UK & Europe
UK and European shares declined to a three-day low in early trading but were well off the lows by Monday afternoon. The FTSE 100 is oscillating around 6300 whilst the German DAX recouped early losses to take it back above 11,100.
European markets are being supported by the prospect of additional central bank stimulus in December. However, stronger than expected business sentiment data out of the Eurozone raises questions about whether it’s necessary for the European Central Bank to ease policy. Inflation maybe lower because of sinking energy prices but economic activity otherwise appears to be slowly improving.
Commodity weakness set the scene for broad weakness on the FTSE 100 with all but two sectors lower. Glencore (L:GLEN) and copper-miner Antofagasta (L:ANTO) were top fallers.
Tesco (L:TSCO) was propping up the UK benchmark on news Harris & Hoole the coffee chain it part-owns will tap the supermarket for £6m in further funding over the next year to help cover financial obligations after annual losses doubled. It seems likely this will be the last bailout H&H will get from Tesco. The supermarket sold off its profitable South Korean unit to focus on its core UK grocer business so it’s unlikely its ownership of an unprofitable coffee-chain will stand the test of time.
Plans for government defence spending to rise by £12bn sent defence contractors Rolls Royce (L:RR) and BAE Systems (L:BAES) to the top of the FTSE 100. Shares of IAG (L:ICAG) sagged by over 1% after the airline said it had been approached by rival airlines for takeovers.
A top mid-cap riser was Argos-owner Home Retail on speculation over a possible takeover. The retailers plummeting share price following a profit-warning ahead of Christmas has apparently caught the eye of private equity investors. Argos is struggling to fend off online competition and earnings look like suffering as a result. A private equity sale makes sense because stores would probably get sold off to help pay for debt used in the buyout. The potential for growth could be that remaining stores, if used effectively give Argos an edge over online competition with click-and-collect.
US
US markets opened unchanged, recovering from early losses in futures markets as Pfizer confirmed it would buy Allergan for $160bn and the price of oil turned positve for the day.
Both shares of Allergan and Pfizer traded lower on the news the deal was confirmed but equities have benefitted in the broader sense because it’s a positive that deals of this size can get done.
FX
There was very little happening in the FX markets on Monday. Most major FX pairs were dead in the water with only the Australian and New Zealand dollar showing weakness alongside commodity prices.
The euro was unmoved against the dollar but marginally higher against the pound after German and Eurozone manufacturing PMIs came in ahead of expectations.
Commodities
Commodities as a group tanked on Monday. The move lower was in part a late reaction to the announcement of the emergency Fed meeting which strengthened the US Dollar on Friday. The meeting is to review advance and discount rates. A hike in any of the rates the Fed has influence over would be one of the strongest indications yet that the Fed plans on raising rates in December.
Commodities of course still have their own supply and demand misbalance.
It was a bit of a roller coaster for crude oil. Starting the day down over 2%, crude rallied back over 2% before settling back again of its highs. The initial sell-off was in line with the rest of the commodity sector as troubled oil-producing nation Venezuela touted the possibility of $20 oil. The sharp recovery came off the back of another promise from Saudi Arabia that it will work with OPEC to stabilize oil markets. The Saudi comments largely echo what oil minister Ali al-Naimi said last week, but with the OPEC meeting in two weeks’ time, oil traders are getting twitchy around $40per barrel in WTI.
Copper has seen heavy falls on Monday, down as much as 2% in typically less volatile Asian hours. Copper continues to respond to comments from Chilean miners Codelco and Antofagasta favouring cost-cuts over reducing output.
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