UK and Europe
Markets are looking more buoyant than they have done all this year. The FTSE 100 as well as major indices in France and Germany have moved higher for four of the last five days.
The three main concerns that sent markets into a tizzy at the start of the year have receded in just the last week. Concerns over low oil prices, Chinese currency devaluation and Fed rate hikes were borne out in one of the worst start-of-the-year sell-offs in recent memory.
A denial from the PBOC governor that China plans to devalue the yuan, the Fed pulling back from its rate hike plans this year and the joint oil output freeze from Russia and Saudi Arabia are all reasons investors might hold off on further selling. While none of these events have fundamentally changed anything, they have already begun to trigger a sharp bear market rally, which potentially has a lot further to go.
While a decline in mining shares saw the FTSE 100 pullback on Thursday, it has been this sector’s strength that meant the UK benchmark barely took out its January 20 low while the likes of the German DAX sank another 5%.
Rolls Royce (L:RR) topped the FTSE 100 after it was reported the British engineering giant might give activist US hedge fund ValueAct a seat on its board following multiple profit warnings. British Gas owner Centrica (L:CNA) was a top riser on the UK benchmark following well-received earnings. Yesterday’s biggest riser Glencore (L:GLEN) was one of the day’s biggest fallers as commodity prices dipped.
US
US stocks opened higher in choppy early trade following yesterday’s release of FOMC minutes which confirmed a greater sense of concern amongst policymakers over the impact of ‘tighter financial conditions’ on the health of the US economy.
Shares of Wal-Mart (N:WMT) sank after the world’s biggest retailer beat on earnings but missed revenue estimates and issued weak guidance for the first quarter of 2016.
FX
The US dollar was mixed following cautious FOMC minutes as economic data came in better than expected on Thursday. The Philly Fed manufacturing index registered at -2.8, an improvement from -2.9 in December while weekly jobless claims dropped to 262k, down from 26k last week.
The British pound has pulled away from two week lows as British investors cast half an eye on developments in Brussels. PM David Cameron’s level of accomplishment in negotiating a better deal for the UK in Europe with 28 of his European counterparts could have a strong bearing on the direction of UK asset prices.
European Council President Donald Tusk warned a deal was not yet certain. Consensus in markets is that with unemployment at near 5%, wages growing and consumer confidence relatively high, British people won’t want to rock the boat by voting to leave the EU. But if Mr Cameron’s deal is perceived to be weak, it will pose a distinct risk to this view and could and to uncertainty in the lead-up to the referendum.
Commodities
Oil prices were again volatile on Wednesday following the meeting between Iran and some of its fellow oil producing nations over a freeze in output.
Further gains in oil have been less forthcoming since Iran didn’t actually agreed to an output freeze itself, even at some higher future level of production. US oil inventories are reported a day late following the US holiday. Another weekly draw in US inventories would add to the case for a bottom in oil.
Gold has closed above $1200 per oz for the last five days. While it remains above that key psychological level, gold has the opportunity to take out the highs of last week at $1260 per oz. A rally in stocks puts the bullish case for gold at risk. However, the increasing use of gold as hedge against less confident buying of equities could diminish the impact.
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