UK and Europe
Stocks in Europe flip-flopped on Tuesday with major averages edging back and forth between gains and losses. The chances of a Federal Reserve rate rise in September have diminished to the point of non-existence after Fed governor’s Brainerd’s cautious speech on Monday night. The sudden burst of volatility in the previous two days saw investors pause on Tuesday to decide whether it’s a buying opportunity or a sign of more pain to come.
After a brief spell above, the FTSE 100 dropped back below 6,700.
Energy and mining companies including Royal Dutch Shell (LON:RDSa) and BP (LON:BP) were the biggest drag on the UK stock market following a report from the International Energy Agency suggested the supply glut will continue through the middle of next year. Associated British Foods (LON:ABF) was amongst the top fallers, adding to sharp declines yesterday after poorly-received results.
Carnival (LON:CCL) was top blue-chip riser in signs of accumulation before it reports earnings next week with other travel companies including IAG (LON:ICAG) getting a boost from the IEA’s forecast which indicated a prolonged period of low oil prices. Healthcare companies including Shire PLC (LON:SHP), Hikma Pharmaceuticals (LON:HIK) and GlaxoSmithKline PLC (LON:GSK) were amongst the top risers.
US
Stocks in the US had a difficult start on Tuesday with Dow Jones falling over 200pts. The decline erases about half of the low-to-high gains made on Monday. There is some profit-taking with the massive reversal on Monday looking unsustainable in the short-term.
Shares of Wells Fargo (NYSE:WFC) stabilised after it announced it would stop sales targets for retail bankers following the recent scandal. Separately, one of the executives in charge the department responsible for create the falsified account received a £125m golden handshake.
FX
The British pound was top FX faller following data showing a more modest pace of inflation than expected. Cable dropped below 1.32 after inflation stats failed to reflect the expected feed-through effect from a weaker pound. Consumer price inflation was unchanged and producer prices rose at a much more modest pace than expected.
It would appear that the price pressures from the fall in Sterling may be more of a medium-term phenomenon. Importers of foreign goods and inputs have so far resisted the temptation to push higher prices onto customers. Companies will often use agreed exchange rates or hedge with forward contracts, meaning there is no need to immediately pass on a higher cost of foreign goods. There would also appear to be some selling in GBP/USD ahead of tomorrow’s release of UK unemployment and wage data.
There was general US dollar strength, though most of the gains were versus commodity currencies, reflecting the weakness in the price of oil.
The euro brushed off another slowdown in German investor sentiment. The ZEW survey saw confidence in the current situation drop to 55.1 and economic sentiment remains at a depressed 0.5.
Commodities
Oil prices fell on Tuesday after the International Energy Agency suggested the supply glut will continue through the middle of next year. That’s a setback from the idea the surplus in oil will have been run off by the end of this year. There have been several supply disruptions this year, the latest being in the US following storm Hermine but that’s been offset by higher out from OPEC. OPEC countries, including Iran have been pumping at full tilt and tepid demand from India and China hasn’t matched the supply. More generally, the price of oil remains in a volatile range beneath $50 per barrel with the chance (albeit low) of an output freeze being announced at this month’s OPEC meeting.
The price of gold is on target for its fifth daily decline. Reined in expectations of a Fed rate rise and a sell-off in equities has done little for precious metals markets. Falling prices amid what should be positive news flow could be the precursor to a drop below $1300 per oz for the first time since the Brexit vote.
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