UK and Europe
The long holiday weekend in the UK and the US has made for lacklustre trading on Friday. UK markets are closed for the May bank holiday whilst the US is off for Memorial Day. If not physically out of the office, traders were mentally checked out.
The drop in volatility comes off the back of a solid few days for markets in which the FTSE 100 saw its biggest advance in seven weeks. The gains in global equity benchmarks are in stark contrast to money draining out of equity funds during the week. This week’s equity outflows put the total for 2016 above $100bn according to EPFR.
FTSE 100 was flat as a pancake, unchanged from yesterday’s closing levels.
Banking stocks responded positively to talk that Lloyds (LON:LLOY) is preparing a bid for MBNA, Bank of American’s UK credit card business. Shares of Lloyds dropped since an acquisition could put Lloyds recently re-started dividend payments at risk. RBS (LON:RBS) and Barclays (LON:BARC) shares advanced over 1% on the potential for any deal to trigger a wave of activity for the sector. Lloyds returning to deal-making is a symbolic confidence-builder for UK banks.
The defensive utilities sector saw some buoyancy with shares of United Utilities (LON:UU) rising over 1% whilst oil’s pullback from $50 per barrel made oil and gas the worst performing sector.
US
US stocks opened mixed with the Nasdaq seeing modest gains whilst the S&P 500 was flat. Equity investors appear to be cautiously upbeat ahead of a speech from Fed Chair Yellen at Harvard University, where her comments are likely to impact the expected timing of any US rate rise.
Ms Yellen’s speech is likely to be a lot more nuanced than other Fed officials. The Dow Jones is sitting less than 3% from its record peak in a low volume day before Memorial Day weekend. Past experience suggests Ms Yellen will be keen not to rock the boat.
Shares of Apple (NASDAQ:AAPL) dropped over half-a-percent in early trading after a report suggesting the company showed some interest in buying Time Warner Cable (NYSE:TWX).
FX
The US dollar saw steady gains across the board on Tuesday after data showed an improvement to first quarter GDP growth, albeit smaller than expected. US GDP rose by 0.8% y/y in Q1, a rise from the previous estimate of 0.5%. Consumption was unchanged so the main improvement came from private inventories and net trade which fell less than previously estimated.
The GDP report didn’t do too much to change the landscape for a possible Fed rate hike in June or July. So the dollar is strengthening off the back of hawkish rhetoric from Fed officials and expectation that Fed Chair Janet Yellen will corroborate them.
The British pound dismissed more international interference into Britain’s upcoming EU referendum, this time from the G7. Leaders have said a Brexit would pose a ‘serious risk’ to global growth. Sterling was flat against the euro but saw some losses against the dollar and the yen.
Commodities
Gold was shooting for its 8th straight day of declines ahead of the speech from Janet Yellen, which is expected to see the Fed Chair reaffirm the more hawkish minutes released from the April meeting. If Ms Yellen green flags a summer rate hike, that could be lights out for the rally in gold. Whether gold can hold above $1200 per oz may rest on the response in equity markets. Any sharp fall in stocks could trigger haven flows into gold.
The price of oil fell back for a 2nd day after peaking above $50 per barrel as traders erred on the side of caution ahead of the speech from Fed Chair Yellen and the OPEC meeting next week. Having gained 85% from the lows this year, crude is well overdue a correction, with $46 per barrel an area of possible support.
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