s head of European fixed income strategy Alan Clarke’s verdict is:
Brexit clearly hasn’t hurt business sentiment, the acid test is whether this feeds into the hard data.
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Chris Williamson, chief business economist at IHS Markit, has sent his commentary on the PMI survey findings:
Hiring has revived alongside upturns in new orders and business confidence, but prices continue to rise sharply. All of which adds weight to the argument that the next move by the Bank of England is as likely to be a rate hike as a cut.
He said sterling weakness continued to be seen as a key driver of growth, but mainly for manufacturers.
However, while manufacturers again reported stronger export sales in December, buoyed by the more competitive exchange rate, there were few signs of the weak pound boosting spend from overseas tourists in the service sector. Service sector expansion was driven by business service providers and financial services, with transport and communications and IT also showing robust growth. Activity in the hotels and restaurant sector fell for a second month running.
What happened to the mini-tourism boom?
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UK all-sector PMI at 17-month high in December, tracked here v Bank of England policy decisions pic.twitter.com/TUgn0rozs4
— Chris Williamson (@WilliamsonChris) January 5, 2017
Although #PMI data indicate the economy grew 0.5% in Q4, business optimism remains historically low, suggesting #BoE will be cautious pic.twitter.com/9D50u0jpoW
— Chris Williamson (@WilliamsonChris) January 5, 2017
The FTSE 100 index hit a new record peak of 7,211.96 earlier this morning, and is now trading just below the 7,200 mark at 7,197, up 0.1%.
And here’s some instant reaction from economists. They tend to be cautious, saying that the stronger-than-expected economic momentum isn’t likely to last.
Scott Bowman of Capital Economics says:
December’s Markit/CIPS report on services suggests that the UK economy will turn in another strong performance in Q4 and hasn’t lost any momentum since the vote to leave the EU.
The support provided to activity from a lower pound and rock-bottom interest rates should prevent growth from slowing too sharply. Overall, our forecast is for GDP growth to ease from around 2.0% in 2016 to about 1.5% in 2017.
Dean Turner at UBS Wealth Management echoed those comments.
The robust nature of recent economic data has been supported by a number of factors, in particular the weaker pound, as well as looser monetary and fiscal policy.
As we move further into the year, our expectation is that these positive effects may begin to fade. Moreover, higher inflation is likely to erode household income growth which could dampen the up to now buoyant consumer.
Here is some instant Twitter reaction.
17 month high on the UK Services PMI: the economy has a lot of forward momentum.
— Duncan Weldon (@DuncanWeldon) January 5, 2017
Brexit? What Brexit? UK PMI rise in tradable goods & non tradable goods $EWU $SPY $FXB @NicTrades pic.twitter.com/vhutub1cnj
— alpe pinnazzo (@alpepinnazzo) January 5, 2017
The UK economic policy uncertainty backdrop. Big spikes around the referendum and the US election. More fun & games in 2017, no doubt! pic.twitter.com/jqQ2Zwa7S4
— Rupert Seggins (@Rupert_Seggins) January 5, 2017
The survey findings took economists by surprise (again). They had pencilled in a slight easing in services growth in December.
Let’s dig deeper into those numbers.
The final batch of UK PMI survey data for 2016 from IHS Markit and CIPS suggested that the service sector expanded strongly in December to the fastest rate since July 2015, fuelled by stronger growth in new work.
The index remained above 50 for the fifth consecutive month, indicating a continued recovery from the contraction suffered in July linked to the EU referendum.
However inflationary pressures are also picking up with prices charged by firms surging at the fastest pace since April 2011, due to the decline in sterling since the Brexit vote.
#UK service sector ends 2016 with strong expansion as #PMI hits 17-month high of 56.2 (Nov'16 - 55.2). https://t.co/vvB4UZQrc1 pic.twitter.com/3dw8me2DoJ
— Markit Economics (@MarkitEconomics) January 5, 2017
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UK services and all-sector PMIs at 17-month high
The UK services PMI hit a 17-month high of 56.2 in December, up from 55.2 in November, according to Markit/CIPS, which compile the survey.
The all-sector PMI, which pools the services, manufacturing and construction survey findings, is also at a 17-month high, rising to 56.4 from 55.1 in November. Markit said this points to GDP growth of 0.5% in the fourth quarter, down a tick from 0.6% in the third quarter.
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Lower London luxury house prices trigger more sales
Falling prices for luxury pads and mansions in London triggered more deals in the autumn, says upmarket estate agent Savills. Its latest figures for prime central London show prices fell 2.1% between October and December, and by 6.9% over the year as a whole. Prices are down 12.5% since their 2014 peak.
Higher property taxes coupled with political and economic uncertainty have been dragging down prices. Savills is forecasting zero growth over the next couple of years.
In outer prime London, where the average value is just below £2m, prices fell 4% last year and are just 2.7% down from where they were two years ago.
Savills collected data that suggests from January to the end of November there were around 320 sales worth over £5m in London, with a total of over £3.7bn spent. The number of sales was 17% below the same 11 month period of 2015.
Contrary to some reports, the very top end of the market has been more active than in 2015. In the 11 months to the end of November £1.43bn was spent on properties worth over £20m compared to £1.07bn in 2015.
Lucian Cook, Savills UK head of residential research, said:
We saw a real dearth of transactions over the late spring and summer months following the race to beat the new 3% surcharge [stamp duty]. But further price adjustments, coupled with the currency play for international buyers, appear to have triggered greater buyer commitment and prime London sales volumes picked up significantly in September, October and November before easing back in December.
