Europe
Talk that the Italian banking system could be on the verge of a €15bn bailout from the European Stability Mechanism has pushed equity markets in Europe to their highest levels in several months, with the German DAX hitting its highest levels this year, after breaking above the 10,810 level for the ninth time of asking having seen it cap every single rebound in the aftermath of the June Brexit vote.
It was also a good day yesterday for the FTSE MIB as the index rose above its pre Brexit peaks and June highs, with banks helping driving the gains.
While the reports of a bailout request have been denied the usual rule of thumb when these sorts of reports do the rounds is that there is usually an element of truth to them, even if we don’t know the exact mechanics, and markets are responding to that.
As with most things the devil is likely to be in the detail, and the likely strings that are likely to be attached to any aid request, if and when it comes. It is here that markets could be getting ahead of themselves.
Banks in particular have continued their recent gains with Monte dei Paschi posting the largest gains, along with optimism that the ECB will extend its bond buying program when it meets for the final time this year tomorrow.
This in turn has prompted bond yields to fall back further as money flows back into bond markets.
The tone of tomorrow’s press conference is likely to be as important as the decision given the recent jump in inflation expectations, as Mr Draghi will find it hard to justify an extension to the program if the ECB decides to upgrade its inflation and growth forecasts.
Mining stocks have also been caught up in the positive mood, helped by the continued recovery in iron ore prices which are now trading at 2 year highs above $82 a tonne.
The best performers are Rio Tinto (LON:RIO) which has also been helped by an upgrade from Credit Suisse (SIX:CSGN). The UK banking sector has continued its recent rally with the FTSE350 banking index now trading at over 45% above its post Brexit lows of 2,823 as it moves back into positive territory for the year.
The best performers include Standard Chartered (LON:STAN) and HSBC, with Royal Bank of Scotland (LON:RBS) not too far behind.
On the downside advertising agency shares have taken a nosedive on reports that the US Department of Justice is investigating the price fixing of contracts for business commercials with WPP (LON:WPP) and Publicis shares down on the day.
Shire is also down on the day after being downgraded over concerns about lower returns by UBS.
US
US markets don’t appear to be getting too caught up in the euphoria being seen in European markets today opening slightly lower after last night’s new record on the Russell 2000.
The main focus appears to be on the health care sector after Pfizer (NYSE:PFE) was fined $107m for overcharging the NHS for one of its epilepsy drugs. The UK regulator also ordered the company to lower its prices in a ruling which is likely to resonate quite well in the US given recent high profile incidents of price gouging by other drugs companies.
FX
The pound has come under pressure again today after October industrial production showed a surprise 1.3% decline in October missing expectations of a 0.2% rise. Manufacturing also registered a surprise 0.9% decline with oil output acting as the biggest drag due to an oilfield shutdown in the North Sea due to maintenance work, though this output should bounce back once the field comes back on line.
The Australian dollar has also slipped back a touch after the economy surprisingly contracted in the third quarter, which has raised expectations in some parts that the RBA might cut rates further when it next meets. This would seem unlikely given that the contraction is likely to be temporary, but it has caused some political hysteria given that contractions have been so rare in an economy that hasn’t seen a recession since 1991.
The US dollar continues to show signs that it may be near a short term peak ahead of next week’s highly anticipated US central bank meeting and rate rise.
Commodities
Oil prices have continued to come under pressure looking to post their third successive daily decline, though the declines haven’t come anywhere near close to reversing the gains through the middle of last week. Since the deal was announced production levels for November have come in above expectations from not only OPEC but Russia as well, which does suggest that cartel members may find it difficult to cut deep enough to deter other countries from pumping more to offset any slowdown in the bigger producers.
For further comment from Michael Hewson, please call 0203 003 8905 or 07824 660632
Email: marketcomment@cmcmarkets.com
Follow CMC Markets on Twitter: @cmcmarkets
Follow Michael Hewson (Chief Market Analyst) on Twitter: @mhewson_CMC
CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.