UK & Europe
UK stocks gave up early gains to trade flat on Monday with the FTSE 100 trading around 6240 having earlier edged back over 6280. Stocks in Europe have made back over half of Thursday’s drastic losses with the German DAX surpassing 10,990 before giving some back in the afternoon.
OPEC’s decision to abandon its oil output quota is leading to another collapse in Oil prices, the uncertainty of which is hitting stock markets.
So far markets have pulled back rather than extended Thursday’s shock ECB-induced moves. There’s been a sense of reassessment rather than panic. There is clearly still a stark divergence between European and US monetary policy. The ECB’s under-action has so far just meant a quick readjustment over the size of the divergence.
Heavy short positioning in the euro going into the meeting probably meant the surge higher was an over-reaction. The close negative correlation between European stocks and the euro meant a necessary drop as the euro rebounded. The other half of the bearish equation for the euro is the Federal Reserve. With only US retail sales and inflation figures to go before the policy meeting, markets are pricing an 80% chance of the Fed tightening rates.
The oil price dictated the main winners and losers on the FTSE 100 on Monday. Travel and leisure stocks including Easyjet, TUI and Carnival (L:CCL) were top risers on the prospect of cheaper fuel but lower future oil revenues meant Royal Dutch Shell (L:RDSa) and BP (L:BP) were top fallers.
Rolls Royce (L:RR) was top of the UK benchmark on optimism that talks with shareholders this week will help bring about a quicker and more effective turnaround. Broker upgrades for property firm Hammerson and rating reaffirmations after earnings last week for Associated British Foods (L:ABF) meant both shares were top risers. The weak oil price meant oil-majors.
US
The slump in crude oil prices weighed on US stocks in early trading with most sectors on the S&P 500 trading in the red. Chipotle Mexican Grill fell over 6% after the restaurant chain warned an E. coli breakout would mean a fall in fourth quarter sales. Keurig Green Mountain’s shares boiled over 74% higher after the coffee-maker was acquired for $13.9bn.
FX
The US Dollar was stronger across the board on Monday as the euro continued to retrace its ECB-surge, commodity prices tanked and Atlanta Fed president Dennis Lockhart said markets were prepared for a hike.
The Norwegian krone was by the far the biggest FX faller amongst G10 currencies. A drop in Norway’s industrial output added to the currency’s weakness brought about by the sliding price of Brent crude oil.
On Monday the euro sank for a second day after German industrial production rose only 0.2% m/m versus expectations of a 0.8% rise. EUR/USD dipped briefly below 1.08 but remains over 300 pips away from multi-year lows.
Commodities
Oil prices are sliding again with Brent crude hitting a fresh six year low. The renewed oil rout follows OPEC’s failure to even agree on a quota. Initial reports had suggested a rise to 31.5m b/d but in the final equation a row between Saudi Arabia and Iran meant a specific ceiling was omitted from the statement. Oil fell sharply after OPEC decided to leave the production ceiling unchanged at its last meeting in November; now price has to reflect no production ceiling. Oil has plummeted 40% since OPEC’s last decision in November; an equivalent percentage plunge from current levels would take it to around $25 per barrel.
Gold dropped over 1% as the dollar rallied and oil prices dragged the whole commodity complex lower. The huge breakout in gold on what was considered positive US economic data remains a bit of a conundrum. If it was just a crowded dollar-bull trade that sparked short covering then there is scope for gold to retrace all of its recent gains. However, if gold is being bought as a hedge against uncertainty, demand could pick up again before the Fed meeting.
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