Europe
Renewed volatility in government bond markets shook equity investor confidence on Thursday but calls from the IMF for a 2016 US rate cut offered a sign of relief and pulled equities away from early losses.
There has been a flood of selling in government bond markets all this week and following yesterday’s European Central Bank press conference, it is starting to reflect more heavily on equity prices.
ECB President Mario Draghi said yesterday that the central bank would look through market volatility and maintain its current QE policy. The ECB saying it will keep doing the same wasn’t enough to support bond markets that have become a falling knife.
The German 10 year bund yield reached just short of 1% before retreating, that’s almost double in the space of a week thanks to a lack of market liquidity. The scariest bit is that the ECB seems out of ideas for combatting the volatility that it played a large part in causing.
There was no deal for Greece after late night crunch talks on Wednesday night between Greek PM Alexis Tsipras and Eurozone creditors including Eurogroup head Jeroen Dijsselbloem and EU president Jean-Claude Juncker. The next round of 11th hour talks happen on Friday in which it is hoped one of the two parties will compromise on the so-called “red-lines” that have prevented an agreement to date.
UK markets were held down on Thursday by underperforming resource stocks, led lower by Royal Mail (LONDON:RMG) after the government announced it will sell its stake and Lloyds (LONDON:LLOY) bank which has been fined for PPI mis-selling.
UK Chancellor George Osborne announced the government will sell its remaining stake in Royal Mail worth approximately £1.5bn, fully privatising the firm. He did not give a timeframe for when the sale would take place.
Lloyds shares dropped over 1% after the bank received a record £100m fine from the FCA for mis-handling PPI payouts. This is on top of a previous £4.3m fine for similar offences. The resulting dent to the bank’s profitability adds to the downside risk in shares at a time when the government has been offloading its stake.
US
US equities opened down following volatility in Europe’s stock and bond markets but bounced off the lows following a surprise call from the Internal Monetary Fund for the Federal Reserve to delay its first rate hike until 2016. The call for lower rates for longer is generally well received by stocks and it seemingly came just at the nick of time when bonds were looking pretty unstable.
The basis for the unusually specific call from the IMF for a delay to a US rate hike was not for economic reasons, rather because of the risk of financial instability.
Unemployment claims dropped further than expected in the last week adding to a picture of continuing strength in the US labour market after over 200k jobs were created according to the ADP report.
FX
Both the euro and the US dollar had a volatile session but were mostly flat towards the end of European trading.
Progress towards a Greek deal, movements in bond yields differentials, strong US labour market data but dovish suggestions from the IMF about US monetary policy all played a part in FX movement on Thursday.
Commodities
Saudi oil minister Ali al-Naimi is claiming success from OPEC’s decision not to cut production in November and is predicting a rise in Oil demand for the rest of this year. While the rise in oil demand, if it were to come about, is positive for oil markets, Naimi’s comments have been construed as confirmation the cartel will continue its current policy of no intervention.
Gold and silver prices slumped again on Thursday with gold possibly setting up for a close below $1,180 per oz, the bottom of the trading range that’s been in place since the end of March. Symbolic of the lost investor interest in gold, the largest gold exchange traded fund, the SPDR Gold Shares (ARCA:GLD), has dropped out of the top ten most popular ETFs.
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