Thursday 18 January 2018

Daily Market Update: Equity & oil price slide resumes

Kyzylorda region, southern Kazakhstan, January 2016. REUTERS/Shamil Zhumatov
Kyzylorda region, southern Kazakhstan, January 2016. REUTERS/Shamil Zhumatov

Richard Ramsey

Last week global equity markets ended a torrid week on a high.

European stocks recorded their biggest twoday gain since 2011. Meanwhile Wall Street’s S&P 500 notched up its first weekly gain of the year. There is a strong correlation between oil and equity prices with a strong rebound in the former boosting the latter. However, that was last week. Yesterday saw a return in risk aversion with oil and equities pushing lower. Following its biggest two-day rally in seven years, oil has resumed its decline. Brent crude is down over 7% over the last 24 hours from $32pb at yesterday’s open to sub-$30pb this morning. The glut in supply continues with Iraqi oil production hitting a record high in December.

Meanwhile the chief of Saudi Aramco, Saudi Arabia’s national petroleum and natural gas company, signalled that his company will not cut oil and gas investment. The OPEC secretary-general Abdalla El-Badri has pleaded for the world’s largest oil producers to help arrest the worst price collapse in decades. He also added that the market needs to see inventories come down to levels that allow prices to recover and investments to return.

Global equity markets are a sea of red today following the start of a renewed sell-off yesterday. The Euro Stoxx exchange closed 0.7% lower yesterday. However, Wall Street’s S&P 500 posted a much sharper decline of 1.6%. Concerns over record levels of capital flight from China remain a key source of unease. Following a 6.4% decline this morning, China’s Shanghai Composite has plunged 47% since June and is now at a 13-month low. The Japanese yen is always boosted by a return of risk aversion. However, a stronger currency is bad news for its exporters with the Nikkei 225 down 2.4% this morning. European equities have taken their lead from Asia with the Euro Stoxx index of the Eurozone’s 50 blue-chip companies down almost 2% at one stage this morning. While concerns over China and global growth have hit investor sentiment, there are other concerns in Italy. The declines in the Italian stock market are concentrated on its beleaguered banking sector.

It was a relatively quiet day on the economic data front yesterday. The German IFO was the key release of the day. Confidence amongst German businesses fell to an 11-month low in January and was weaker than analysts had anticipated. Manufacturers are particularly gloomy with confidence in this sector at a 12-month low. Speaking on the latest survey, IFO economist Klaus Wohlrabe said “Germany cannot completely decouple from the downward dynamic in emerging markets”. One bright spot in the latest survey was resilience in domestic consumption, with retailers’ expectations rising.

Meanwhile the ECB President delivered a keynote address in Frankfurt last night. Mario Draghi promised to increase inflation, rejecting criticism of the ECB's loose monetary policy and arguing that sluggish growth in prices was damaging the euro zone economy. According to Draghi, the ECB is contributing to securing the cyclical recovery by fulfilling our price-stability mandate and added that there are no warning signs of serious financial instability. In the UK, the latest CBI industrial trends survey revealed that manufacturing order books are contracting at a faster rate than expected. There are no key data releases due from the Eurozone or the UK today. However, Governor Mark Carney is appearing in front of a Treasury Select Committee this morning. As always, his comments will be closely followed by financial markets.

In the US, the Dallas Fed’s survey of manufacturing activity doesn’t tend to grab the headlines. However, the pace of decline in the heavily oil reliant state of Texas is accelerating. The latest survey for January hit its lowest level since April 2009. There is a raft of US data due today with the Conference Board’s consumer confidence survey and the latest S&P Case-Shiller house price index. The flash Markit services and composite PMIs are also due this afternoon. The focus within financial markets today is expected to remain on equities and oil. Meanwhile in other markets, sterling has been on the back foot against the dollar and the single currency. GBP/USD has been testing sub-$1.42 this morning and is currently changing hands at that level. EUR/GBP has been on the rise over the last 24 hours and has risen from around 75.6p to 76.3p this morning. EUR/USD is a tad firmer this morning up from $1.081 to $1.084 over the last 24 hours.

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