Equities
US election anxiety, slumping oil prices and some disappointing corporate updates gave markets a clear risk-off tone to end the week.
The FTSE 100 dropped below 6700 to a seven-week low as the British pound climbed a wall of Brexit-worry to a one month high. The timing of, the ‘hardness’ of and whether Britain’s exit from the European Union even happens hangs in the balance after the high court decision.
Basic Materials, the highest beta sector of the index led the declines. Healthcare stocks, which have proven the most sensitive to the Presidential election, were under pressure with Hikma Pharmaceuticals (LON:HIK) dropping over 6%.
IAG (LON:ICAG) shares dipped after the owner of BA, Aer Lingus and Iberia downgraded its 2016 profit forecast for the second time since the EU referendum vote. IAG reports in euros so it doesn’t feel the benefit of a weaker pound via the translation of its Aer Lingus and Iberia sales. It is on the wrong end of the sterling drop, forecasting lower BA passenger numbers from the weaker pound hitting UK tourism abroad. The timing of the Aer Lingus acquisition couldn’t have been much worse as the falling pound adds to the threat of terror attacks in Europe on passenger numbers.
A rise in UK bond yields coupled with a slide in the shares of Commerzbank (DE:CBKG) after the German lender swung to a third quarter loss hurt British banking shares including RBS (LON:RBS) which fell over 3.5%
The only riser of note on the main index was Paddy Power Betfair (LON:PPB) after it raised its profit forecast on the back of higher than expected revenues. The combination of the Paddy Power and Betfair gambling assets is now starting to bear fruit. An increase in sports stakes during Euro 2016 football and the benefits of a lower pound on foreign earnings have added some sugar on top.
US equity benchmarks fluctuated between gains and losses on Friday. The latest polls showing a narrow lead for Hillary Clinton offered US stocks a glimmer of hope after an eight-day drubbing. However, US markets still closed lower.
FX
The US dollar had a jumpy response to a mostly solid non-farm payrolls report. The headline number slightly missed expectations with the US having created 161k jobs in October but the other components were all positive. The report has not materially moved the dial on the market expectation of a December rate-rise.
A bigger than expected rise in average earnings growth, a big revision higher to September’s job growth and a 4.9% unemployment rate saw the US dollar initially rise, only to unwind the gains after 10 minutes.
In the current politically-driven market environment, the US unemployment report was a side-show. The data-driven bounce in the dollar simply provided an opportunity to sell more dollars ahead of the US election.
The British pound crossed back above 1.25 to the dollar for the first time since the flash crash. There has been almost no retracement to the strong rally yesterday. The high court ruling has seen the market price in the improved chance of a “soft Brexit” and the remote chance of ‘Bremain’.
Commodities
The price of oil extended its decline on Friday after it was reported Saudi Arabia has threatened to raise oil output to bring prices down if Iran does not agree to limit its supply. The news took Brent crude back down to $45 per barrel for its ninth daily decline in the last 10 days. The two rival nations reaching agreement always seemed like a tall order. The announcement of an intention to cut output had been taken at face value on the belief that Saudi Arabia had caved in to Iran’s demand to be exempt, it appears it hasn’t.
The price of gold was the mirror image on the US dollar surrounding non-farm payrolls data. The gold dip following the US economic data was readily bought up by fearful investors ahead of polling day.
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