UK and Europe
Talk and rumours proved enough bring European markets off oversold levels on Wednesday after financials shares underwent two days of pummelling.
Talk late on Tuesday that Deutsche Bank (DE:DBKGn) could do an emergency bond-buyback to shore up its finances and relieve worried creditors saw the German bank’s shares rally by as much as 15%, lifting the rest of the banking sector. A much more improbable rumour that the European Central Bank is considering buying bank shares at its March meeting helped crystallise the early gains.
Fed Chair Janet Yellen’s testimony was always going to be aimed at provoking the least reaction possible in her testimony to the House Financial Services Committee but stranger things have happened at sea. Markets did initially dip when the prepared comments were released and indicated no obviously dovish shift in policy, but the measured remarks allowed a recovery in the lead up to the live testimony.
Gains in the FTSE 100 were led by financials and industrials in a relief rally from yesterday’s drop. Shares of Prudential (L:PRU) and Worldpay (L:WPG) were top risers while shares of Barclays (L:BARC) and Royal Bank of Scotland (L:RBS) were higher but remain well down over the week. Share of Rolls Royce (L:RR) and BAE Systems (L:BAES) were up ahead of earnings reports in the next few days.
Shares of Hikma Pharmaceuticals (L:HIK) saw a dramatic day of trading when a near 20% decline was fully reversed. The UK pharma company lowered its offer price for acquiring Roxanne Laboratories after receiving new information regarding its target’s 2015 financial performance. Investors are never too enthused about spending potential dividend-cash on acquisitions so lowering the earnings expectations after the offer shows a lack of due diligence and has angered shareholders.
US
Fed Chair Janet Yellen didn’t end up rocking the boat in her semi-annual testimony, allowing a jump in US stocks.
Ms Yellen said the committee is still expecting gradual path of rate rises but emphasised that monetary policy is by no means on a set path, it depends on incoming data. A direction mention of risks from equity price declines and dollar appreciation was offset by the belief that job and wage gains should support incomes and spending.
The closest repetition of president of the New York Fed Bill Dudley’s comments on “financial tightening” was to say that “Financial strains could weigh on the growth outlook if persistent” and “financial conditions have recently become less supportive of growth.”
There was no overt suggestion that the dot-plot expectation of four rate hikes is off the table but Ms Yellen did say that “if the economy were to disappoint, a lower path of federal funds rate would be appropriate.”
“Cord cutting” was at the heart of a sell-off following poorly received earnings from Disney (N:DIS) and Time Warner (N:TWX) on Wednesday.
Shares of Disney dropped despite the film studio reporting its best quarter ever thanks to the success of Star Wars: The Force Awakens. The fear is that Disney’s cable television business which includes ESPN will suffer from cable subscribers “cord cutting” in favour of online streaming services like Netflix (O:NFLX).
FX
There was a mixed reaction in the US dollar following Yellen’s testimony with the yen still seeing some haven demand while the euro sank on disappointing economic data.
The UK, Germany, Italy and France have all reported dire industrial production figures this week. The data both in the UK and mainland Europe points to a continuing dependency on the consumer as the main source of economic growth.
A modicum of relative strength in the British pound could be explained by the fact that the decline in UK manufacturing actually looks worse than it was since it was led by a 5.4% slump in gas and electricity production owed to the warmer winter.
Commodities
Oil prices were typically volatile on Tuesday with early talk of production cuts from Iran and a surprise draw in weekly US inventories steering against very bearish sentiment.
Gold reversed overnight losses but remains below the key $1200 per oz handle.
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