UK & Europe
European markets staged an afternoon rally on Thursday after ECB President Mario Draghi signalled the central bank could add to its current arsenal of monetary stimulus in March. The recovery was supported by a more stable oil price which swung between gains and losses, an improvement over the sharp drop that took US crude prices to below $27 per barrel the day prior.
Since the ECB just recently expanded the duration of the asset purchase program, the most likely policy change in March would be further cuts to the deposit rate and the inclusion of different financial instruments. An increase to the size of monthly purchases seems like a tall order when the December ECB minutes signalled a number of participants were unsure about the need for any extra stimulus.
The German DAX benefitted from a decline in the euro following the ECB press conference but generally improved sentiment also lifted the FTSE 100 off its lowest level in three years. Looking ahead, given that European markets are now well-down from when the ECB began its QE program, it’s debatable how much help any additional stimulus will be for asset prices.
The mining sector led gains across the FTSE 100 with BHP Billiton (L:BLT) and Glencore (L:GLEN) both seeing big gains. By far the biggest riser on the day was Pearson (L:PSON), where shares gained as much as 15% after the publishing company announced 4000 job cuts. Continuing the job cutting theme, Barclays (L:BARC) shares were higher after the bank announced it was closing investment banking businesses across a number of countries.
Royal Mail (L:RMG) shares had their best day in two months rising to the top of the FTSE 100 after the postal service delivered a good set of Christmas numbers.
Royal Mail remains under competitive pressure but can’t take the go-to corporate cost-saving measure of slashing jobs because of its deal with unions and restrictions due to its universal service obligation. The better than expected letter and parcel volumes at UKPIL and GLS over the Christmas period along with Chief Executive Moya Greene’s expectation that the reduction in operational costs is on target show Royal Mail moving in the right direction. Royal Mail shares are coming off 10-month lows but relative to the FTSE 100 at 3-year lows is actually doing ok.
US
US stocks opened flat, recovering early losses in futures markets after the comforting words of more stimulus in the pipeline from ECB president Mario Draghi. Earnings were mixed with Verizon shares higher after it beat expectations while airlines South West and United Continental both matched and missed respectively.
Shares of Twitter (N:TWTR) dropped after News Corp denied rumours circulated on Wednesday that has been building a stake in the social network.
FX
The US dollar was mostly higher on Thursday, barring losses against commodity currencies as the Philly Fed manufacturing index fell less than expected in January.
Outside of the G10, the Russian ruble got crunched by as much as 5%. Russian central banker Elvira Nabiullina said the ruble at current levels did not require intervention, essentially opening the door for short-sellers. The ruble has been under pressure all this year over fears the sharp slide in the price of oil would harm the oil-exporting Russian economy.
The euro dropped as much as one big handle to the dollar after Mario Draghi hinted at further monetary stimulus at the European central bank’s March meeting. EUR/USD fell below 1.08 before rebounding back into the tight 1.08-1.10 range that’s been in place since the last ECB meeting.
Commodities
The price of oil stabilised on Thursday ahead of the delayed release of US inventories data after the Martin Luther King US holiday. The reaction to the IEA report on Wednesday which suggested the oil market would “drown” in over-supply was probably a bit overdone. Oversupply is a known entity so the IEA report was essentially just hyperbole and could support a relief rally if inventories beat expectations of a build of 3.3M barrels in the last week.
Gold prices retraced some of yesterday’s gain as equity markets settled. Some overhead supply has built up at $1110 per oz in gold. US equities will probably need to see a sustained breakdown from the August lows to see gold push above £1110.
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