Wednesday 7 December 2016

Stock market rout: European shares rebound but gold strong as investors flee to safe havens

Published 12/02/2016 | 11:25

Gold is seen as a safe haven for investors
Gold is seen as a safe haven for investors

European shares rebounded strongly from the previous session's steep losses on Friday, with positive results from Commerzbank and a rally in oil prices helping banks and commodity-related stocks to regain ground.

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The pan-European FTSEurofirst 300 was up 2 percent at 1,218.97, having closed down 3.7 percent on Thursday, when a slump in banks and resource-related stocks pushed the index to a 2-1/2 year low.

Banks were in favour with Commerzbank up 14 percent after it returned to profit in the fourth quarter. Provisions for bad loans fell, allowing the bank to draw a line under a six-year restructuring by announcing it was closing its 'bad bank' comprising non-core assets.

In all, the STOXX 600 Banks index rose 3.8 percent.

"There's a sense of relief. There's so much nervousness in the market at the moment that even slightly good news out of a bank like Commerzbank is taken very well," said Mark Priest, sales trader at ETX Capital.

"The German banking sector has been pretty battered, and it's got to a point where there may be value there, so long as global economic factors start to calm down.

Germany's DAX was up 1.4 percent. Traders said that growth data from Germany, which showed growth was steady and in line with expectations, provided reassurance after economic fears had pegged back markets this week.

The FTSEurofirst 300 nonetheless remains down 5 percent this week, with banks still down around 7.5 percent on the week, hit by concerns over profitability in a low growth, low interest rate environment.

Caution over exposure to default from the energy sector has also hindered bank stocks. On Friday, the oil and gas sector rose 3.1 percent after a rally in oil which left crude prices up over 3 percent.

Growth sensitive mining stocks also rallied, up over 3 percent.

In other corporate news, Rolls Royce rallied 11.9 percent after its results, its biggest one-day rise since November 2008. It stuck to its 2016 guidance, despite being forced to cut its dividend following three profit warnings last year. It said there would be no need for a rights issue.

"It has... been able to leave guidance unchanged, breaking away from that slew of profit warnings we've seen of late," said Tony Cross, market analyst at Trustnet Direct, who added that the dividend cut was a "bold" move.

"This really does have the feel that management is attempting to draw a line under recent events."

Gold on Friday clung to sharp overnight gains that pushed the metal to a one-year high, and looked set to post its best week in over four years as stock market turmoil stoked safe-haven demand.

Bullion jumped 4 percent on Thursday, its biggest single-day percentage rally since 2013, and analysts and traders see more gains ahead if the weakness in equities persists.

While European shares gained today, Asian shares slid as mounting concerns about the health of European banks further threatened a global economic outlook. MSCI's global stock index closed more than 20 percent below its all-time high.

Safe-haven assets shone across the board. U.S. 10-year Treasury yields hit their lowest since 2012 and the Japanese yen climbed to its highest in 15 months against the dollar, while money continued to flow into gold-backed exchange traded funds.

Spot gold rose to as high as $1,260.60 an ounce on Thursday, its highest since February last year. It retreated only modestly on Friday, trading down 0.3 percent at $1,242.63 by 0712 GMT.

"We are seeing a flight to quality," said a Sydney-based trader. "ETFs have been accumulating the metal for some time now. They are one of the main drivers (of the gold rally) along with the equity markets which are extremely soft."

For the week, spot gold is up almost 6 percent, the biggest such gain since October 2011.

U.S. gold futures have risen more than 7 percent for the week, the sharpest jump since 2008.

Assets in SPDR Gold Trust, the world's top gold exchange-traded fund (ETF), rose 2 percent on Thursday, the biggest inflow in two months.

Total holdings of the top eight gold ETFs have risen by 3.8 million ounces so far this year, after three straight years of decline.

The risk-off sentiment has made gold the best performing commodity in 2016, investment bank ANZ said. Others predicted further gains.

"$1,300 would be possible if stocks don't stop falling," said Yuichi Ikemizu at Standard Bank in Tokyo.

Jeffrey Gundlach, co-founder and chief executive officer of DoubleLine Capital, said gold is likely to reach $1,400 as investors lose faith in central banks.

Also helping gold were dovish comments this week from Federal Reserve Chair Janet Yellen, who stressed that the U.S. central bank was not on a "pre-set" path to return policy to "normal" amid a worsening meltdown in global stock markets.

Though Yellen said she still expects the Fed to gradually raise rates this year, federal funds rate futures have almost completely priced out the chance of a rate hike.

Reuters

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