UK & Europe
In what has become a period of prolonged low volatility, Friday proved somewhat of an outlier, with some relatively big moves lower across both stock and bond markets.
Notably the German 10 year bund yield struck 0% after months of trading in negative territory. The jolt across bond markets began when ECB president Mario Draghi said the governing council did not discuss extending its asset purchase program. Understandably, bondholders got a little nervous about holding onto a negative-yielding asset which could fall in price if there’s no central banking buying alongside them.
As markets hear talk of the Bank of Japan studying options to tighten policy by the back door and reflect on Thursday’s non-committal ECB policy meeting, there’s a growing sense that central banks have run into a brick wall.
Current levels of earnings and economic growth are not enough to support current valuations so any small sign that central banks are stepping back from stimulus is a big deal for markets.
A reduction in Germany’s trade surplus has added to concerns of a slowdown in the continent’s biggest engine of growth. Greece’s future was again hanging in the balance as ministers met in Bratislava to discuss the handout of its next bailout tranche. North Korea’s claim that it tested a mini nuclear warhead didn’t help sentiment.
The only positive sector on the FTSE 100 was the banking sector, which stands to benefit from an end to the low-interest rate environment. Industrials including Ashtead Group (LON:AHT) and Bunzl (LON:BNZL) led the decliners.
Shares of JD Wetherspoon were near the top of the FTSE 250 index after the pub company reported record sales and profit before tax. If there were a desire to pick holes in generally strong results it would be the fall in operating margins and losses incurred from closing underperforming pubs. New minimum wage laws have contributed to an increase in staff costs.
US
US stock markets fell over 1% in early trading as global risk sentiment deteriorated amid concerns central banks would not add to stimulus.
Shares of MasterCard were lower on the news it is being sued £14bn in Britain’s biggest damages claim. Shares of American supermarket Kroger (NYSE:KR) dropped after the company missed quarterly sales expectations.
FX
The greenback got a boost from a number of Fed speakers on Friday talking up the chance of a rate hike. Boston Fed president Eric Rosengren said “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”
The Japanese yen fell on news the Bank of Japan is considering taking interest rates further into the negative but losses were capped by talk of effort to steepen the yield curve. USD/JPY touched 103 before pulling back. The Bank of Japan wants to try and address a flattening yield curve which is hurting bank profits and is often the precursor to a recession. The aim would be to get long-term yields higher while depressing short-term yields in order to maintain stimulus.
The British pound gained against the euro after the release of contrasting trade data from the UK and Germany. The UK trade deficit narrowed to -£11.8bn in July, helped by a drop in the value of Sterling which makes British goods relatively more attractive abroad and imports less attractive at home. The data contrasts with the drop in Germany’s surplus where a less favourable exchange rate with the UK will have exacerbated the slowdown in demand for German goods from Asia.
After giving up its gains on Thursday, the euro continued its decent on Friday with EUR/USD dipping below 1.12. Mario Draghi played down his concern for the banking sector at his press conference, but it is clearly a consideration for the ECB. When the ECB cut the deposit rate to -0.4% in March, it simultaneously attempted to ease the impact on banks with cheap short-term loans.
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