UK & Europe
European shares had an initial wobble following an inconclusive election result in Spain but by mid-morning it was only Spain’s IBEX 35 in the red as the rest of Europe bounced back. The initial move lower was a typical market over-reaction and as the maths on possible coalitions was done, the market judged the situation to be a bit more stable than initially feared.
Spain’s IBEX stock index dived to its worst day in three months whilst Spanish bond yields spiked as investors reacted to the country’s uncertain political future.
There is no clear majority after Sunday’s election in Spain since a coalition between PM Mariano Rajoy’s People’s Party and the liberal Ciudadanos would not be enough to form a majority. In order to win in the second round Rajoy’s People’s Party would need rival Socialist to abstain from voting, an unlikely event when there’s a chance a socialist government could take charge if Rajoy can’t form his own alliance of parties. Were the socialists to try and form a coalition with Ciudadanos, only the multiple nationalist parties would need to abstain for a government to be formed. If no consensus is reached amongst the numerous political parties then Spanish voters may have to go back to the polls next year, bringing a period of continued uncertainty that could weigh on Spain’s financial markets.
A socialist government in Spain would not be the end of the world and the recent experience from Portugal suggests bond yields would likely normalise after the initial shock. More broadly, the Spanish election result is another sign of anti-establishment feeling in Europe brought on by discontent particularly amongst the youth and unemployed which were hit hardest during the 2008 financial crisis.
A fresh 11-year low for Brent crude oil meant the energy sector was the weakest component of the FTSE 100 with BG Group (L:BG) under pressure after another a stake sale from another high-profile investor.
It was not all doom and gloom across the commodity space as metal prices recovered for a second day off multi-year lows making the mining sector the best performing sector on the UK benchmark.
News that ITV (L:ITV) is considering a sale to US cable operator Comcast has catapulted shares towards the top of the UK equity benchmark. Rival media conglomerate Liberty Global (O:LBTYA) recently upped its stake of ITV to 9.9% but has denied intensions to attempt a takeover. The possibility of a bidding war is a big positive driver for ITV shares heading into 2016.
US
US stocks opened higher on Monday, rebounding from the huge two-day rout at the end of last week. Blue chip tech stocks including Microsoft (O:MSFT) and Apple (O:AAPL) led gains alongside financials but the energy sector was a drag as oil prices fell.
An article in Barron’s has suggested Microsoft Corporation (O:MSFT) shares could gains as much as 30% off the back of strength in its cloud computing business, offsetting concerns over slowing demand for PCs.
FX
The US dollar was mostly weaker on Monday, retracing gains from last week amidst a vacuum in economic data.
The euro gained against the dollar and the pound amidst mixed messages from ECB members as German producer prices saw a smaller decline in November. The ECB’s chief economist Peter Praet has said the ECB will keep policy accommodative as long as is necessary whilst ECB council member Vitas Vasiliauskas there is no need for further stimulus.
The Japanese yen was flat against the dollar after tumultuous moves on Friday that saw USD/JPY swing by 250pips after the BOJ surprised with an underwhelming addition to monetary stimulus.
Commodities
Brent crude oil slid to $36.04 per barrel, a fresh 11 year low not seen since July 2004 on expectations that supply will continue to outstrip demand as producers cut costs while ramping up production to take market share. The US added the most oil rigs since the summer last week whilst OPEC is seen producing more than 31.5m barrels per day.
The price of gold rallied for a second day after touching $1050 per oz for a second time in December. The gold bounce runs in the face of a recovery in equities and shows that while investors are buying into the recovery story for now, they are also taking out some insurance.
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