UK and Europe
European markets tripped up again on Wednesday as volatile moves in the price of oil triggered wild swings in equities. The most consistent prices moves were those based on fear as investors were drawn to havens like gold and the Japanese yen.
Dashed hopes of a Russian-OPEC joint oil production cut sent oil prices to the lowest in a week, though weekly US oil inventories data provided a little relief, enabling a bounce off the lows.
Miners top and tailed the FTSE 100. Over-leveraged Glencore (L:GLEN) and BHP Billiton (L:BLT), which just cut its dividend were biggest fallers while at the other end of the table were gold miners Randgold (L:RRS) and Fresnillo (L:FRES) which benefited from haven flows into the precious metal.
Barratt Developments (L:BDEV) reporting a 40% rise in half-year profits and a strong start to 2016 has given housebuilders a lift, with shares of Persimmon (L:PSN) and Taylor Wimpey (L:TW) also top risers. Low mortgage rates and a generally healthy British economy means the demand is still there for housing and the government appears determined to address the country’s housing shortage.
The housebuilding sector was one of the worst hit by the Boris-effect on Monday. A British exit from the Eurozone and any resulting cap on immigration could have an especially negative impact on the UK construction industry which employs a higher than average number of immigrants. The concern is that with unemployment at multi-year lows and skills shortages unlikely to be plugged quickly unless by immigration, the ability of housebuilders to build the houses required could be constrained and limit earnings growth.
US
US stocks traded significantly lower before bouncing with the price of oil. The Dow Jones lost over 250 points in early trading as investors fretted over the success of Donald Trump’s presidential campaign. Mr Trump convincingly won the Nevada caucus, his third victory in the race to be Republican candidate for US President.
FX
The dollar was higher again on Wednesday amidst a flight to safety despite disappointing economic data. The Markit services PMI saw a surprise decline to 49.8, against expectations of a rise to 53.4. It’s the first monthly contraction in US services since 2013.
The Brexit threat was plain to see in the British pound which has dropped off a cliff to reach its lowest in seven years. GBP/USD has fallen below 1.40.
A drop in the pound is in general a good thing for UK exports but that’s only insofar as it boosts competitiveness abroad. That isn’t so much the case if it’s dropping over fears Britain could sever trade ties by leaving Europe.
A strong pound has long since been a drag on UK prices as we import low inflation from the Eurozone. Should the UK vote to remain in Europe, the inflationary pressures from a weaker pound could prompt a rate hike from the Bank of England a lot sooner than currently priced by markets.
Commodities
The effectiveness of a Russian-Saudi output freeze is getting priced out of the oil market. Relief that US weekly inventories didn’t see a build as big as suggested by the API prompted a knee-jerk reaction higher. Still, there is limited room for optimism since the build was bigger than expected.
The only good thing about the production freeze was that it could be prelude to a cut, so Saudi oil minister al-Naimi saying there won’t be a cut has kicked the legs out from under oil market. The public spat between Iranian and Saudi oil ministers says it all. With relations between two of the biggest oil producers this bad, the Russian oil minister’s suggestion of a 5% production cut is dead on arrival.
The price of gold surged 2% to over $1250 per oz for the first time since its massive jump on February 11. It’s no coincidence that gold peaked on February 11, the same day that many major global stock markets put in a short-term bottom. Gold is trading on pure fear and a jump of 2% on the day tells you there’s plenty of fear in markets right now.
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