Daily Market Update: Negative Equities
Risk aversion was the key theme in financial markets yesterday.
It was a case of déjà vu for European equity markets which posted yet more losses. The Euro Stoxx index of the 50 largest bluechip companies in the Eurozone shed another 1.75% yesterday which makes the cumulative fall year-to-date over 16%. The UK’s FTSE 100 hit a 3-year low yesterday with the latest 1% decline bringing the total fall year-to-date to almost 10%. The main concern within Europe is the banking sector and its exposure to another global slowdown.
Germany’s Deutsche Bank is nursing the heaviest losses with almost a 40% decline so far this year. Wall Street’s S&P 500 fared much better and closed with a marginal decline. Meanwhile the Japanese yen is a safe-haven currency when markets take fright. A strengthening yen, however, is bad news for its exporters and its stock markets. The Nikkei 225 index closed 2.3% lower this morning. Australia’s stock market has joined the not so exclusive bear market club too. Its latest drop in share prices took it over the 20% fall from recent peak to enter bear market territory. Markets in China and Hong Kong remain closed.
Oil prices continue to slide with a barrel of Brent crude falling by almost 7% yesterday from $33pb to $30.3pb at yesterday’s close. The latest downward move followed the International Energy Agency’s warning that crude oil prices could fall even further as the world’s vast oversupply of petroleum is only getting worse with a surge in production from OPEC. It noted that OPEC flooded the market with an additional 280,000 barrels a day last month. The IEA’s view is that Brent crude oil could reach $26 per barrel, the next key technical level being $16 but they reckon that downside risks to demand look greater and upside risks to supply have materialised recently.
There was also plenty of price action on the currency markets yesterday. Sterling has regained a firmer tone against the dollar and the single currency over the last 24 hours. EUR/GBP briefly touched 78.5p yesterday but has returned to broadly where it started yesterday’s session at 77.6p. GBPUSD has gained a cent over the last 24 hours and is changing hands at $1.45. Meanwhile EUR/USD is up from $1.119 to $1.1126 over the same period.
Yesterday revealed the slump in German industrial output and exports in December. This morning’s figures for France reveal the same trend. French industrial & manufacturing production contracted in December by 1.6% m/m and 0.8% m/m respectively. This compared with an expected 0.3% monthly rise for both measures. This reinforces the view expressed yesterday that we may see a negative GDP print for the Eurozone’s Q4 GDP due this Friday. Italian and UK figures are due shortly.
Yesterday’s UK balance of trade figures were relatively stable. The UK imported £35bn more goods and services than it sold in exports in 2015. That’s virtually unchanged from last year and very close to average for the last 15. But underneath that stability the trends tell a story about the state of the UK and the global economy. First the UK’s deficit in goods is widening, now a cool £125bn. While our surplus in services is expanding too and now stands at £90bn. UK export growth to China fell to 6.5% last year, barely a third of its 18% average growth rate since 2000. But this isn’t just a China issue, sales to the USA fell last year, wiping 1.6% off export growth.
The economic data calendar in the US was fairly light yesterday. There was some good news contained within the latest Job openings & labour turnover survey known as the JOLTS survey. The number of Americans voluntarily quitting their jobs surged in December to a nine-year high. This is viewed as a positive and it shows a high degree of confidence in the labour market for these individuals to quit their jobs. Today the focus is on the Federal Reserve’s Chair Janet Yellen. Yellen is delivering the Fed’s semi-annual Monetary policy Report to the US Congress. No doubt she will be quizzed on the merits of the first rate hike in almost a decade. Since December’s policy change financial markets have taken a turn for the worse. However, European equity markets are on the rise in early trading. But like yesterday, will it last?