UK & Europe
Volatile Brent Oil prices kept tetchy markets on edge on Monday.
UK and European stock indices gave up early gains on the back of positive Chinese economic data and a win for moderates in French regional elections when the price of crude oil saw another steep drop.
The FTSE 100 was unable to hold an early move above 6000 and fell back towards Friday’s lows. The German DAX reached over 10,440 but collapsed back down to just shy of 10,200.
Absent the occasional piece of M&A news that drives a stock price higher, it appears no long term positions are being put on before the Fed meeting. That just leaves stock indices subject to very volatile commodity prices.
Markets are gearing up for a Fed rate hike but plunging oil prices could indicate slowing demand at just the wrong time. There are already signs of distress. Credit spreads in the US have widened in anticipation of corporate bond defaults when highly levered companies can’t afford payments at higher rates.
On the topic of highly levered companies. Glencore (L:GLEN) was propping up the UK benchmark, falling over 7% as investors continue to view it as one of the most exposed to the downturn in commodity prices despite recent talk of asset sales.
Old Mutual and Mondi (L:MNDI) regained some of last week’s losses with the former tasking top-spot on the FTSE 100 on the news South Africa has switched its finance minister again, this time to the more market-friendly Pravin Gordhan.
US
US stocks followed European markets lower on Monday, tracking the price of oil ahead of Wednesday’s Fed meeting. Broker price target cuts sent shares of Apple (O:AAPL) lower by as much as 2% and GoPro Inc (O:GPRO)plummeting by over 13%.
FX
The Dollarwas mostly unchanged versus major currencies on Monday. The greenback gained against the British pound and the euro but lost out to commodity currencies including The New Zealand dollar.
The South African rand was top FX riser after South African President Zuma announced the country would have its third finance minister inside a week. David van Rooyen will now be replaced by ex-finance minister Pravin Gordhan. Gordhan is an old-hand and much more of a proven entity than van Rooyen.
Despite the positive Chinese economic data, the yuan continued last week’s decline with the PBOC setting Monday’s fix at the lowest since 2011. The multi-year lows in the yuan follow Friday’s announcement from a branch of the PBOC announcing a trade-weighted yuan index, composing of 13 different currencies. The introduction of the index right before the Fed is set to raise rates appears to part of a plan to de-couple the yuan from the dollar in case of large appreciation to save China’s exports.
The British pound fell against the dollar and the euro after Bank of England deputy governor Minouche Shafik said she would wait for a more sustained increase in wages before voting for a rate hike. Ms Shafik cited the strength in sterling as exerting significant downward pressure on inflation.
The euro was higher versus the dollar and the pound after ECB president Mario Draghi, in a speech on Monday, signalled he was content that the latest policy moves would be enough to bring Eurozone inflation back to target.
Commodities
Sentiment is so bearish towards oil that it doesn’t take much to send WTI fall beneath $35 to near eleven year lows and today it was the urn of Iran’s deputy oil minister. Amir Hossein Zamaninia said there was “absolutely no chance” of Iran delaying oil shipments because of low prices. Crude oil exports from Iran are on course to hit a six-month high as the country ramps up production and buyers step in ahead of the removal of economic sanctions.
Gold prices were volatile, moving between gains and losses with a mid-point of around $1070 per oz. The Fed meeting on Wednesday will likely be the trigger for whether gold can build on its gains early in the month.
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