UK and Europe
Stocks across Europe were flat on Wednesday. The strong rally that started the week has run out of steam as expectations of stimulus measures were tempered by weak trade data from China, a pullback in oil prices and disappointment that Japan will not implement “helicopter money.”
An afternoon pop helped the FTSE 100 turned early losses into gains but the index was essentially directionless ahead of a possible cut to interest rates at Thursday’s Bank of England meeting. A leap in Burberry shares after quarterly sales fell less than expected was offset by weakness in homebuilding shares after Barratt Developments (LON:BDEV) warned Brexit could impact its investment plans.
After 87th months of interest rates at 0.5%, the Bank of England meetings had become somewhat of a non-event. The fact that this could all be set to change at Thursday’s meeting has given the market pause for thought.
Shares of Barratt Developments were amongst the biggest fallers on the FTSE 100 as the homebuilder warned it would be “reassessing land approvals” following the EU referendum. The results for Barratt were solid, as expected but the outlook for homebuilders is clearly foggier in the wake of the Brexit vote.
Poundland (LON:PLND) was the standout mid cap outperformer following its acquisition by South Africa’s Steinhoff (DE:SNHG) for 220p a share. The drop in the pound against the South African rand has made the opportunity to buy up Poundland too good to pass by for Steinhoff. The South African company already owed nearly a quarter of outstanding Poundland shares so it makes sense to put in a firm offer with the exchange rate offering a healthy discount. Given the current economic uncertainty for the UK economy, a 39% premium will satisfy Poundland shareholders.
There was a quiet applause from investors after Deutsche Boerse (DE:DB1Gn) shareholders approved the stock exchange’s merger with the LSE (LON:LSE), having lowered the threshold to 50% earlier this week. The deal will still need European regulatory approval. Getting regulators on board could be a tall order since it would involve passing control of Europe’s most important stock exchange to a company headquartered outside of the EU.
US
US stocks opened slightly higher ahead of a number of key earnings reports and the release of the Fed’s Beige book, taking the Dow Jones to a new record high for a second day. US treasuries also rebounded from the biggest two-day loss since December.
Shares of Tesla (NASDAQ:TSLA) dropped in response to news it will sell a cheaper version of its Model X crossover vehicle as investors remain concerned about the fatal car crash of one of its customers whilst in autopilot mode.
FX
Currency markets lost their recent buzz on Wednesday. Sterling was flat ahead of tomorrow’s Bank of England rate decision and the yen strengthened moderately at the disappointment over no helicopter money.
Japan’s Chief Cabinet Secretary Yoshihide Suga denied reports that Prime Minister Shinzo Abe is considering “helicopter money” as a possible policy measure. Despite all the evidence that quantitative easing and negative rates haven’t solved Japan’s deflation problem, Abe looks set to double down with his failed Abenomics program. If new monetary stimulus is not through “Helicopter money,” more QE looks in the offering given the poor reception to negative interest rates.
The Canadian dollar strengthened after the Bank of Canada stayed put on interest rates at today’s central bank policy meeting.
Commodities
The price of oil dropped on Wednesday in a natural pullback from strong gains the previous day hampered by a smaller than expected draw in US inventories. The surprise build in API inventories reported on Tuesday has woken traders up to the idea of a more builds over the summer as new oil rigs come back online. OPEC’s rosy prediction of rising oil demand in 2017 has not been backed up by today’s Chinese trade data which fell more than expected and doesn’t imply improving global growth.
After a sharp two-day decline, gold prices rebounded on Wednesday in sync with a weaker dollar and stronger yen.
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