UK and Europe
European shares were choppy on Tuesday as mixed corporate results were overrun by jitters ahead of central bank meetings, a slide in oil prices and ongoing geopolitical tensions after hostages were taken at a church in Normandy. A sharp rise in the yen, typically perceived as a safe haven, saw traders pull out of riskier assets.
The FTSE 100 was higher by around 0.2% by later afternoon, recovering some of Monday’s modest losses, led by gains in Provident Financial (LON:PFG), which reported a 49% profit gain and hiked its dividend.
Former government monopolies top-and-tailed Britain’s benchmark stock index, with BT (LON:BT) shares on the rise after Ofcom ruled it should run Openreach, whilst BP (LON:BP) shares dropped following quarterly results.
Shares of RBS (LON:RBS) dropped over 1% after the bank threatened to start offering negative interest rates on the cash of Royal Bank of Scotland and Natwest business customers. The threat of negative rates is likely a hollow one for now, since no bank wants to be the first mover and risk losing business to competitors. Still, it’s a shot across the bow for the Bank of England’s MPC which is considering a cut to interest rates next week.
Shares of BP dropped as much as 2.5% after the oil major reported a steeper-than-expected fall in profits in the second quarter. Underlying replacement cost profit was $720m, up from $532m in the previous quarter but well below the $1.3m for Q2 2015.
The negative reaction in the share price could have been worse when put into the context of the 10% oil price decline in July, but BP finally drawing a line under its Deepwater Horizon oil spill liabilities was a source of relief. BP’s downstream business continues to be the main breadwinner, but a warning that refining margins would stay under pressure worried investors this couldn’t be maintained. The upstream business did return to profitability since oil prices rebounded from lows earlier this year.
US
US opened flat on Tuesday, the first day of the two-day Federal Reserve meeting. Corporate earnings were missed, with McDonald’s (NYSE:MCD) and 3M (NYSE:MMM) missing whilst Dupont (NYSE:DD) and Caterpillar (NYSE:CAT) beat expectations. Apple (NASDAQ:AAPL) reports its Q2 earnings after the market close.
FX
The British pound dropped before rebounding off its lows after Bank of England rate-setter Martin Weale said “immediate measures may be needed” to combat a slowdown in the economy following a drop in business sentiment data. Mr Weale’s comments were a surprise coming off his suggestion a week ago that there was “no need for rate cut.” The perception that Mr Weale has developed a recent penchant for flip-flopping may be why the decline in sterling wasn’t sustained.
The Japanese yen rallied on reports Japan will double its fiscal stimulus program by 6 trillion yen, double the current program but well beneath previous talk of 20 trillion. Disappointment over the size of fiscal stimulus is spilling over into expectations for more monetary stimulus this week. The unimpressive fiscal stimulus expansion could be opening the door for helicopter money, but more likely means Japan still doesn’t have the political will for more Abenomics.
Commodities
After two days of losses, gold picked up some gains on Tuesday. The precious metal is hovering above $1300 per oz before the Fed. Gold is down 4% since it topped above $1380 on July 11.
The price of oil has come under pressure in the last few days, falling out of the bottom of its old trading range. Brent below $45 and WTI below $43 are possible trigger points for momentum short-sellers.
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