European markets have continued their decline from yesterday as once again weak financials and a slide in commodity prices saw the banking and basic resource sector slip back.
The basic resource sector has been one of the few outperformers so far this year helped by the recovery seen in commodity prices since the beginning of the year.
Housing stocks have also continued to remain weak after yesterday’s decision by Standard Life (LON:SL) to suspend redemptions on one of its property funds. Concern about a decline in real estate values has prompted a net outflow from retail investors looking to lock in some profits ahead of a potential economic slowdown. This rush to the exits on what is a very illiquid asset class appears to have been prompted by the sharp sell off on house building stocks and the slowdown in the construction sector, and the decision to suspend redemptions appears to have been a conscious decision to trigger a circuit breaker to prevent a domino effect, and potentially an even steeper decline.
The latest trading update from Persimmon (LON:PSN) doesn’t appear to have assuaged any concerns around valuations amongst house builders, despite a strong first half with completions up 6%, and the average selling price also up 6%. Given that Persimmon isn’t exposed to the London market in the same way as some of its peers there is a case for suggesting that it is getting caught up in the backdraft of concerns about valuations in the broader market.
While the share price is down 38% from its peaks earlier this year it is also important to remember that it is also up 110% from its 2012 lows.
Also sharply lower Berkeley Group (LON:BKGH) and Taylor Wimpey (LON:TW) have slid back, but are still above the post Brexit lows seen in the aftermath of the referendum vote on 24th June.
Defensive stocks are outperforming with pharmaceuticals and tobacco stocks leading the gainers.
The pound has continue to slide with a new 31 year low against the US dollar just below 1.3120 ahead of Bank of England Governor Mark Carney’s press conference and financial stability report.
While the decline in the pound is welcome from an exporter point of view the Governor is unlikely to want to see a disorderly decline and as such his tone could well be more measured and a little less dovish with respect to current sterling weakness.
Currency markets do appear to be running the risk of getting ahead of events with respect to current sterling weakness with bearish sentiment overwhelmingly negative, particularly since the decline against the yen is even larger. Since last August the pound has slid over 30% against a decline of 15% against the US dollar, decline which are likely to cause concern at the Bank of Japan and the US Federal Reserve.
US markets return today after their long weekend break and look set to open lower ahead of a big data week for US investors, with the latest FOMC minutes tomorrow and the latest jobs report on Friday.
The Dow Jones is expected to open 84 points lower at 17,863
The S&P500 is expected to open 11 points lower at 2,092
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