UK and Europe
It was a directionless start to the new week for European markets as investors digested more hawkish Fed speak, a drop in the price of oil, improved French and German economic data and another mega-merger facing regulatory headwinds.
The FTSE 100 flat-lined amid the latest dire economic forecasts for the UK from the Treasury was there to be a Brexit. Most sectors on the FTSE were higher but losses in the heavily-weighted mining and oil and gas shares brought the average down.
Royal Mail (LON:RMG) was top riser after broker a broker upgrade and newspaper tip following last week’s earnings. Inmarsat (LON:ISA) dropped over 4% ahead of its likely relegation from the FTSE 100 next month whilst M&S (LON:MKS) shares were sluggish ahead of results on Tuesday.
UK-listed airlines EasyJet (LON:EZJ) and IAG (LON:ICAG) shares rose in response to Irish competitor Ryanair (LON:RYA) missing expectations for earnings and forecasts. The idea that you can have too much of a good thing seems to extend to the airlines and low fuel prices. Increased competition for low prices is forcing airlines into a price war and has already threatened capacity expansion plans. At the same time, recent terrorist events and a weaker pound are a risk to demand from UK passengers.
Shares of German pharmaceutical giant Bayer (DE:BAYGN) dipper by over 5% after it made an official offer for US agro-chemical firm Monsanto (NYSE:MON). The biggest source of disruption is likely from regulators as well as Bayer’s own conservative German shareholders. The current Washington administration has been pretty hostile to big M&A of late and judging on the rhetoric from the Trump and Clinton campaigns, there’s little chance of that abating. The main competition concern in the US would be over the merged company’s unrivalled control over farmer supply chains from Bayer’s weed killers to Monsanto’s GM seeds.
US
US stocks opened higher, building on last week’s resilient response to the increased odds of US rate-rise this summer. The Fed’s Bullard and Williams reiterated the new more hawkish stance of the Fed, though data showing a bigger than expected fall in manufacturing activity didn’t support their calls.
This week will be a key test for the market’s ability to withstand the Fed’s message that US rates could be about to rise again. We’re still stuck in a feedback loop where the Fed is watching markets and markets are watching the Fed. If the loop continues, it would suggest downside risk to equities, which are at highs of the year, from a more hawkish Fed.
FX
The was a general tendency for dollar-strength across G10 currencies on Monday, with only the Japanese yen countering the market reposition for a potential summer rate hike from the Fed. The yen gained in spite of weak Japanese trade data.
The Bank of Japan’s wings got clipped at last week’s G7 when US treasury secretary Jack Lew suggested the recent moves in the yen were orderly. If traders thought 105 in USD/JPY might be a level at which the Bank of Japan could intervene, that may have dropped in the last week down to 100 or below.
The euro struggled to make headway amidst dollar and yen strength despite better than expected PMI data for May. French manufacturing saw a smaller than expected rise to 48.3 whilst Germany saw a bigger pickup than expected to 52.4 according to preliminary PMIs for May. Services expanded at a much faster pace of 51.8 and 55.2 for France and Germany respectively. The French service sector is regaining the momentum that was picking up before the Brussels attacks.
The British pound gave up early gains from the Treasury’s forecast of a one-year recession for Britain if it were to leave the European Union. Anybody who’s followed the Treasury’s forecasts will know there is a wide margin for error but the doom-laden headlines will be one more reason to spook the public out of voting to leave.
Commodities
Oil traders continue to grapple with a stronger US dollar and the easing of supply disruptions in Canada and Nigeria. Iran putting out the specific figure of 2.2 million barrels per day for its targeted exports this summer was enough to give sellers the edge.
The price of gold made a fresh three week low on Monday. The dollar strength poses a significant risk to gold’s upside but if that same dollar strength translates to a bearish turn in equities, gold could get bid as a haven.
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