UK & Europe
Stocks in the UK rose on Tuesday with the FTSE 100 reaching over 6400 and its highest since November 5. European shares were more mixed with the German DAX dipping from the 3-month highs reached yesterday below 11,300.
The reason for the pullback in German stocks today can be explained by the precise opposite of what’s supported the market in the past two weeks; euro strength.
The financial sector carried the FTSE 100 higher after all seven banks passed the Bank of England’s stress tests and the financial stability board determined that the financial system has moved out of its phase of heightened risk aversion. Bank stress-tests are part regulatory oversight and part confidence building exercise so the assumption was that all would pass. The icing on the cake was BOE governor Mark Carney saying banks would need to hold Tier 1 equity of 11% of risk-adjusted assets by 2019, less than many already had as of September.
Passing the bank stress tests and the first day on the job for new CEO Jes Stanley helped Barclays (L:BARC) shares rise over 4% to top the FTSE 100. Homebuilders and challenger banks shrugged off the Bank of England’s warning over the buy-to-let market, taking heart from the fact the central bank has decided not to intervene.
A moderate improvement in Chinese manufacturing data supported commodity prices, helping mining to a mixed performance on the UK benchmark, with BHP Billiton (L:BLT) picking up off seven-year low while Anglo American (L:AAL) was lower.
Home Retail (L:HOME) was top riser on the FTSE 250 after a report that the former Garden Centre chief Nicholas Marshall is eyeing a bid for the group’s DIY chain Homebase using private equity. No offer has been made but Mr Marshall outing himself as a possible bidder implies a deal may not be too far away. Profits have been rising under former Tesco (L:TSCO) exec Echo Lu so there’s a feeling that shareholders might get better value if Homebase was stripped away from Argos which last month forced Home Retail into a shock profit warning before the key holiday season.
Aberdeen Asset Management (L:ADN) was a top faller after the Bank of England’s plans for stress tests of asset management firms added to the woes for the fund, which announced a massive 12.5% funds outflow over the past year.
US
US stocks look set for a stronger open at the beginning of December ahead of manufacturing data and a speech from FOMC voting member Charles Evans which could shed some light on the chances of a December rate hike ahead ofFriday’s jobs report.
Automakers including Fiat Chrysler are in focus amidst the release of auto sales data for November that is expected to top 18m car sales in aggregate.
FX
The ‘King Dollar’ trade is getting a bit crowded ahead of the ECB meeting and jobs report that are widely expected to demonstrate the divergence in the path of monetary policy between the two countries. As such the dollar was mostly weaker on Tuesday in a broad-based pullback.
The British pound slipped against the euro but remained positive versus the dollar after factory orders slowed more than expected in November according to the latest Manufacturing PMI reading.
A new record low in German unemployment and an unexpected rebound in German manufacturing underscored strength in the euro which was already gaining off the back of a sell-off in the dollar. Improved economic data including higher German inflation has helped one of the ECB’s preferred inflation measures, the five-year, five year forward break-even rate has risen above 1.8%. The higher inflation expectations are partly reflective of the strong hints of inflationary monetary stimulus in December but do call into question how much the ECB really needs to do.
Despite disappointing trade data at home, the New Zealand dollar was top FX riser, gaining over 1% against the US dollar after well-received Chinese manufacturing data indicated demand for the country’s exports could start to improve.
Commodities
Oil slid for a fourth day before US inventories from the API as supportive comments from Saudi’s oil minister only served to provide a bounce for oil-bears to sell into. Mr al-Naimi said Saudi Arabia will discuss “all issues” at the OPEC meeting on Friday, presumably including cutting output to prevent further declines in the oil price. Still, consensus is that after all the discussions are finished, OPEC will still do nothing.
Improved manufacturing data in China as well as a softer dollar supported precious and industrial metal prices. Copper rallied over 1% on news Chinese smelters will cut output in response to the price touching six-year lows. Chinese copper smelters are following the lead of nickel and zinc markets where smelters have already agreed to lower production next year in order to remove excess supply.
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