Europe
European markets look set to finish the week on the back foot as the air starts to slowly come out of the recent rally.
The German DAX has continued to pull back after hitting its highest levels since April 2015 earlier this week. The FTSE100 has also come under pressure, hitting a two week low as a number of earnings reports disappointed.
After spending the last few days climbing a wall of expectation, are investors starting to lose their footing, on heightened political concerns and a reassessment of the reflation trade?
With gold also at four month highs it would appear that caution is back at the forefront today, as German 2 year prices hit new record highs and yields go to an incomprehensible -0.95%. With German inflation currently at 2%, that equates to a real yield of -3%. German savers will love that!
A mixed week of banking results came to a conclusion today with the full year results from Royal Bank of Scotland (LON:RBS) and Standard Chartered (LON:STAN), and there wasn’t too much to cheer about in today’s numbers.
Nine years and counting as Royal Bank of Scotland announced its ninth successive annual loss in a row. The loss wasn’t a surprise given that the bank announced it would set aside over £3bn in January in respect of its outstanding mortgage backed securities probe which it has yet to settle with the US Department of Justice.
The loss this year was just shy of £7bn and brings the total losses up to £58bn since the bank was bailed out back in 2008. £5.9bn of the loss was in relation to further provisions in relation to conduct charges, while the bank also set aside another £201m in respect of PPI in Q4.
Asia focussed bank Standard Chartered also disappointed investors when it reported annual operating profits of $1.09bn below expectations, of $1.42bn. Including one off items this profit turned into a loss of $478m, an improvement on last year’s loss, but still the second annual loss in succession. New CEO Bill Winters is in the middle of a significant restructuring plan having raised $5.1bn of new capital from shareholders in his first year in charge, and suspended the dividend.
The problems for publishing company Pearson (LON:PSON) were no secret to investors given recent profit warnings but today’s announcement of its biggest ever loss of £2.6bn was still a solemn reminder of the extent of the company’s problems. Even without the impairments profits were still down 21% and revenues were down 8%, while debt levels rose to just over £1bn, an increase of 66%.
On the plus side British Airways owner International Consolidated Airlines Group (LON:ICAG) moved higher after announcing a share buyback, and an improvement in Q4 profits.
US
US markets look set to open lower after last night’s comments from US Treasury Secretary Steve Mnuchin tempered expectations about an imminent fiscal and tax plan. This change of tone makes next week’s speech by US President Donald Trump much more significant in the context of what we can expect to see in the next few months, with any disappointment likely to exacerbate some of the doubts that appear to be creeping in about the new administrations ability to deliver on their promises.
That’s always the trouble with raising expectations to unrealistic levels; the readjustment process can be quite sudden when the sugar rush wears off.
FX
The US dollar has struggled to hold onto its gains this week, as a decline in yields weighs on the greenback. Doubts about the timing of the next Fed rate rise are starting to see some slippage away from March. The pound has continued to build on its recent resilience, as it pushes up towards the upper end of its recent ranges, buoyed to a certain extent by economic data, which while showing some weakness, does have the benefit of a fairly stable political environment, compared to events in Europe.
Commodities
Gold prices have moved higher again today, above $1,250 an ounce as falling yields in the US, and political risk in Europe drives risk aversion flows into the safe haven asset. It would appear that the receding prospects of an imminent large scale fiscal stimulus after yesterday’s comments from US Treasury Secretary Steve Mnuchin appears to have prompted some short term US dollar weakness.
Crude oil prices continue to struggle near their recent range highs as US crude inventories showed another rise and inventories rose to new record highs. While OPEC cuts came in at an 86% compliance new data appears to show that rising US exports are filling the gap.
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