Yesterday, higher oil prices, surging commodity stocks, and bounce in banking shares prompted an extension of the rally that began February 12 when Deutsche Bank (DE:DBKGn) repurchased its own bonds and JP Morgan chief Jamie Dimon bought $26m worth of his own company’s stock.
On Tuesday, European markets look to pullback from those gains alongside a dip in the price of oil as China stocks fall and mining giant BHP Billiton (L:BLT) slashes its dividend.
In the last seven trading days, banking shares have largely stabilised amidst mixed earnings, with HSBC disappointing on Monday and results from Standard Chartered (L:STAN) today and Lloyds (L:LLOY) and RBS (L:RBS) in the pipeline this week.
A jump in the price of oil towards the peaks reached earlier in February has rekindled hopes that a bottom could finally be in after a 20-month rout.
Resource and energy shares leading the rally calls into question its sustainability. If it’s the same stocks that are leading the market higher a month after those same stocks led the market lower, it suggests simply a sentiment switch from risk-off to risk-on.
BHP Billiton has slashed its interim dividend by 75% on Tuesday, following in the footsteps of other miners who have ditched progressive dividend policies to protect credit ratings while earnings remain low.
Mining giant Anglo American (L:AAL) is one of the best performing stocks this year, and it also happens to have one of the highest registered short-interest. Highly shorted stocks rallying points to a short-covering rally.
The close relationship between equities and oil this year is one of the chicken and the egg. Economists have been scratching their heads, because a lower oil price should be an economic stimulus and be positive for stocks. What is actually happening is that oil and share prices are not moving to economics, but simply represent markets where risk is either on or off. This rapid switching between risk on and off (high volatility) all comes back to the attempted withdrawal of unprecedented monetary stimulus from the Federal Reserve.
Economics did play a part in the US dollar falling from its highs on Monday, when manufacturing PMI data from Markit showed “the worst business conditions for over three years.”
The weak US data allowed the British pound to finish well off its near seven-year low against the dollar. London Mayor Boris Johnson’s allegiance to the Britain “out” of Europe campaign has probably been over-played. Whether the fakeout beneath the January low marks the bottom in what is likely to be a volatile Sterling in the lead-up to the referendum could rest with BOE Governor Mark Carney. Mr Carney testifies alongside other prominent BOE members at the inflation hearings today.
IFO data reported today is expected to show a softening of German business sentiment in February.
EUR/USD – The euro has dropped back to the 1.10 level with a close below a ‘tweezer bottom’ on the daily candlestick chart. 1.0980 was resistance from December 22 to January 28 and could act as support on any further decline.
GBP/USD – Sterling dropped like a rock to fresh 6 ½ year lows on Monday before reversing off the lows. The fakeout to new lows could be the first step towards a double bottom at 1.41.
EUR/GBP – The euro-pound eased off its highs as the British pound recovered. The number of long wicks between 0.78 and 0.79 suggest selling interest at the former multi-year support.
USD/JPY – Dollar-yen has slipped back beneath 112 and is attempting a rebound before the February 11 low. If the rebound does happen, it could target the former 1-year support at 116.
Equity market calls
FTSE100: to open 40 points lower at 5,997
DAX: to open 58 points lower at 9,515
CAC40: to open 30 points lower at 4,268
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