UK and Europe
It was a downbeat finish to a week plagued by the terror attacks in Belgium, falling commodities and lower trading volumes before the Easter break.
Revised expectations over the pace of rate rises in the US and a slump in the price of oil back below $40 per barrel has frightened leading equity benchmarks into a retreat.
There were only a handful of risers on the FTSE 100 in a broad-based sell-off led lower by catalogue retailer Next (LON:NXT), bank and commodity shares. Other retailers joined the drop-off with Marks and Spencer (LON:MKS) and Primark-owner Associated British Foods (LON:ABF) near the bottom of the UK benchmark.
Next shareholders lost their shirt when the company’s stock dropped double digits after its Chief Executive Lord Simon Wolfson offered a stark warning for the year ahead. Lord Wolfson suggested it could be the toughest year since 2008 for Next as consumer spending looks less stable. He even went so far as to say there could be a “cyclical move away from spending on clothing.” According to Lord Wolfson, it looks less likely that UK consumers keep spending, and if they do, it may not be on clothes, which are Next’s bread and butter.
Strength in the dollar is casting a long shadow across markets. Commodities denominated in the greenback are falling, taking oil and basic resource sectors of the stock market down with them.
Standard Chartered (LON:STAN) led a slump in banking stocks after its regional peer ANZ Bank (AX:ANZ) issued a warning over bad loans to the commodity sector. It was the speed of the deterioration in ANZ’s estimates for soured loans that really caught the market off-guard. ANZ said its total charge for bad debts would be A$100m more than estimated in February.
The longer commodities prices remain depressed, the harder it is going to be for firms in the resource sector to pay off their debts. Banks are having to write-down these bad loans and more they have to write-down, the less willing they will be to rollover loans to more credit worthy firms in the sector. It is this breaking point of multiple bankruptcies within the commodities sector that is likely needed for commodity prices to find a meaningful bottom.
US
US stocks dropped in early trading with the Dow falling over 100 points as investors pulled positions before the long Easter weekend amidst renewed uncertainty over US monetary policy and a weaker oil price.
Durable Goods orders and weekly jobless claims data beat expectations, adding to strength of the US dollar and further undermining equity markets.
FX
The US dollar continued its run of good form on Thursday after the Fed’s Bullard reiterated his hawkish stance by suggesting a rate hike is “not far off” adding that he was “reserving judgement” over how to vote in April. A higher close on Thursday would mark the fifth positive finish in a row for the dollar index.
The Fed has seemingly backtracked from the very cautious message put out via its forecasts and the press conference from Fed Chair Janet Yellen. Fed speakers reviving the chance of a rate hike in April have forced traders to quickly cover short-dollar positions.
Still, the dollar index remains below its March 16 peak around 97, made on the day of the March Fed meeting. Another leg lower in DXY appears likely while below 97, especially if some more of this year’s voting members come out in support of the March decision to hold rates steady.
The British pound fell to its lowest versus the euro since December 2014, while the cost of hedging a decline via currency options increased dramatically as Brexit fears jumped. Polls conducted by ICM and ComRes showed a narrowing lead for the “Remain” campaign. UK retail sales fell less than expected in February, taking a bit of sting out of the sterling decline.
Commodities
Oil prices dropped sharply on Thursday, losing value for a third day after a higher than expected build in weekly US inventories saw oil stockpiles hit another record.
Oil has rebounded in part because of a planned producer meeting amongst OPEC and non-OPEC member countries. A freeze has been priced into the market but a cut looks like a long way off. The Russian oil minister has said it is “technically possible” Russia could cut oil output by 5%. That Russia “could” cut output may be stating the obvious but Siberia’s harsh climate does limit how quickly it can be done.
Gold and silver steadied on Thursday but look set for the biggest weekly loss since November.
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