UK & Europe
Investors appear non-too convinced by government efforts to stabilise stocks in China. In a choppy day of trading UK and European shares managed to edge out gains, retracing some of Monday’s sharp decline as the outlook for China’s economy and stock market remained uncertain.
Chinese authorities tackled investor concern on multiple fronts. The PBOC added money market liquidity through reverse repos, state-backed funds bought equities and the ban on institutional selling was extended beyond this week’s deadline.
It’s an unstable situation when local investors are selling to a government buyer, it can only last so long. The intervention has served to prevent another circuit-breaker day but is unlikely to aid confidence amongst the largely ‘mon n pop’ Chinese investor base who got a nasty reminder that another August-style drop could be around the corner.
It was a volatile time on the FTSE 100 for UK retailers with plenty of attention on the sector after Christmas and during January sales.
Shares of Sainsbury (L:SBRY) were volatile while Home Retail Group (L:HOME) shares soared 30% after it was reported the supermarket made a rejected £1bn offer to buy the Argos and Homebase-owner. After climbing to a two-month high, Sainsbury’s shares sunk 5% as investors fretted over the risk posed by such a deal.
The idea is to bring together two well-known British retailing names to sell a wide range of products through multiple channels. It’s surprising that Sainsbury’s would take such a bold move in a difficult environment for supermarketsbut the cross-selling opportunities including the use of click and collect is a compelling motive for the combination. Sainsbury’s is under pressure from discounters Aldi and Lidl while the Argos model is struggling to fight off online competition. The size and variety of the combined company could enable both companies to better compete through cost-savings and convenience for customers. The bigger risk is perhaps that the merged Sainsbury’s-Argos-Homebase company is too big to steer and loses out to more nimble competitors.
Next (L:NXT) was a top faller on the UK benchmark after an unexpected drop in sales over the key Christmas period. The catalogue retailer went to great lengths to blame the warm winter weather for the weak sales using a graph correlating the two but did admit to stock problems in its online division. The drop in sales partly reflects Next’s determination not to join the flood of discounts before Christmas, which did at least help maintain profit margins.
Shares of Volkswagen (DE:VOWG_p) were top fallers on the German DAX on news the US justice department, on behalf of the Environmental Protection Agency (EPA) will sue the carmaker for cheating emissions standards.
US
Healthcare stocks led US stocks in a fairly flat line session after the worst opening day for eight years as biotech Gilead Sciences (O:GILD) rose after a new drug was found safe in trials. Still, price action was unconvincing as a number of prominent tech stocks including Apple (O:AAPL) and Netflix (O:NFLX) fell over 1%.
FX
The US Dollar was mostly higher on Tuesday as investors sought the safety of US assets. The dollar index reached its highest level since the ECB easing disappointment on December 3 as investors price in what could be a hawkish set of minutes from the FOMC on Wednesday.
The Japanese yen was the haven of choice in FX, hitting an eight month high versus the euro and gaining slightly versus the dollar.
The British pound gained against the euro after robust construction data but sank further against the dollar, marking a fresh eight-month low for the third day running.
Commodities
Oil prices have brushed past rising tensions in the Middle East and slumped gain on Tuesday as Saudi Arabia raised its February prices to Asia but lowered them for North West Europe ahead of API weekly inventory data.
The uncertainty surrounding China’s economy, stock market and the extent of government intervention, alongside an increasingly divided Middle East is sending investors to havens include gold and silver.
Industrial metals retraced some of Monday’s losses on Tuesday as Chinese equities recovered from Monday’s sell-off. Still the price of copper remained below $2.10 per lb inside a tight consolidation that’s been in place since the end of November.
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