UK and Europe
European stock markets stalled for a second day as major indices ebbed between gains and losses after the IMF cut its global growth forecast while rumours spread of a deal between Russia and Saudi Arabia to freeze oil output.
It’s the fourth time the IMF has slashed its growth forecast in a year. The speed of the downgrades are troubling for the global economy and hardly a confidence-booster for a market looking for catalysts to sustain a two-month old rally. That said, the usefulness of the forecast is probably negatively correlated with how often it gets revised.
Italy’s FTSE MIB was the notable underperformer as early optimism over the newly created €5bn bank rescue fund gave way to caution as investors parsed the details. Shares of top banks involved in the fund Intesa Sanpaolo (MI:ISP), UBI Banca (LON:0LBN) and Unicredit (MI:CRDI) all saw heavy losses as the day moved on.
The Italian bank rescue fund surpassed initial expectations but is a far cry from a permanent solution to Italy’s troubled banking system. Top Italian banks are basically being forced to backstop their weaker peers in another failure of for competition and European capitalism. The €5bn size of the fund is paltry in comparison to the €360bn in non-performing loans in Italy. The funds are earmarked to buy the excess shares that nobody else wants from troubled lender’s capital raising. At best the fund is a confidence-boosting measure, at worst it kicks the can of Italian zombie banks down the road for a bit longer.
Banks in the FTSE 100 came off early highs but losses were limited by reports that Nomura (NYSE:NMR) will shutter its European equities, underwriting and derivatives businesses involving the loss of around 500 jobs which saw the Japanese bank’s share price leap almost 9%.
US
US stocks were modestly higher in early trading as investors look past weak results from Alcoa (NYSE:AA) with an eye on the gain in oil prices and a drop in the Japanese yen. The sluggish movement in US stocks comes in spite of US oil moving further beyond $40 per barrel, easing the pain for the energy sector.
Alcoa, perhaps unsurprisingly as a metals and materials company didn't get US earnings off to the best of starts as shares fell 4%. The company's earnings slid slightly less than expected whilst the drop-off in sales was worse than forecast.
FX
The US dollar was mixed on Tuesday as it gained ground against most major currencies, including the yen but lost out to commodity currencies as oil and metals prices rallied. The Fed's Williams and Lacker speak on Tuesday but are unlikely to put much of a dent in the feeling that April and likely June are off the table for a US rate hike.
The British pound gained after a surprisingly big monthly change in annual inflation stats. UK CPI saw a surprise increase to 0.5% y/y in March from 0.3% while core prices grew 1.5% y/y, up from 1.2%. The British pound is one of the best-performing currencies over the past two days as shorts got squeezed on a failure to sustain losses beneath the psychological 1.40 level. Today’s inflation data gives some durability to sterling's recent strength and complicates the Bank of England rate decision on Thursday.
Commodities
The price of oil added to early gains on unconfirmed rumours that Russia and Saudi Arabia have reached an agreement to freeze production. The agreement has theoretically been in place since February 16, it’s the details of quotas and the involvement of other countries, notably Iran that is yet to be resolved. The dollar index breaking technical support at 94 to hit its lowest since August has played its part in the oil price bounce.
Gold prices saw a technical pullback from 1260 per oz, a possible right shoulder to a head and shoulders pattern as the dollar turned higher.
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