Equities
European stocks started the day in positive spirits, supported by a rise in multinational company shares which stand to benefit from a weakening euro. As the day pushed on, the bullish spirit waned. European investors see the record highs in US stocks but are fretting over the implications of a sharp slide in commodity and bond prices.
Trump-watching is still the pastime of choice. Donald Trump is attempting the tricky balance of appeasing rebellious voters and his Republican colleagues in congress. Donald Trump’s staff appointments will signpost whether the notable sector rotation that began in the wake of the election result actually makes sense.
The move into financials and basic materials is part of a reflation trade that started before the election, which has accelerated since. Banks also stand to benefit from lighter touch regulation, possibly involving the dismantling of Dodd-Frank.
A return to New Deal-esque infrastructure spending is probably one of the areas Donald Trump will struggle the most to get through the fiscally-conservative Republican congress. That makes the rise in industrial and construction stocks the most vulnerable.
Well-received corporate updates from Taylor Wimpey (LON:TW), William Hill (LON:WMH) and DCC (LON:DCC) built on top of gains in financial and basic resource shares to put the FTSE 100 in positive territory.
Tesco (LON:TSCO) was a top-riser on Monday after a broker upgrade in signs the supermarket’s shares can overcome the problems at Tesco Bank.
Britain’s listed energy companies including SSE (LON:SSE) and Severn Trent (LON:SVT) and Centrica (LON:CNA) were propping up the UK equity benchmark after a report in The Sun newspaper that they are making much better profit margins than reported. Average energy bill prices are set based on the average cost of provision. The charge is that standard-rate customers are paying much more than the average. Energy Secretary Greg Clark will meet representatives from the Big Six over the claims. Should the claims prove true, it could see public pressure to drop energy prices, striking down the enlarged profit margins.
US stocks were positive on Monday with the Russel 2000 joining the Dow Jones in making a record high. There was a clear divergence in the tech-heavy Nasdaq where (NASDAQ:FANG) stocks came under renewed selling pressure.
Tech stocks like Facebook (NASDAQ:FB) and Netflix (NASDAQ:NFLX) won’t get any government contracts in a rise in infrastructure spending but Chinese expansion plans are at risk by possible trade tariffs.
FX
The US dollar continued its strong performance since the US election. The US dollar index struck 100 for the first time since February 2015. Investors are gearing up for a December rate hike in the US, now priced as a 90% likelihood according to Fed funds futures. The promise of fiscal spending by the incoming president should also be inflationary, potentially steepening the pace of rate rises in 2017.
Slumping Treasury bond prices (higher yields) was the bigger influence on the Japanese yen than surprisingly good economic growth data for the third quarter from Japan. USD/JPY hit 108, a five-month high.
10yr gilt yields nearing a six-month high, in a relatively steeper move than German bunds, expanding the yield differential, pushed the British pound higher against the euro. EUR/GBP slipped below 0.85 for the first time since late September.
The euro has fallen out of bed in the last week. Concern that the populism that gripped elections in the UK and the US will soon shift to Europe contrasted with an imminent US rate rise has seen EUR/USD slump towards 1.07 and nine-month lows.
Commodities
Commodities came under pressure on Monday with oil prices soft, gold and silver seeing heavy declines and copper coming off earlier highs.
The price of gold fell over 1% while silver dropped over 3%. Investors dumped precious metals in anticipation of a higher interest rate environment.
Copper prices rose above 2% in early trading but gave up over half the gains by the afternoon. Copper bulls have been unnerved by the sharp reversal on Friday that unwound an intraday gain of over 7%.
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