Europe
Shares in Europe made back of some of the previous session’s losses on Tuesday after data showing a 14-year low in UK inflation added to the mounting pile of evidence that global stock markets may still have plenty of time left to benefit from zero-bound interest rates.
The headline rate of UK inflation dropped to 0.5% year-on-year in December, the joint lowest on record last seen in the year 2000. Core prices which strip out food and energy rose slightly to 1.3%. The drop in the rate of inflation drastically reduces the chances of seeing any kind of rate-hike in the UK for the whole of 2015.
Governor Carney in an interview with the BBC suggested the lower inflation may indeed mean a longer period of low interest rates but ruled out another bout of QE. This is in contrast to the European Central Bank which given the latest CPI data for Europe slipping into negative has ramped up its rhetoric for its first go at QE in its January 22 meeting.
Oil prices slid sharply in early trading but reversed fortunes mid-session with Brent crude oil finding support just shy of $45 per barrel.
Clearly feeling the benefits of lower prices at the pump and in the supermarkets as well as benefitting from the relative strength of the UK economy over the continent, consumers were out in force during Christmas lifting the sales performance at a number UK retailers.
Shares in Morrisons (LONDON:MRW) rose strongly on the announcement CEO Dalton Phillips is stepping down in March after the announcement of full-year results. Like for like sales fell less than expected and were better than last Christmas but it was Morrisons’ underperformance when compared with Tesco’s, Asda and Sainsbury (LONDON:SBRY) that proved Phillips’ undoing.
Looking through Morrison’s position at the bottom of the top four in sales performance, there is some hope for the supermarket going forward. Morrisons’ smaller footprint and overall size makes it more nimble than the others. Morrisons’ was late to the party with the introduction of its loyalty card, online shopping as well as building convenience stores but the price cuts introduced position it well to build these up substantially in 2015.
Debenhams (LONDON:DEB) shares sold off sharply on Tuesday after the company missed its quarterly earnings expectations. Debenhams did perform better over the Christmas period than the share performance would suggest with a 29% leap in online sales which is considerably better than the profit-warning that was issued on New Year’s Eve last year.
Shares in Asos (LONDON:ASOS) traded strongly as the company left its annual earnings targets unchanged after massive UK sales growth drove performance over the Christmas period. The relative outperformance over online retailer peer Boohoo (LONDON:BOOH) should leave ASOS investors saying woohoo.
US
Markets in the US matched the strength in Europe after aluminium-producer Alcoa Inc (NYSE:AA) beat earnings estimates raising expectations heading into key bank earnings later in the week.
Third quarter earnings did not quite have time to reflect the rally in the US dollar and falling oil prices; the effects should be a bit more pronounced in the fourth quarter.
FX
The US dollar was strong again on Tuesday but did moderate somewhat from the rally seen in the previous session.
The pound fell early on as a result of the drop in inflation but proceeded to rebound close to the lows formed above 1.50 and undo almost all of its daily losses after the Bank of England governor ruled out another round of QE. In an interview with the BBC, Mark Carney suggested that although inflation is lower than Bank expected, there is no need for more monetary stimulus"
Commodities
Gold and Silver continued their run higher on Tuesday. Gold has broken the December 9 peak putting it at its highest level since October on safe-haven demand as well as protection from ECB QE.
Copper dropped over 2.6% to see one of its largest intraday drops since November on ongoing concerns of oversupply.
After having hit $50 per barrel less than a week ago, Brent crude came close to the $45 handle on Tuesday before finding some support. As the price of oil drops, analyst forecasts are lowered to match and then in a negative spiral prices fall towards the new forecasts.
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