UK & Europe
Stocks in Europe were mostly higher on Thursday as markets digested insurance company earnings, a renewed slide in oil prices and a race to the bottom in government bond yields.
The FTSE 100 manage to erase early losses but underperformed equity benchmarks in Germany and France as post-Brexit concerns highlighted risks for the domestic economy. A weak property market and a widening pensions funding gap have hit homebuilder and financial shares.
Falling government yields is a problem for the investment returns needed for the insurance business model to function, leading to heightened scrutiny of earnings from Swiss insurer Zurich and FTSE 100-listed Old mutual.
Zurich has attributed the 22% decline in first-half profits to restructuring costs. Investors have bought into the belief that second-quarter earnings falling less than expected are a sign that new CEO Mario Greco’s turnaround plan is taking shape.
Old Mutual shares dipped despite a 1.4% rise in first-half profit. The insurer’s warning that its main markets of the UK, US and South Africa face a challenging second half is raising question marks over the planned split into different businesses.
An uncertain outlook for the UK property market, blocked redemptions at Aviva’s property fund and a broker downgrade to Travis Perkins (LON:TPK) have put shares of Berkeley Group, which went ex-dividend and Persimmon (LON:PSN) under pressure. A poll of surveyors from Rics has seen reported house price increases falling to the lowest in 3 years, though optimism for higher prices in the next 12 months has improved.
US
US stocks rose in early trading in a rebound from yesterday’s oil-induced sell-off. Retailers were leading the charge with Macy’s, Kohls and Nordstrom were topping the S&P 500 after well-received quarterly earnings.
With Macy’s and Kohl’s up double-digits, investors are obviously willing to reward retailers that outperform. Most of the competition is seeing declining sales amidst online competition and a sluggish economy.
FX
The New Zealand dollar was top FX riser on Thursday following the Reserve Bank of New Zealand’s decision to cut interest rates by 25bps in line with expectations. NZD/USD went higher after selling off before the news as some expected a cut of 50bps. In fact, the cut by the RBNZ can be taken as bearish for the US dollar. Yet another major central bank has lined up to take monetary policy in the opposite direction to the Federal Reserve, making it harder for Yellen and co. to row against the tide.
The US dollar made some modest gains against European currencies, helped by an unexpected drop in jobless claims to 266k, down from 267k last week. Commodity currencies firmed alongside the New Zealand dollar as oil prices pulled back some of the losses from Wednesday.
Commodities
Today’s IEA report in essence confirmed the fears that drove oil prices back in a bear market this month. Demand has slowed and the temporary outages in Canada and Nigeria were more than offset by rising production from Saudi Arabia and Iran. The weakened demand outlook suggested by the IEA will certainly be used by the oil minister of Venezuela, Qatar and Ecuador to push for a production freeze at next month’s unofficial meet up of producing countries. Still, Russia ruling out any freeze and the fight more market share between Iran and Saudi Arabia makes any action unlikely.
The price of gold rose for a 3rd day after holding support at $1330 per oz, matching a decline in the dollar index and a pullback in equities. The Word Gold Council said gold demand from investors was the highest on record in the first quarter, 16% higher than Q1 2009 during the financial crisis. Brexit uncertainty and central banks with a pedal to the metal in looser monetary policy has been enough to drive gold prices higher. The rise is however at odds with the lack-of-fear factor that has seen a corresponding rise in risky assets including the stock market.
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