UK and Europe
European markets dropped on Tuesday, led lower by a pullback in the price of oil when the Iranian oil minister called a deal to freeze output “ridiculous.” Losses began in Asia when the PBOC cut the reference rate for the Chinese yuan by the most since January, bringing back concerns of a bigger devaluation.
The London Stock exchange topped its own index the FTSE 100. LSE shares jumped double digits when the company announced it was in talks for a possible “merger of equals” with Germany’s Deutsche Boerse (DE:DB1Gn). Reports of 54/46 split indicate the merger would be a bit ‘more equal’ for the German group. The merger would make the group the largest exchange in the world, valued at $20bn.
The merger isn’t without president, these two companies tried to merge over a decade ago but it fell apart because of investor opposition. Since becoming publically traded companies, most major stock exchanges have been trying to grow as fast as possible through acquisitions in order to attract the most trading volume. Exchanges are paid on transaction and listing fees and want more trading volume to attract more fees. The bigger the exchange, the more trading volume and new listings, the greater the liquidity and that attracts more volume and listings.
The London Stock Exchange’s decision to merge with a German company just before Britain potentially votes to exit Europe in which Germany is the largest member makes for interesting timing. The London Stock Boerse doesn’t quite have the same ring to it.
Choppy oil prices kept markets on edge as Iranian and Saudi oil ministers went tit for tat on the effectiveness of an output freeze amongst OPEC and non-OPEC producing countries.
After surging on Monday, basic resource shares dropped to the bottom of the FTSE 100 as the market temperament shifts from risk on to risk off.
BHP Billiton (L:BLT) shares dropped after the mining company slashed its interim dividend by 75% on Tuesday in response to a gigantic $5.67bn half-year loss. The move follows in the footsteps of other miners which have ditched progressive dividend policies to protect credit ratings while earnings remain low.
Shares of Standard Chartered (L:STAN) crashed after the Asian-focused bank reported a surprise -$2.36bn net loss for 2015 driven by bad loans to slowing Asian economies and the commodities industry.
US
US markets were mixed amidst positive corporate earnings but choppiness in the price of oil saw gains wiped out in early trading.
Clothing retailer Macy’s (N:M) beat low expectations for fourth quarter earnings, surprising markets with a 4.3% decline in same-store sales against expectations of 4.7%. The warm winter has hampered winter clothing sales but a colder January including a blizzard across the East Coast saw a late pickup. Unfortunately it hasn’t been just the weather, an ongoing slowdown in sales has prompted management to slash 4500 jobs and sell real estate.
Home Depot (N:HD) shares got a pop after exceeding estimates as rising home prices as well as job and wage gains prompted an 8.9% gain in US same-store sales.
Today’s results would suggest Americans are choosing to spend their money dressing up their homes instead of themselves.
FX
Funds moved back into FX havens on Tuesday with the Japanese yen, Swiss franc and US dollar all rising as the British pound remained under Brexit-induced pressure. The switch-around in sentiment took place after the People’s Bank of China took markets by surprise by lowering its reference rate for the onshore yuan against the dollar.
The drop in the yuan comes as a bit of a shock after People’s Bank of China Governor Zhou’s comments last weekend had soothed concerns of an intentional depreciation. There was a sense that the PBOC might leave the yuan alone until at least after the G20 meeting this week.
The euro sank as German business confidence fell more than expected, but losses were in line with other major currencies versus the dollar. EUR/USD sits just above the psychological 1.10 level.
Commodities
A return to havens helped trigger demand for gold which traded back above $1220 per oz. Holdings in gold-backed ETFs have seen the biggest two-day jump since 2010 to total a near one year high.
Oil prices turned lower after the Iranian oil minister’s colourful description of the output freeze between Russia and Saudi Arabia as “ridiculous.” Iran and its plans to ramp up output after the lifting of sanctions is proving a thorn in the side of other producing counties which appear to be reaching consensus that production should stay at current levels. Tensions are clearly rising in the cartel as the Saudi oil minister reposted that “not all the countries will freeze. The ones that count will.”
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