UK And Europe
Global stocks rebounded strongly on Friday, capping a massive two-day about-turn that erased sharp declines early in the week. The rally was aided by a surging oil price and talk of stimulus from both the European Central Bank and the Bank of Japan.
The FTSE 100 has seen its first weekly gain this year. The gain is all the more impressive after Britain’s main stock index fell into bear market territory with a 20% decline to the lowest levels since 2012 on Wednesday.
The stabilisation began mid-week when oil prices rebounded from 12-year lows but strong hints of further monetary stimulus from the ECB has kicked off a full-on relief rally.
The rally in stocks is probably more attuned to the rise in the oil price than the talk of stimulus given the more muted reaction in the euro. If it was Mario Draghi’s promise of “no limit” to ECB money-printing that caused today’s rally in equities, then the euro should have seen a bigger fall. Still, the prospect of further monetary easing has been enough stimulate a recovery in sold off risky assets including oil, which in a positive feedback loop has supported gains in equities.
The general return to risk-on sentiment which saw the Japanese benchmark equity index the Nikkei gain over 5% has flowed into the FTSE 100 where every sector is higher on the day. The rebound in oil prices has seen the oil & gas sector lead the gains while a disappointing December UK retail sales report saw the consumer goods sector underperform.
US
US stocks opened strongly supported by a 3.5% rise in Apple shares (O:AAPL) and the rest of the technology sector. Gains across major indices were slightly more muted than those in Europe given the less directly beneficial role ECB stimulus would have on assets in the US.
Shares of American Express (N:AXP) bucked Friday’s market trend, falling as much as 6% to a new 52-week low after the credit card company reported a 38% decline in Q4 earnings. The risk is that Amex doesn’t change strategy by cutting its rewards and marketing costs, leaving it even more exposed to falling revenues after Costco (O:COST) severed its exclusive deal and switched to Visa (N:V). Credit card companies are overall benefiting from the public’s move away from cash but there is a rising threat from digital payment methods like Apple Pay and Bitcoin.
FX
A large reversal in the dollar index just beneath the psychologically significant 100 level has coincided with some strong rebounds in some of the more oversold currencies. Most notable are the commodity currencies including the Russian ruble, Canadian dollar and Australian dollar, but also the British pound.
The British pound has rallied furiously against the dollar in the past two days, creating a big weekly reversal after reaching fresh 6 ½ year lows. The strong move higher in Sterling came in the face of a weaker than expected -1.0% m/m decline in retail sales for December.
Much stronger than expected retail sales of +1.7% m/m in Canada helped the Canadian dollar make gains alongside the rise in the price of oil. USD/CAD has dived over 500pips in three days to below 1.42.
The euro has been relatively resilient against the dollar but saw substantial losses against the British pound, losing as much as 1.5%, opening up a potential drop back to 0.75, the highs from May and October 2015. Despite weaker than expected services and manufacturing PMI readings for January, EUR/USD is still above 1.08. Draghi’s reputation for delivering what the market wants was damaged in December so if oil prices resume their decline, the rally in stocks could end as quickly as it started.
Commodities
Oil prices spiked by over 6% on Friday, extending the massive short-covering squeeze over two days. The move back above $31 per barrel to the oil price to a seven-day high and, should gains be preserved, have the best week in three months. There hasn’t been a real fundamental catalyst for the rebound in oil; US weekly inventories actually saw a bigger build than expected. You could call it the “IEA low” after the agency made its untimely comment that the oil market would drown in oversupply.
The price of gold fell slightly below $1095, but not massively given the extent of the rally in equities and showed some scope for another push higher should uncertainty return early this coming week ahead of the FOMC meeting.
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