Falling financials and energy stocks overshadowed gains in tech, leading to a mixed session on Wall Street overnight. Nerves ahead of a slew of corporate earnings reports out this weeks from names such as Amazon (NASDAQ:AMZN) and economic bellwether Caterpillar (NYSE:CAT), in addition to rising geopolitical tensions meant that investors are still not prepared to put risk fully back on the table.
The Dow and the S&P closed lower, whilst the Nasdaq managed to close higher snapping a three day sell off.
Big swings in the Chinese markets continued, with the previous two-day rally moving sharply into reverse. After mulling over Chinese stimulus plans the market is seeing these stimulus measures as cushioning a fall rather than boosting the economy. The yuan has displayed this glass half full sentiment all along as it remains little changed around a 21 month low.
Asian markets traded firmly lower, with European bourses also set to open to a sea of red. Sentiment continues to take a hit from a combination of geopolitical tensions including the growing isolation of Saudi Arabia, Italy’s defiant stance towards the ECB and Brexit.
Growing isolation of Saudi Arabia
President Trump warning on Monday that he was not satisfied with Saudi Arabia’s version of events so far has unnerved the markets.
Trump is censuring Saudi behaviour, yet he is showing a rare reluctance to jump in and punish the key ally and oil producer. Oil moved lower last night, a reflection of Trump’s reluctance to act and after Saudi Arabia pledged to play a responsible role in the oil markets. This calmed nerves that the oil producer would look to weaponize oil and underpin the idea that Saudi Arabia will increase production to cover the upcoming shortfall from Iran.
Italy’s game of chicken
In an unprecedented move, Brussels is widely expected to reject the proposed budget and request a revised spending plan from Italy. Italy is refusing to budge in this game of chicken, insisting that the increased spending is necessary to lift the stalling economy despite it breaking EU fiscal rules. Italian yields dipped on Monday, a relief rally in bonds after Moody’s didn’t place a negative outlook on Italy, European stock markets have been less relieved.
The FTSE MIB struck an 18-month low, the CAC a 12 month low and the IBEX 35 is trading at the lowest level in 2 years. Should the European Commission seek a revision, Italy has three weeks to come up with the goods, meaning this saga will hang over the market for a few more weeks yet.
Politics hit the pound
The pound tumbled to 2 ½ year low in the previous session on fears of a leadership challenge. Whilst those fears will continue to weigh on the pound, there was little evidence in the commons that MP’s were prepared to take such a risky step, which should allow give some reprieve to the pound.
On a quiet day as far as UK economic data is concerned, traders will continue to digest Theresa May’s 4 point plan to get Brexit talks moving again. So far, the market doesn’t seem overly impressed with the pound remaining below $1.30 overnight. With little to distract traders on the UK economic calendar, attention will remain firmly on domestic politics and Brexit developments. Immediate support can be seen at $1.2930.
Opening calls
FTSE to open 38 points lower at 7004
DAX to open 100 points lower at 11425
CAC to open 31 points lower at 5024