But he cautioned:
Buyer sentiment remains fragile. Improved transaction levels are the result of adjusted pricing and should not be seen as a precursor to price rises in the foreseeable future. High stamp duty rates and the uncertainty created by negotiations to leave Europe will still need to be factored into expectations on value.
The forecast is for prime central London growth to total 21% in the five years to the end of 2021.
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Meanwhile the British car industry is warning of a sales downturn this year as the economic uncertainty that followed the Brexit vote kicks in. Our transport correspondent Gwyn Topham writes:
A fifth consecutive year of growth saw nearly 2.7m new car registrations in the UK last year, a rise of 2.2% on 2015. But the Society of Motor Manufacturers and Traders said it expected growth to reverse, with a sales decline of 5-6%, as the cost of new cars rises due to sterling’s fall. An end to cheap financing deals would also hit sales, it said.
As a reader has helpfully pointed out, global debt levels surged to more than 325% of the world’s GDP last year – mainly because of a sharp increase in government debt, according to a report from the Institute for International Finance. Reuters has the details:
The IIF’s report found that global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion. The report also found that general government debt accounted for nearly half of the total increase.
Emerging market debt rose substantially, as government bond and syndicated loan issuance in 2016 grew to almost three times its 2015 level. China accounted for the lion’s share of the new debt, providing $710 million of the total $855 billion in new issuance during the year, the IIF reported.
Higher borrowing costs in the wake of the US presidential election and other stresses, including “an environment of subdued growth and still-weak corporate profitability, a stronger [US dollar], rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness” presented challenges for borrowers, the IIF said in its report.
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There’s not much corporate news here in London so far, apart from a Persimmon trading update. One of Britain’s biggest housebuilders, it shrugged off Bexit uncertainty and posted 8% growth in revenues to £3.2bn for 2016, when it built 15,171 homes. The York-based company said reservations for new homes remained healthy during the autumn, echoing comments made by other housebuilders.
At 11am the embattled retailer Sports Direct will kick off a shareholder meeting at its Shirebrook HQ. Its chairman, Keith Hellawell, a former chief constable, is under growing pressure to step down. He already lost a vote of independent shareholders in September but his offer to resign was rejected by the board. Will he survive today’s meeting?
A series of City investment groups, including Aberdeen Asset Management, have called on shareholders to oppose his re-election to the retailer’s board.
But this time round the company’s billionaire founder Mike Ashley, who owns 55% of the business, is allowed to vote, which means Hellawell could well cling on.
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Fed cautious on rate hikes due to fiscal uncertainty
The US Federal Reserve is cautious over the pace of interest rate hikes this year, amid a great deal of uncertainty over how much fiscal policy loosening the Trump administration will unleash, i.e. tax cuts.
Last night the minutes of the American central bank’s 14 December meeting which concluded with a 25 basis point rate hike, the first in a year, and only the second since the 2008 financial crisis. The minutes showed that only half of Fed officials included some form of fiscal policy loosening into their economic projections.
The median projection at that meeting suggested three more 25bp rate hikes this year, which could take the fed funds target range to between 1.25% and 1.5% by the end of 2017. However some economists think there could be more – Paul Ashworth, chief US economist at Capital Economics, says:
Assuming that the incoming Trump administration and the Republican-controlled Congress do agree on a major package of tax cuts by mid-year, however, we still think there will be four rate hikes this year, albeit with three of those hikes coming in the second half of 2017.
The recurring theme in the minutes is the uncertainty over the direction of fiscal policy that Donald Trump’s unexpected election victory has thrown up. Neverthless, almost all participants “indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies.” Some participants thought the upside risks to inflation had increased too. The dollar’s subsequent rally will help to keep a lid on inflation next year, but all that will do is partly offset the impact of the rally in crude oil prices.
The agenda: UK, Irish and US services PMIs
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
This morning at 9:30am we’ll get the UK services purchasing managers’ index from Markit/CIPS for December, a closely watched survey. It is expected to show a slight easing in activity, to 54.8 from 55.2. Anything above the 50 mark indicates expansion. The sister surveys for manufacturing and construction showed both sectors growing at a robust clip, suggesting the economy was stronger than many expected in the fourth quarter, despite the uncertainty caused by the Brexit vote.
The Irish services PMI is already out. It indicates growth in Ireland’s services sector rebounded in December, returning close to the level where it was before Britain voted to leave the European Union. Ireland is considered to be most at risk from the Brexit vote because of its close trading links with the UK.
The Investec services PMI for Ireland rose to a five-month high of 59.1 in December from 56 in November, adding to a strong manufacturing survey earlier in the week which showed factory activity at a 17-month high.
In the US, ahead of tomorrow’s December non-farm payrolls report we get the latest ADP employment report which is expected to show a drop from November’s 216,000 to about 175,000, while the latest ISM services sector survey is forecast to show a slight slowdown to 56.8, from 57.2 in November.
Back in the UK, Andy Haldane, the Bank of England’s chief economist, is speaking at an Institute for Government event on ‘An economy that works for everyone’ at 1pm today.
Britain’s leading share index notched up another record close yesterday when the FTSE 100 gained 0.17% to end the day at 7,7189.74– the fifth trading day in a row it closed at an all-time high.
But today could be different – European stock markets are set for a somewhat lacklustre opening. Michael Hewson, chief market economist at CMC Markets UK, is predicting:
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FTSE100 is expected to open unchanged at 7,189
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DAX is expected to open 4 points higher at 11,588
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CAC40 is expected to open unchanged at 4,899
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