Europe
It was a sea of red for European equities on Wednesday even with a cautious green light for QE from the European Court of Justice after the World Bank slashed its world and European growth outlook despite the potential benefits from falling Oil prices.
The World Bank in its half-yearly outlook slashed its global growth forecasts with drastic cuts to expected growth within Europe and Russia. Nobody will disagree with the WB’s assessment that the world is overly reliant on US growth and that it would be preferable to have several engines firing at once.
The World Bank forecasted lower oil prices could add 0.5% to growth in the long run but was less confident on the effect it would have in the short term. The biggest threat was listed as a hike to US interest rates which could be especially detrimental to emerging markets that may have to follow suit with their own rate hikes to stem capital flows.
The European Court of Justice in an unbinding ruling advised that the Outright Monetary Transactions (or OMT) program is “in principle” in line with the EU treaty. The argument of opponents to the program is that OMT breaks the EU treaty since it allows the ECB to fund national governments by buying their debt.
The ECJ appears to have given the political cover needed for the ECB to go ahead with some additional form of easing at its next meeting, possibly in the form of quantitative easing. The use of the word proportionate suggests that there may be conditions that may impact the potential scale of the program. Either way, it doesn’t disguise the German constitutional court ruling that went the other way and the distrust in the efficacy of QE within the Bundesbank.
The rout in oil and copper prices sank the heavily commodity-weighted UK indices as mining and oil and gas shares propped up the bottom.
Burberry Group (LONDON:BRBY) shares were trading lower after its recent trading statement in which it reported a 14% rise in revenues year-over-year didn’t prove enough to undo general risk-off sentiment in UK markets.
Tesco was topping the FTSE 100 after a brief mention from Bill Ackman in a TV interview that he was considering a stake in the company. While Ackman did say he decided against the stake, the fact that a large fund like his is taking a look at Tesco suggests others probably are too.
US
It was a rocky start for US markets after retail sales fell more than expected in December despite expectations that the drop in oil prices would prompt a surge in spending.
Retail sales in the US appear to be being driven more by falling wages rather than the drop in petrol prices.
Bank earnings this week didn’t get off to the greatest start after JP Morgan missed fourth quarter estimates and got hit with another $1.1bn in legal charges.
FX
The US dollar turned lower on Wednesday, not helped by the big drop-off in retail sales which raised doubts over the sustainability of the third quarter growth in the light of the global slowdown.
Recent safe-haven buying while stocks have been falling has seen USD/JPY extend its recent declines to 400 pips since hitting 120 almost a week ago.
The massively overbought USD/NOK declined over 1% as oil prices saw a late recovery on dollar weakness.
After dropping below its 1999 launch value following the ECJ decision EUR/USD rallied strongly after the US retail sales data creating a possible bear trap as traders short the market are forced to cover.
Commodities
The World Bank downgrade and collapsing industrial metal prices such as Copper just act to confirm global growth fears that plagued markets in 2014 and are continuing to do so in the New Year.
Declining oil and copper prices reflect in part oversupply but also slower demand particularly from the likes of China, the world’s biggest buyer of commodities.
Oil and copper not only have their own particular supply/demand issues but are being pressured by a rallying US dollar in which they are denominated. The US dollar index is currently sitting at nine-year highs.
US Natural gas prices extended by over 5% today as prices failed to fall through $2.80 MMBtu the low formed on January 2. This adds to the bullish momentum seen from the large gap higher on January 5.
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