UK and Europe
European stocks gave up early gains after minutes from the European Central Bank suggested a level of comfort with negative interest rates not shared by markets. Banking shares, including Germany’s Deutsche Bank (DE:DBKGn) are now back at their February lows when stock markets bottomed. If bank stocks are a leading indicator then broader markets are in for a large pullback.
The ECB said that “on balance, the combination of all monetary policy measures taken, including negative rates, appeared to have contributed positively to banks' profitability thus far." The central bank highlighted the positive impact of negative rates on credit expansion but some members worried about increased pressure on banks' profitability and exacerbated financial market volatility if rates were to be cut further.
Shares had initially gained ground after markets interpreted a cautious and slightly divided set of Federal Reserve meeting minutes to mean there would be no rush to raise US interest rates. An about-turn in the price of oil played its part in reversing early optimism.
Gains on the FTSE 100 were led for a second day by healthcare stocks as investors position for new areas of consolidation after the collapse of the Pfizer (NYSE:PFE)-Allergan (NYSE:AGN) merger. A jump in the price of gold placed Randgold Resources (LON:RRS) at the helm of the equity UK benchmark
M&S (LON:MKS) shares were amongst the high risers after a well-received trading update. M&S clothing sales remain a drag but expectations of margin improvement helped by growth in online sales could mean there is light at the end of the tunnel.
Arm Holdings (LON:ARM) shares gained ground after positive Samsung (LON:0593xq) results lifted hopes for the smartphone market in which ARM is the dominating chip-maker.
Pearson (LON:PSON) shares slumped to the bottom of the UK benchmark as it went ex-dividend but losses were exacerbated by rising concern over its US textbooks business after rival Apollo Education Group withdrew its full-year guidance.
US
US stocks opened lower as the US government crackdown on mergers, Fed minutes, higher oil prices and a weak dollar all played on investors’ minds before earnings season kicks off next week.
FX
The US dollar was mostly unchanged barring big losses to the yen and big gains against commodity currencies, notably the Aussie dollar.
The market is now calling the Bank of Japan’s bluff on further intervention. “Checking rates” may cause the occasional short-covering rally in USD/JPY but is likely to just provide a better price for short sellers. With 110 having given way, FX traders have their sights set on 100.
The euro has rallied six of the last seven days against the pound, taking the currency pair above 0.81 for the first time since June 2014. Prime Minister David Cameron’s family tax affairs coupled with upset over the budget risk turning the Brexit referendum into a vote of no confidence in the government. Concurrent Brexit risk and lost faith in the ECB’s ability to weaken the euro has sent EUR/GBP one big handle higher in just over four months. ECB minutes are released later.
Commodities
Safe haven flows and the April Fed meeting off the table for a possible US rate hike sent the price of gold back above $1240 per oz, its highest since the end of March.
A weak dollar and a US inventories draw saw oil prices jump on Wednesday but profit taking and a switch in focus back to the meeting in Doha this month has prompted a pull back.
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