UK and Europe
Stocks in Europe rallied on Monday bolstered by a rise in the price of oil and mining companies as well as a bounce-back in banking shares with the exception of HSBC (L:HSBA) which reported disappointing full-year earnings.
The possible sale of the De Beers London headquarters has helped Anglo American (L:AAL) to the top of the UK benchmark equity index as investors welcome the mining company slimming down to match lower demand for its commodities.
The gains spread across the mining sector with shares of BHP Billiton (L:BLT), Rio Tinto (L:RIO) and Glencore (L:GLEN) all rising over 8% on the day. Mining companies have underperformed more UK-exposed shares as growth in the UK economy outpaced other parts of the world. With Brexit uncertainty possibly disrupting business investment and consumer spending, it could be the more internationally-exposed sectors’ time to shine.
Rallying commodity prices from crude oil to copper have boosted the beaten up mining sector. Signs of a possible bottom in numerous commodities as well as cost-cutting plans across the mining industry has helped the FTSE 350 mining index finish its fifth week higher.
Mining shares are still wallowing in a hangover from years of excessive production to meet the demands of booming industrial production and construction in China. But in the last couple of quarters, companies have started talking about closing down production, asset sales and dividend cuts to match a new reality in which China's growth is slowing as it transitions to consumption-based economy.
Banking shares were mostly higher as sentiment towards the sector continues to improve from last week, while HSBC bucked the trend, sitting at the bottom of the FTSE 100. The Anglo-Asian bank reported a surprise loss in the fourth quarter, leaving annual earnings below expectations at just 1% higher. HSBC’s earnings miss was a surprise but the causes were not. Increased costs from bad loans concentrated in Oil and Gas and low net interest income because of lower interest rates are familiar concerns.
US
US stocks opened higher in line with higher oil prices and positive trading in Europe, looking through disappointing PMI manufacturing data from Markit which reported “the worst business conditions for over three years.”
Shares of Yahoo (O:YHOO) jumped after the internet search company launched the sale of its core assets on Friday. Yahoo has formed a committee to explore strategic alternatives to the turnaround plan of its CEO Marissa Mayer, even hiring investment bankers to assist in the process. Activist shareholders including Starwood Capital have forced the hand of Yahoo’s board into selling the core assets after previous efforts to spin-off its stake in Alibaba (N:BABA) failed.
FX
Baring strength in commodity currencies which rose with the price of oil, the US dollar was stronger on Monday. Demand for the dollar has almost become a flight to safety as investors jump ship from the euro with negative yields and the British pound amidst political uncertainty from the June Brexit vote.
The British pound was sent reeling after popular London Mayer Boris Johnson backed the campaign for Britain to leave the EU. Boris is one of the few British politicians liked by the British public and is a significant coo for the “Out” campaign. The odds of a Brexit has shifted a few percentage points with Boris on the “out” side.
The reaction to the referendum has been concentrated within the currency market because of the implications for monetary policy. The Bank of England is now almost guaranteed not to raise interest rates in the first half of 2016 before the vote. The fact that gilt yields are flat and UK stocks are higher would suggest Brexit fear has still not really taken hold. The vote is still four months away, and despite Mr Johnson’s addition to the “out” campaign, the likelihood is that Britain will vote to remain in the EU.
Commodities
Gold prices tanked as much as 2% but recovered off the low of the day just ahead of $1200 per oz. The failure to surmount the February 11 peak suggests a bigger pullback in gold. A sustained move back below $1200 per oz in gold would depend on equity markets. If the current equity rally gathers steam then gold is likely to have topped for the time being. A move to 2000 in the S&P 500 could match a drop to $1150 per oz in gold.
The price of oil bounced for the first time in three days as Nigeria joined the Saudi-Russian output freeze agreement. The last two days of declines in oil have not undone the gains after the production freeze was announced. A close above $36 per barrel in Brent crude could see more shorts unwound and a fairly rapid move towards $40.
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