Europe
European markets took their cues from last night’s declines in US markets, sliding lower as investors weighed up the minutes of the latest Fed meeting, and the surprise revelation that balance sheet reduction may start sooner rather than later, as well as comments from Republican Paul Ryan that any plans to implement tax reform could well take a lot longer than originally envisaged.
With a balance sheet of $4.5trn and Fed chief Janet Yellen’s term coming to an end in January next year, the prospect of imminent reductions in the Fed’s balance sheet appears to have shaken up expectations about what to expect from the Fed in the coming months, and what it might mean for the pace of future rate rises.
It’s also important to weigh the effects that House speaker Paul Ryan’s remarks have had, given that an awful lot of recent gains in stock markets have been predicated on a Trump stimulus plan. If healthcare is already problematic, and tax reform is likely to be delayed then the only thing supporting the current rebound will be the US economy at a time when the Fed is on a tightening path. Is that enough to support current valuations? We may be about to find out, though the outcome of the Trump/Xi meeting may also have an effect.
As for today it’s been a mixed session with the FTSE 100 underwater for most of the day while European markets have been slightly more buoyant.
On the downside Pearson (LON:PSON) shares have come under pressure today after a downgrade from Paribas on doubts about the profit sustainability of its education business in the US.
In other news, investors gave a collective “meh” to plans by Unilever (LON:ULVR) to spin off its spreads business, buy back some shares and look to increase its profit margins. The value of the spreads business is estimated to be in the region of €6bn and while profitable, sales have been in decline as a result of changing consumer habits. In light of these changes surely it makes more sense to develop newer products in line with its “sustainable living” corporate culture.
While these plans are no doubt a response to the recent attempt by Kraft Heinz (NASDAQ:KHC) to acquire the business, it’s not immediately apparent why they would make shareholders any more or less likely to consider any future bid attempt later on down the line.
US
US markets opened slightly higher today after last night’s sharp sell-off, with weekly jobless claims dropping sharply from 259k to 234k. This sharp drop does appear to suggest a tightening labour market, but does contrast with yesterday’s bumper ADP numbers, which suggested that there still remains a significant amount of slack in the US labour market.
Apple (NASDAQ:AAPL) is in the news on reports it is being sued by Australian regulators who have accused the company of freezing iPhones whose screens have been fixed by non-Apple approved repairers.
On the retail front Costco (NASDAQ:COST) reported a better than expected increase in monthly same store sales for March.
FX
It’s been a mixed day for the US dollar, gaining against the pound and the Japanese yen but losing ground against the Swiss franc and theNew Zealand dollar.
The euro shrugged off dovish commentary from ECB President Mario Draghi who dialled back from the rather hawkish interpretation of the most recent ECB meeting, by pledging to keep rates low and to keep monetary policy on its current path. His comments on wages would appear to suggest that the ECB will remain in no hurry to move while wage growth remains weak. This isn’t likely to change given the still high levels of unemployment in certain parts of the euro area. It is also clear that the ECB remains divided on the current path with German members extremely uncomfortable with current levels of real rates.
Commodities
Crude oil prices have rebounded from the sharp fall from yesterday’s peaks after the surprise build in US inventories caught oil bulls on the wrong side. US crude oil exports have continued to grow with most heading to Asia, but markets continue to bet on the prospect that the surplus of supply will finally bow to the inevitable and see the effects of the OPEC production freeze deliver a re-balancing of the oil market in favour of demand over supply.
Gold prices continue to butt against the 200 day MA without much in the way of success for now, but dips for now appear to be shallowing, not surprising given current uncertainty on the shape of possible next policy moves by the Fed.
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