Europe
The post-Fed minutes exuberance didn’t last too long in Europe when reality sank in that Europe’s still in trouble after more weak data from Germany and the bankruptcy of Espirito Santo Financial (LISBON:ESF) offered a reminder of the fragility of the European banking system.
Markets had opened higher after the Federal Reserve surprised many by an overtly dovish set of minutes which emphasised concern over weakness in Europe and the strength of the dollar rather than strength in the US economy. FOMC members appeared overly worried about market reaction to a change in the “considerable time” reference to keeping rates low in their statement.
The direct reference to international concerns was unexpected but a dovish tone shouldn’t have been because the Fed have been consistently dovish in all their statements. It was only the slight shift in the dot-plot at the last meeting that markets understood as hawkish in the context of strong US GDP growth.
German exports dropped by -5.8% in August. German exports were all the more worrying against the backdrop of a lower euro which should have made German goods relatively cheaper abroad.
Espirito Santo Financial Group which has a big stake in troubled bank Banco Espirito Santo (LISBON:BES) SA filed for bankruptcy and the Bank of Italy reported that bad loans at Italian banks had grown by 20% in August to a new record high.
Banco Espirito sent markets into a tailspin in June so the mere mention of it in reference to bankruptcy sends shudders down the spine of investors and record bad loans in Italy just compounded it.
The Bank of England left rates and the asset purchase facility unchanged as expected. The UK economy does seem to have come off the boil a bit lately so further dissent seems unlikely in the minutes released in a couple of weeks
The FTSE 100 was lower like the rest of Europe but it was commodities that dominated the extremes with higher Gold prices and a broker upgrade boosting gold miners Randgold Resources (LONDON:RRS) and Fresnillo Plc (LONDON:FRES) while oil prices declines were hurting Royal Dutch Shell (LONDON:RDSa).
US
Volatility seems here to stay in US markets with another triple digit move in the Dow 30 early on, this time to the downside as Europeans concerns undo yesterday’s Fed-based rally.
Trouble overseas didn’t bother US markets earlier this year but with stock valuations at lofty levels; investors are worried about anything that could derail earnings in Q3 and expectations for Q4 and right now that worry is centred on Europe.
Pepsico Inc (NYSE:PEP) and Alcoa Inc (NYSE:AA) have offered some hope that US markets might still have some immunity to international concerns with strong earnings growth that beat expectations in the last quarter.
One factor that has bolstered stock prices this year is the unprecedented level of share buy-backs from top US companies. Carl Icahn’s open letter to Apple Inc (NASDAQ:AAPL) CEO Tim Cook requesting a second round of buy-backs this year just went to emphasise the unsustainability of that particular support for the market.
FX
The US Dollar was mostly lower today as FX traders pulled back expectations for the timing of the next Fed rate hike after yesterday’s minutes.
The mixed talk from Japanese governor Kuroda over the pros and cons of a weak Japanese yen at the latest BOJ meeting in combination with the latest Fed minutes which essentially jawboned the US dollar lower made USD/JPY a top riser in FX with the rate back below 108.
Thanks to the recently more neutral RBA, AUD/USD was one of the bigger movers early on after US dollar weakness accelerated by paired back gains after hitting 0.89.
Commodities
Gold and silver have benefited immensely from the apparent change in tact from the FOMC in the latest minutes but the strength of the dollar rally could see gold pull back to $1,200 again before precious metals can completely reassert themselves.
Comments from Shell (LONDON:RDSa) CEO Ben van Beurden that oil prices will be “robust” in the long run were not enough to undo the slide in Crude Oil prices after yesterday’s inventories data. Brent Oil is holding $90 per barrel but a test of the June 2012 low at $89 seems very plausible with current momentum.
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