UK and Europe
Markets are hanging over the cliff-edge. There has been a widespread flight to safe-havens across asset classes with gold, the Japanese yen and government bonds all heavily in demand. The assets most exposed to slowing global growth and negative interest rates are being dumped with bank shares and oil taking the brunt of it.
Negative interest rates have become a real sore point because of the way they impair the bank’s ability to do business. The Swedish Riksbank’s decision to cut interest rates to -0.5% while French bank Societe Generale (PA:SOGN) missed profit estimates because of litigation provisions hit the market’s concern.
The US 10-year treasury yield sank below 1.6% to its lowest since 2012, while yields on UK gilts and German bunds all dropped markedly. At the same time, Fed funds futures have now priced out any more rate rises in the US until 2018.
Fed Chair Janet Yellen hinted in her testimony that trouble in financial markets could delay further rate hikes if they were to persist, and for now they are persisting. It was always going to be a tricky balance to strike for Ms Yellen. With such a risk-averse sentiment, markets could have fallen if she said rates would go higher, or if she said they would stay lower due to lower growth.
One of the most persistent trends in recent memory kicked in again today when the price of US crude oil dropped beneath the lows of this year to its weakest since May 2003. The price did however bounce off its lows, offering some support to equities.
A $40 surge in the price of gold took shares of gold-miners Randgold (L:RRS) and Fresnillo (L:FRES) to the top of the FTSE 100. The rest of Britain’s benchmark index was in the red, taken lower by the financial sector with both banks and insurers set to struggle with incessantly low interest rates.
US
US stocks opened sharply lower with financial and technology shares leading the decline in line with global risk aversion.
FX
The FX market was fragmented for a second day with the dollar weakness concentrated in the yen and currencies with negative rates, while commodity currencies were battered with the price of oil.
The Japanese yen soared against the dollar, pound and euro. USD/JPY plummeted over 200pips to 111, its lowest since October 2014 before rebounding. With the yen appreciating so rapidly rumours appeared that the Bank of Japan “checked rates,” a call to primary dealers which typically causes a quick re-pricing in case of intervention.
Commodities
Gold took off like a rocket, gaining $50 per oz to a one-year high. It sounds ridiculous to say, but with negative interest rates in Europe, Japan and perhaps soon in the US, gold has an attractive yield.
WTI crude oil sank to its lowest since May 2003 with high inventories at Cushing in Oklahoma, the largest storage hub adding to the supply glut. Brent crude was not far behind with lobbying attempts by Venezuela for a meeting between Russia and Saudi Arabia and other OPEC producing countries falling on deaf ears.
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