UK and Europe
The winning streak that began late last week and followed through to the first half of this week has been snapped. US oil back below $30 per barrel juxtaposed against a higher reading on US inflation have added complexity to the next move in US interest rates. The correlation between equities and oil remains enduringly high.
The FTSE 100 and other major stock markets having stalled after three to four days of large gains. In the context of a very weak market, investors are naturally a little nervous that we’re on the cusp of another panicked sell-off
There are signs of a pullback from current levels in UK stocks with considerable uncertainty surrounding PM David Cameron’s apparent efforts to defend the interests of the UK and the City of London during Brexit negotiations.
On a positive note, the FTSE 350 mining index finished its fifth week higher with volatile Anglo American (L:AAL) shares one of the outperformers. Mining shares are still wallowing in a hangover from years of excessive production to meet the demands of booming industrial production and construction in China. But in the last couple of quarters, companies have started talking about closing down production, asset sales and dividend cuts to match a new reality in which China's growth is slowing as it transitions to consumption-based economy.
Financial shares were some of the worst performers with shares of RBS (L:RBS) bottom of the FTSE 100. Coca Cola HBC (L:CCH) was a top riser of the UK benchmark after reporting better than expected full-year results.
US
US markets saw a weaker open, having already snapped a three-day winning streak as inflation data added to the case for a US rate hike in March.
FX
Stronger than expected US inflation data and hawkish comments from the Fed’s Loretta Mester spurred a rally in the US dollar with only the Japanese yen outperforming on safe-haven flows as equities dropped back. US CPI was unchanged m/m but a jump in core inflation to 2.2% y/y, its highest since 2012 caught markets off-guard.
The British pound fell despite higher UK retail sales and a the highest budget surplous in eight years as PM David Cameron’s Brexit talks dictate the state of play. UK retail sales rose by 2.3% m/m in January, massively exceeding expectations of a 0.8% after a -1.0% drop in December.
The pound is likely to remain depressed until there is some movement in Brexit negotiations; for the good or the bad. A weak or no deal with Europe would add to uncertainty over the referendum result and could see GBP/USD get another jolt lower to fresh six-year lows beneath 1.41.
Safe haven flows generally supported the euro despite the governor of the Bank of Italy Ignazio Visco saying he sees “no reason the ECB could not take bad loans as collateral,” adding to expectations of more stimulus at the March meeting.
Commodities
Another build in US weekly inventories has renewed supply-glut fears over the last two trading days. The situation in energy markets looks more positive after Russia and leading OPEC nation Saudi Arabia agreed to a production freeze and Iran supported the decision. Arguably the agreement has been undermined with both Russian and Saudi oil ministers saying afterwards that they do not plan an output cut.
Gold continues to look well bid after seeing its sixth close above $1200 per oz since its massive surge on February 11. Gold appears to have turned a corner but its biggest risk is that today’s stronger US inflation data starts to get corroborated by other parts of the economy, leading the market to shift its recent belief that the Fed will delay its next rate rise.
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