Monday 22 January 2018

Daily Market Update: Green Budget while equities see red

REUTERS/Leonhard Foeger/Files
REUTERS/Leonhard Foeger/Files

Richard Ramsey

European equities were a sea of red yesterday with significant declines across the board as risk aversion returned with a vengeance.

The Euro Stoxx index of the top 50 blue-chips in the euro-zone closed over 3% lower yesterday. Meanwhile Greece is back in the financial market crosshairs with a decline of almost 8% yesterday. This takes the benchmark Athens Stock Exchange back to levels last seen in 1990. Back then, the number one singles included Vanilla Ice’s ‘Ice Ice Baby’ and Sinead O’Connor’s ‘Nothing compares 2 you’. Wall Street’s S&P 500 ended yesterday’s session 1.4% lower at the closing bell. Banking stocks were the big losers yesterday as fears over global growth continue to linger. Shares in Germany’s largest bank Deutsche Bank fell 9.5% yesterday , the biggest fall since 28 July 2009. Meanwhile some of the Greek banks posted declines of almost three times what Deutsche experienced.

Overnight, Asian markets have taken their cue from the sell-offs in European and the US yesterday. Japan’s Nikkei 225 index plunged 5.4% in this morning’s session. The risk aversion has been accompanied by a flight to safe haven assets such as Japanese government bonds (JGBs). Yields, which move inversely to bond prices (& demand) have turned negative on two out of every three government bonds, including the benchmark 10- year JGB. Japan now matches Germany on this front. The Chinese markets are closed this week for the Chinese new year celebrations. So next week when they open could be very interesting. European equities markets have opened higher this morning. The Euro Stoxx is up 0.6% in early trading. Meanwhile Brent crude oil has fallen almost 3% over the last 24 hours and is currently trading at $33.3pb. This morning the International Energy Agency (IEA) has said that the global oil surplus will be bigger than previously estimated. This does not bode well for a rebound in the oil price in the short-term.

There is just over a month to go until George Osborne presents his March 2016 Budget. Yesterday the influential Institute for Fiscal Studies (IFS) presented its Green Budget highlighting some of the challenges facing the Chancellor. Osborne has imposed a series of fiscal rules which could provide him with some fiscal headaches ahead of the 16th March Budget. In light of the deteriorating global economic outlook, the Chancellor’s quest for a fiscal surplus in 2020 looks all the more challenging. According to the IFS, the inflexible rules that the Chancellor has introduced “could require big tax rises or spending cuts with very little notice”. Volatility in global markets may further impact revenue projections with weaker than expected earnings growth. Indeed, last week the Bank of England revised down its forecasts for the annual rate of earnings growth.

UK bond markets followed equity markets lower yesterday. The benchmark 10-year UK government bond, of gilt, saw its yiled fall to 1.4% yesterday. This represented the lowest level in a year. Remember with the bond markets the yield moves inversely to the price. Demand for this safe-haven is going up (price up too) and yield is going down. Sterling has also headed lower over the last 24 hours with EUR/GBP almost touching 77.6p yesterday. Weaker than expected German data this morning has sent the currency pair lower to 77.4p as I write. Meanwhile cable (GBP/USD) hit a low of $1.4350 lunchtime yesterday. This was almost two cents lower than it opened yesterday morning. Last Thursday the currency pair was trading at $1.4650 at one point. It has recovered some of this ground and is back at $1.444 as I write. Meanwhile EUR/USD has moved higher over the last 24 hours from $1.114 to $1.117. This new found euro strength will hamper the Eurozone’s economic recovery.

Given January’s slump in global equity markets, yesterday’s decline in investor confidence in the Eurozone perhaps came as no surprise. However, the latest Sentix survey of private and institutional investors within the Eurozone came in below analysts’ predictions. Investor sentiment in February fell to its lowest level in 14 months. Elsewhere in the Eurozone business sentiment and consumer confidence were on the rise in France and Ireland respectively. The French central bank’s business sentiment indicator started the new year with its highest reading since November 2013. Meanwhile consumer sentiment in the Republic of Ireland soared in January to a near 15-year high. You have to go back to February 2001 to find a time when morale amongst Irish consumers was higher than it is today.

Outside of the Eurozone sentiment surveys the incoming hard economic data is somewhat concerning. This morning it has been revealed that German industrial production and exports slumped in December. Industrial production had been expected to rise by 0.5% m/m but instead fell by 1.2%. This was the second successive month of declining output. This morning’s news highlights that the Eurozone’s largest economy is clearly feeling the impact from the wider global economic slowdown. German exports fell by 1.6% m/m in December and by 2.3% for Q4 as a whole. In light of these figures, the anticipated 0.3% q/q rise in German Q4 GDP looks somewhat optimistic. Don’t be surprised if these figures due on Friday reveal a decline in economic growth. We get the UK’s trade figures for December at 09.30hrs this morning. Overall it is a quiet day for economic data with financial markets expected to focus their attention on equity markets instead.

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