UK & Europe
UK and European shares advanced for a second day as global markets attempt to undo some of the damage wreaked by the tumultuous first week’s trading. A higher Chinese yuan was the main source of comfort behind the rise in stocks. The price of oil was less supportive as it jumped back and forth between gains and losses near 12-year lows after a series of investment banks lowered forecasts to as low as $10 per barrel.
The German DAX rallied back over the 10,000 level in a palpable sense of relief from the yuan devaluation onslaught. The PBOC fixed the onshore yuan rate higher but traders took the bounce as an opportunity to sell the offshore rate forcing suspected state-backed bank buying to bring the onshore-offshore spread back into line. The unintended consequence was another giant spike in offshore borrowing rates. The risk is that more Chinese state intervention means more market fires get started than put out.
Retailers topped the FTSE 100 with Tesco (L:TSCO), Sainsbury’s, Burberry, Dixons Carphone (L:DC) and M&S all on the rise thanks to positive holiday sales results from Morrisons and Debenhams.
US
US stocks opened higher on Tuesday following mixed earnings from Alcoa (N:AA) reported overnight as global sentiment improved following apparent Chinese state intervention in currency and stock markets.
The tech sector, which saw some of the sharpest falls in last week’s sell-off was leading the charge with shares of Apple (O:AAPL) re-taking $100 alongside healthcare as Shire signed its deal with Baxalta.
FX
The US dollar was mixed on Tuesday, essentially unchanged versus the euro and the yen with most of the FX market volatility concentrated in the volatile offshore yuan.
Sterling fell to a new five-and-a-half year low against the dollar after data showed ongoing weakness in the UK’s manufacturing sector. UK industrial production unexpectedly declined by -0.7% m/m in December when flat growth was expected after a rise of just 0.1% the previous month. The weak data sent GBP/USD down to 1.44 and EUR/GBP back above 0.75.
Commodities
Crude oil saw a technical rebound just shy of $30 per barrel in both Brent and WTI contracts, erasing earlier losses after a number of investment banks cut forecasts to as low as $10 per barrel.
The forecast cuts come off the back of concerns surrounding the demand for oil from China as its economy slows coupled with a risk that a rise in the dollar will further devalue dollar-denominated commodities. Oil markets have become increasingly volatile. Traders are still pushing oil prices around by as much as $3 within a matter of days just like when the price was a $100 per barrel but with prices now at $30 per barrel, what was a 3% move has become a 10% rollercoaster.
The price of gold is dropping as fast as it rose last week as relative calm in equity markets reduces safe-haven demand. If demand for gold doesn’t reappear before $1070 per oz, around the July 2015 low then there’s an increased risk of fresh five-year lows.
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