UK and Europe
Equities rebounded from multi-month lows on Tuesday after weak Chinese economic data raised the prospect of further government stimulus.
Multiple equity benchmarks had run into do-or-die price levels on Monday where further losses would have taken them below the lows seen in August and September and potentially a much larger correction. For now, markets have chosen to stay alive. The Chinese data wasn’t great but wasn’t bad enough to send stock markets over the edge.
While inflation remains low, missed expectations raise the possibility of further rate cuts from the PBOC. If the data is to be believed, China’s economy more or less met policymakers' targets with growth of 6.9% y/y. Meeting the economic growth target for 2015 goes someway to offset concerns that Chinese authorities’ mismanagement of the stock market would spill over into their management of the economy in 2016.
The IMF matched the positive sentiment towards China in yesterday’s market action by keeping growth estimates for the country unchanged at 6.3% y/y in 2016 while downgrading estimates for other economies including that of the US.
Basic resource and financial companies led a jump across every sector of the FTSE 100. Positive earnings from US banks helped improve sentiment amongst European banks after a heavy sell-off on Friday. The appointment of John Foley as new boss for the UK and Europe at Prudential (L:PRU) helped a rise in the company’s shares that saw Legal & General and Admiral rise in sympathy. Defensive areas like tobacco, defence and utilities underperformed amidst generally risk-on sentiment.
US
A little time-off has done US markets some good. Both the Dow Jones and S&P 500 were boosted by the global reaction to the China data and better than expected earnings from top US banks. Morgan Stanley (N:MS) posted earnings of 39c against a 33c consensus estimate while Bank of America (N:BAC) posted earnings of 28c a share versus 26c estimates.
FX
The FX market was again divided between commodity and non-commodity currencies. The dollar saw small gains against most counterparts barring the oil and metals-sensitive CAD, AUD and NZD.
The British pound has become a falling knife nobody’s willing to catch. Sterling has seen its worst two-month drop since the financial crisis as it gave up early gains after a dovish speech from BOE Governor Carney gave absolutely no signal that a rate rise is coming any time soon. The pound had earlier gained against the US dollar and euro after UK core inflation that strips out the effect of oil prices rose more than expected to 1.4% y/y. GBP/USD fell below 1.42 for the first time since March 2009 while EUR/GBP pushed through 0.77.
Commodities
Gold did a big about turn on Tuesday, reversing an almost $10 early gain and turning negative as equity markets responded well to Chinese economic data, prompting flows out of havens and into risky assets.
Oil as well as copper prices got some respite with the possibility of higher commodity demand if Chinese authorities add stimulus this year in response to the weaker growth outlook.
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