Equities
It was a mixed European session for equities on Tuesday. Most equity benchmarks gained ground, though were off their highs in the afternoon whilst the FTSE 100 nursed losses in the region of 1%.
Italy’s FTSE MIB Index was a notable outperformer thanks to a rebound in banking shares in which Banca Monte dei Paschi (MI:BMPS) rose double digits. Reports that the European Central Bank stands ready to temporarily increase its purchase of Italian government bonds after the referendum has eased concerns of a systemic failure. The ECB buying bonds would dim the impact of rising borrowing costs should investors flee Italian assets if the referendum gets a ‘No’ vote. The ECB buying extra bonds would be a physical and psychological backstop to an Italian bank failure. At the same time it would help smooth out any bond market distress.
UK financial stocks were mostly unable to participate in a rally in their European banking counterparts as investors remained cautious ahead of the results of Bank of England stress tests.
Some heebie-jeebies before Wednesday’s OPEC meeting dragged down the FTSE’s commodity-sensitive sectors. Shares of Chilean miner Antofagasta (LON:ANTO) were lower by over 3% while BP (LON:BP) and Royal Dutch Shell (LON:RDSa) shares were down over 2%.
A rise in mortgage approvals helped send homebuilders towards the top of the UK Stock market with Barratt Developments (LON:BDEV) shares amongst the biggest risers. The bounce in mortgage approvals since the summer lows, like other areas of the UK economy, continues to dumbfound the more doom-laden market participants. Still, the share price gains could be short-lived. Homebuilders, like Sterling could come in for some punishment as markets look ahead to next week’s high court case appeal.
Stocks in the US were back to charting a higher course again on Tuesday with the Dow Jones comfortably clearing the 19,000 level. With even the OECD endorsing Donald Trump’s infrastructure spending plans, the pullback in US shares is likely more as a result of its old age than concern over his staff appointments.
FX
The US dollar was mixed yesterday, down against European currencies but up against commodity currencies after data showed US GDP grew at 3.2% y/y in Q3, up from 2.9% in the prior reading and faster than the 3.0% expected. A softer than expected rise in prices of 1.4% core PCE and the GDP price index at 1.4% y/y took away from the headline gains. The US economy has had a stop-start year, but Q3 data has shown signs of an upswing, adding fuel to the belief that US rates could be in for a steeper rise next year.
The multi-year lows near the 1.05 mark in EUR/USD kept euro bears at bay on Tuesday after GDP data from France and inflation data from Germany met expectations. The euro remains a focal point for investors worried about a possible season of political discontent in Europe, starting with the Italian referendum this Sunday.
A rise in mortgage approvals helped the British pound continue to receive some Brexit-respite before the upcoming high court-case appeal. GBP/USD topped 1.25.
Commodities
OPEC jitters weighed on oil prices gain on Tuesday. Brent crude fell over 3% by mid-afternoon to near $46.50 per barrel. Pulling out of meetings with non-OPEC meetings yesterday morning and on Monday is likely all designed by Saudi Arabia to put pressure on the other producers. It’s all in the OPEC member’s interest to get the biggest overall output cut while minimising their country’s share of the burden to cut. Saudi oil minister Al-Falih’s suggestion on Sunday that prices would hold up in 2017 without OPEC intervention thanks to higher demand doesn’t quite stack up with forecasts from the IEA. The IEA sees the market being over-supplied for a fourth year in 2017, taking prices lower, should OPEC not reach agreement.
Metals prices were led lower by copper which extended losses after failing to extend beyond its November 11th peak on Monday.
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