Europe
Markets don’t like surprises but had three big ones on Tuesday that sent European shares for a tumble; as China shocked markets by tightening credit conditions by raising collateral standards on loans only weeks after loosening conditions by cutting interest rates. At the same time Greece announced it will bring forward its Presidential election to this month and Tesco announced a big surprise profit warning.
Chinse regulators have made lower-rated bonds ineligible as collateral for loans in an attempt to block the rise of margin trading and short selling. Chinese authorities are engaging in selective tightening and easing within the economy attempting not to reinflate the housing / credit bubble but also support growth in key areas needed to boost domestic consumption. Chinese authorities really are micro-managing the economy now; it’s a big test for the model of a controlled economy, history suggests it’ll fail.
Greek Presidential elections had been planned for two months’ time but were brought forward to address political uncertainties surrounding the rise of the populist anti-austerity Syriza party. Should the Greek Prime Minister’s favoured choice not be chosen for President then that could create a precedent for snap elections and risks the Syriza party coming to power and destabilising the Eurozone.
German trade balance increased following a fall in imports fell. The lower euro is helping demand for German products aboard but sluggish German domestic demand is turning its back on the now relatively expensive imports.
UK markets continued negative momentum from Monday; there was a big fall in industrial production against expectations of a small rise while retail sales were seen higher thanks to Black Friday sales. Mining shares rallied as gold and silver prices broke out but most of the index was lower with Tesco seeing huge losses after a profit warning.
Tesco’s have been cutting prices alongside the other three of the big four supermarkets to compete with discounters Aldi and Lidl. At the same time costs have increased as company has hired more staff and spent money on restructuring its relationships with suppliers after the accounting scandal revealed issues with the timing in which it reported payments and fees.
The profit warning should not be a surprise but and the sheer scale of it as well as it being unscheduled caught investors by surprise; the UK’s number one supermarket cut forecasts by £1bn since August which sent the shares down as much as 16%.
US
US markets traded lower on Tuesday as a culmination of worries have crept into the market, not least of which is the prospect of Fed tightening thanks to the acceleration in job creation seen in last week’s non-farm payrolls report.
The Dow Jones came just shy of 18,000 and then the following Monday saw the biggest sell off since October; with stocks this overextended without a proper pullback selling may lead to more selling.
Fed tightening as well as uncertainty over ECB easing and crashing oil prices are all adding to volatility and investors are exiting risky assets and over-extended rallies.
Apple shares have not recovered the sharp losses from last Monday caused by a broker downgrade to the tech sector as its trial continues over accusations it has monopolised the digital music market.
FX
The dollar yen saw a huge unwinding of its rally higher; the more the rally was overstretched the bigger the correction was going to be.
USD/JPY fell 200 pips today and 350 pips from the high alongside Japanese and global stock markets.
The euro saw some big gains as investors pulled back bets of imminent ECB stimulus after Germany saw a bigger trade surplus.
Commodities
Gold and Silver saw massive safe-haven driven rallies as other commodities including oil prices, natural gas, copper, corn and wheat all rallied in sympathy.
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