UK & Europe
Another drop in the value of Chinese shares coupled with volatile oil prices are keeping markets on edge. UK and European had earlier looked through the 5% decline in the Shanghai Composite, instead focusing on the slightly higher fix for the yuan by the PBOC. With the yuan stable, equities took their direction from a volatile oil price.
Equity benchmarks in Europe struggled to make headway in either direction with the negative force of a drop in the value of Chinese shares offset by stability in the yuan exchange rate.
The pause after a rough first week shows Investors stepping back to reassess whether last week’s declines are justified. So far in January, the yuan continued to drop, Chinese manufacturing continued to be weak and the US continued to see flat wage growth. None of this is new.
The FTSE 100 was trading in and out of break-even for the day around 5900. Markets were more resilient in Europe but the German DAX remained below 10,000.
Sainsbury's (L:SBRY) shares were amongst top risers ahead of a possible renewed bid for Argos-owner (L:ARGR) Home Retail Group (L:HOME) and its Christmas sales data which are expected to see it perform the best amongst the big four supermarkets. Shares of both Sainsbury’s and Tesco (L:TSCO) brushed off rival Asda (N:WMT) stepping up the price war with another £500m investment into price cuts.
Shares of BG Group (L:BG) were amongst the top fallers on the FTSE 100 after it was revealed Standard Life (L:SL), a large shareholder opposes its takeover by Royal Dutch Shell (L:RDSa). A big short squeeze in Anglo American (L:AAL) took shares from a fresh low to top of the UK benchmark.
US
US stocks matched the positive sentiment in Europe, brushing off another slide in the value of Chinese shares with a positive open.
The PBOC have kept the yuan peg against the dollar basically fixed for the past two days. Should the devaluation of the yuan slowdown, US investors may turn inward towards fourth quarter earnings season, which kicked off yesterday with former Dow bellwether Alcoa (N:AA) reporting after the closing bell.
FX
Absent any major market-moving data, the US dollar was mixed on Monday, gaining against the euro and yen but losing out to the British pound and commodity currencies including the Aussie dollar.
The pound fell to a fresh five-and-a-half year low versus the dollar and an eleven-month low versus the euro on Monday ahead of the interest rate decision and minutes from the Bank of England this week. The decline took GBP/USD to 1.45 where it found bidders to take it higher off round-number support.
The Bank of England have surprised to the dovish side in recent commentaries and markets are pricing in similar rhetoric in minutes released on Thursday. There is certainly no pressure from an inflation perspective for the BOE to get more hawkish at this stage but a lot of the reason for the low inflation is because of pound-strength and oil price weakness. If sterling maintains its current weakness and the initial oil price decline from the summer of 2014 to early 2015 comes out of the annualised inflation numbers, the BOE may have to swiftly change course.
Commodities
Oil dropped again on Monday, falling as much as 3% during the Asian session before paring only some of its losses as another investment bank called for the price to drop to $20 per barrel.
Improved sentiment in equity markets saw the price of gold lose some of its lustre of a safe-haven with the price dipping below $1100 per oz. for a second day running.
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