UK and Europe
European markets were mixed on Friday following an underwhelming easing of monetary policy from the Bank of Japan. Italy’s FTSE MIB was Europe’s top performing stock index with its troubled banking sector leading the gains on news Monte dei Paschi would accept a private rescue plan.
A consortium of banks led by JP Morgan and Mediobanca have come up with a €5bn recapitalisation plan ahead of stress test results that might have forced Monte dei Paschi into an unwanted “bail in” of its bondholders and depositors.
The EURO STOXX 600 Banks index rose 2.5% on Friday, erasing a loss of equal size on Thursday in a sign of heightened volatility before ECB stress test results are released at 9pm BST. Japanese interest rates not being cut further into negative territory was an additional source of relief for the sector where profitability has been crushed by the low rate environment
The BOJ kept interest rates steady despite a renewed political mandate for Abenomics and data showing worse-than-expected deflation in Japan. It is one of the clearest indications yet that central banks have reached the lower limit on interest rates. That, on the face of it, is a good thing for bank profitability.
Well-received results from Barclays (LON:BARC) bank and British Airways owner IAG (LON:ICAG) helped balance the FTSE 100 against a drag from commodity-related stocks as oil prices slid for a seventh day.
Barclays shares jumped almost double digits at its peak on Friday after the bank reported a bigger than expected drop in profits but offered positive guidance on the sale of non-core assets this year. Fixed income trading performance was more in line with the improvements seen at US peers rather than the tail off seen in Europe.
The effect of London’s cooling property market was clear for all to see in the latest results from estate agent Foxtons (LON:FOXT). The company blamed uncertainty surrounding the EU referendum for a 42% slump in profits. Unfortunately for Foxtons, higher taxes on foreigners and second-home owners is probably the reason, meaning profits aren’t about to improve anytime soon.
US
US stocks edged out small gains as corporate earnings offset some of the concern over sliding oil prices and limited easing from the Bank of Japan. US stock markets have dismissed the BOJ rumbling the liquidity party for now with quarterly earnings taking centre stage.
The Nasdaq 100 benefited from Amazon (NASDAQ:AMZN) and Google-parent Alphabet (NASDAQ:GOOGL) beating quarterly earnings expectations, adding to the run of good form amongst the top US tech companies. Amazon’s push into services including its cloud services and Prime membership is seeing profits growth stating to match the sales growth and Google has joined Facebook (NASDAQ:FB) in the domination of mobile advertising.
FX
The Japanese yen rallied against every major currency following the BOJ announcement, taking USD/JPY down over 200 pips to beneath 103. Further declines for another test of the key 100 level appear likely. It was a missed opportunity for the BOJ to have done more at its first meeting after Prime Minister Abe was re-elected with a new mandate to expand Abenomics.
The US dollar extended a run of weakness that has seen the dollar index decline four out of the past five days after second quarter US GDP growth missed estimates by a wide margin.
There was limited reaction in the euro after data showed inflation in the Eurozone rose modestly to 0.2% whilst GDP halved to 0.3%, matching estimates. Unemployment remains stubbornly higher at 10.1%.
Commodities
The price of oil slid for a seventh day in what has become a huge unwind of the uptrend that began in February. WTI crude oil contracts entered bear market territory with a 20% slide from the peak reached in June. The oil market began to top out as the surplous seen in crude oil shifted to a persistent surplous in refined products. The supply outages in Canada in Nigeria proved to be the last gasp of a faltering bull market in oil. US production continues to fall but at a modest pace and with no production cap in place, OPEC nations are pumping at full tilt.
The price of gold came just shy of $1350 per oz after US GDP data came well short and put another spanner in the works of a September rate hike. The price jump extended the strong gains made on Wednesday after the less-hawkish-than-expected statement from the Federal Reserve. For now, gold remains range bound but the much overdue correction in equities could be the necessary trigger to get it to new one-year highs.
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