Daily Market Update: Sterling hits an 11-month low against the Euro
European equities enjoyed some respite yesterday following their recent declines.
However, ongoing volatility within the oil market sent US equities sharply lower. The trigger was fresh data from the Energy Information Administration which showed a rise in US crude inventories last week. The combination of rising supply and falling growth rates is putting downward pressure on oil prices. Wall Street’s S&P 500 closed last night some 2.5% lower and ended below the 1,900 mark for the first time since late September. Meanwhile the tech stock heavy NASDAQ exchange dropped 3.4% yesterday.
On Tuesday US oil prices fell below the $30pb mark for the first time in 12 years. Yesterday it was the turn of the European benchmark, Brent crude, to briefly dip below $30pb for the first time since April 2004. The price of Brent crude is hovering above $30pb this morning. This morning’s equity markets are a sea of red once again with China being one exception. The Chinese Shanghai Composite closed 2% higher after avoiding falling into official bear market territory. The latter is defined as a drop of at least 20% relative to its recent high. The Japanese Nikkei 225 index, which is very sensitive to the strength of the Yen, reversed most of yesterday’s gains with a 2.7% fall this morning. European equities are today posting heavy losses in early trading with the Euro Stoxx down 2.4% as I write.
In the US, the Federal Reserve’s Beige Book was the only release of note yesterday. The US central bank’s economic survey showed that the US economy expanded across most of the country in the past six weeks as the job market showed strength. However, the latter is failing to stoke broad wage pressures that the FOMC wants to see. Meanwhile a number of Fed policymakers, past and present, have been airing their views over the last 24 hours. Boston Fed President Rosengren (voter) said estimates for US economic growth are falling, putting the central bank’s projected path for rate increases at risk. He added “Policy makers should take seriously the potential downside risks to their economic forecasts and manage those risks as we think about the appropriate path for monetary policy”.
Chicago Fed President Charles Evans (non-voter) said he would have been “pleased” to have not raised interest rates in December. He added that he is “nervous that inflation expectations are not as firmly anchored as we perceived them to be a year ago, that they have drifted down a little bit.” Meanwhile former Minneapolis Fed President, Narayana Kocherlakota, who was one of the most dovish members of the FOMC, took to social media last night to express his concerns. Kocherlakota, who stepped down just two weeks ago tweeted a chart showing falling US inflation expectations. One measure of medium-term inflation expectations hit a new low which is a “very worrisome signal for Fed credibility”. There is a lack of top tier economic data in the US today. Instead financial markets will be focussed on whether or not Wall Street can reverse yesterday’s sizeable losses.
One economic data release of note yesterday was the Eurozone’s latest industrial production figures. Industrial production in the Euro Area fell 0.7% in November, in a further sign that the slowdown in emerging markets is affecting the most externally focussed sectors of the world's advanced economies. The UK was not alone in seeing manufacturing output fall. Germany's manufacturing output fell as well, by 0.8% m/m. It was left to the smaller economies to lead the charge, with Greece topping the leader board for November, growing by 2.2%. That means that the manufacturing sector there is now a mere 25% smaller than in November 2007. Today is fairly quiet on the economic data release front with the Bank of England’s latest policy announcement due at 12 noon. No change is expected and we will have the release of the MPC minutes too.
On the currency markets sterling remains on the back foot with talk of Brexit risks weighing on the pound. Sterling has already touched an 11-month low against the euro. EUR/GBP has already touched 75.9p this morning. Meanwhile cable continues to trade near 5-year lows but is this morning back above $1.44. The single currency has gained against the dollar and is up around 1 cent over the last 24 hours. EUR/USD is currently trading around $1.092.