Europe
Stock markets in Europe are a sea of red this afternoon as investors are taking their ques from the US and Asia. It is a broad decline on London as dealers are cashing in their positions, and locking in profits. The large sell-off in the US last night got traders nervous, and now the fear has spread.
On the London market the financial sector is the worst performer. Banks can under additional pressure after the Financial Conduct Authority (FCA) urged lenders to increase checks on interest-only mortgages. Borrowing levels are high and there has been talk of a property bubble for some time now, and the prospect of another housing crash is weighing on Barclays (LON:BARC), Lloyds (LON:LLOY), RBS (LON:RBS) and HSBC (LON:HSBA).
The slump in commodity markets has driven mining and energy stocks lower. We are seeing a decline in metals and oil which has prompted investors to sell Rio Tinto (LON:RIO), Anglo American (LON:AAL) and BP (LON:BP).
To make matters worse for the European equity markets, the continued weakness in the US dollar had pushed up the pound and the euro – which have hurt the FTSE 100, DAX and CAC 40.
US
Profit taking is rife on Wall Street as the hefty declines last night has spooked traders and now the selling has intensified. Investors have been concerned about the US stock market being overbought for some time, and now it seems the jitters are setting in.
The chatter is the Federal Reserve will raise growth and inflation expectations, and that is pushing up US government bond yields, which are now at a rate that is attractive to investors. The jump from stocks to bonds could continue until we hear from the US central bank tomorrow.
The US dollar index has fallen to a three year low, and that is likely to lead to inflation as imports are tipped to become more expensive. The perception that inflation will rise is fuelling the rise in US government bond yields.
Healthcare stocks like MetLife (NYSE:MET) and UnitedHealth (NYSE:UNH) are feeling the pressure after Amazon (NASDAQ:AMZN), JPMorgan (SIX:JPM) and Berkshire Hathaway (NYSE:BRKa) announced their plans to enter into a partnership to go into the healthcare business. It is believed the new venture would focus on more efficient I.T. solutions for the industry. The healthcare industry has come under attack from different aspects of the political and financial world, as the bills for patients can be costly. The hope of a new player, with collectively a great track record, entering the sector could drive down profit margins for existing companies.
FX
EUR/USD is taking advantage of the weak US dollar and has resumed the upward move that it has been in since November. The single currency did well against the dollar even though some major economic announcements from the currency bloc were mediocre. In the fourth-quarter the eurozone grew by 2.6% on a yearly basis, which was slightly below the expectations of 2.7%. German inflation slipped to 1.6% from 1.7%, which is out of kilter with the broadly robust German economic indicators.
GBP/USD is also being assisted by the drop in the greenback. Sterling was already in recovery mode against the US dollar when the UK revealed that consumer lending jumped to £1.52 billion from £1.49 billion in November. Mortgage approvals dipped to 61,303 from 65,130, but the total amount of money lent on mortgages increased.
Commodities
Gold has edged up as the softer greenback is making it more attractive, and the flight-to-quality factor is helping too. Gold is still in the same positive trend it has been in since December, but seeing as tomorrow is the Federal Reserve update, traders may not be too keen to stay long going into the meeting.
WTI and Brent Crude continue to be under pressure from profit taking. Dealers are keen to trim their long positions in oil so concerns about US supply ticking up are still doing the rounds. When recent three year high in the price of oil has prompted increasing output from shale producers in the US.
Tomorrow the energy information administration (EIA) will release the inventory data, and traders will also be keeping an eye on the US production level.
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