UK & Europe
Markets have started the week on a softer note with stocks and oil lower, yields streaking higher and havens including gold and the Japanese yen in demand.
Reports of divisions between Chancellor Philip Hammond and the rest of Theresa May’s cabinet over Brexit have caused investors to sell UK assets across the board. UK stocks, bonds and the pound were all lower on Monday.
Over the weekend Mr Hammond was rumoured as preparing to quit over the divisions, though the Treasury has since denied this is the case. In a cabinet with some hot-headed opinions on Brexit, Mr Hammond is viewed by markets as a cooler cucumber. His departure and the resulting political uncertainty would likely see another nose-dive in the pound and exacerbate the rise in gilt yields.
Mr Hammond is thought to prefer a plan in which migration curbs are delayed and Britain would pay into the EU budget for single market access. It’s a stance that would be welcomed by markets but he has been described as “arguing like an account” and “only seeing the risks” by fellow MPs.
The EY Item Club calling the economic stability in the UK since the Brexit vote “deceptive” and Open Europe suggesting banks could shift operations to Europe in 2017 without passporting rights are doing little to remedy shaken sentiment.
The government bond sell-off has sent UK 10yr Gilt yields to the highest since the EU referendum, putting them on course for one of the biggest monthly rises in 20 years.
Homebuilders are feeling the brunt of Brexit tensions and higher yields despite rising house prices in the last month according to Rightmove. Barratt Developments (LON:BDEV) is one of the biggest decliners on the FTSE 100. Higher interest rates lead to higher mortgages, which is typically not good for the housing market since it makes borrowing to buy a house more expensive.
Shares of Pearson (LON:PSON) fell as much as 8% after it reported falling sales despite the positive currency effect of a falling pound.
Shares of Paddy Power Betfair dropped after the soon-to-be-combined Ladbrokes-Coral sold over 3000 betting shops to gambling rivals BetFred and Stan James.
US
Two straight weeks of declines in US stocks weighed on sentiment in early US trading but Bank of America (NYSE:BAC) beating estimates at the beginning of a week chock full of earnings saw shares come off the lows.
Bank of America shares were little changed after its results, leaving the rest of the banking sector mixed. Citibank shares were higher but Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS) shares were lower.
Twitter shares dropped over 2% to come close to two-month lows reached on Friday after Salesforce ruled out a possible bid for the social network.
FX
There was little in the way of movement in the currency market on Monday. Not for the first time the British pound was the biggest decliner amid more UK political uncertainty. The New Zealand dollar was top riser in G10 FX.
The euro gained on Monday after euro area CPI rose to the highest in almost 2 years ahead of this week’s ECB meeting. Higher oil prices, bolstered by OPECs decision to cut output are pushing global inflation expectations higher, part of the reason bond yields are rising. EUR/USD briefly recovered the 1.10 handle before pulling back. A rising belief that the Fed will raise rates this year and the ECB likely indicating it will extend its QE program beyond its March deadline saw EUR/USD drop below 1.11 for the first time in two months last week.
Commodities
Crude oil prices softened on Monday after Baker Hughes reported a rise in the rig count last week and Iran announced plans to increase oil output to 4m barrel per day. Brent crude and WTI crude have failed to sustain a break above the highs made in June and a starting to roll over. The price decline comes at a bullish sentiment extreme. Hedge funds are the most bullish since 2014 according to COT data. The Saudis will need the proceeds from their upcoming bond sale to make up the deficit in oil receipts. If the OPEC output cut goes ahead as indicated and Iran produces 4m barrels a day, Saudi Arabia is necessarily giving up market share to Iran.
Gold is still finding some interest at $1250 per oz. Whether the precious metal can hold its support could depend on Tuesday’s US inflation report. Higher inflation in the US, as seen in the Eurozone would make a US rate-rise that much more likely, denting the prospects of non-yielding assets like gold.
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