Europe
European equity markets have continued to look on the soft side despite a weaker euro raising the question as to what the next catalyst for a move higher would be.
Last week we saw the German DAX briefly push to its highest levels since August 2015, but it was unable to hold on to those gains despite evidence of continued improvements in the most recent German economic data.
Amongst the decliners German car makers have come under pressure after US President elect Donald Trump fired a broadside at BMW threatening the company with hefty tariff penalties on any cars it builds in Mexico and attempts to import into the US. Porsche, Daimler and VW have also slipped back.
More broadly, rising tensions between ECB policymakers about the duration of the current easy monetary policy is inviting some debate as to the longevity of the current plan against a backdrop of rising inflationary pressure.
While Europe’s broader markets have slipped back the FTSE100 has once again outperformed, making another new record high, as a result of a lower pound, though it does appear to be showing some evidence of running out of steam, having risen for a record 14 days in succession, so while we’ve seen another record high, another record close may be a step too far as sterling recovers from its lows.
The best performers have been the usual suspects in the basic resource sector, like Anglo American (LON:AAL), Rio Tinto (LON:RIO) and Randgold Resources (LON:RRS), as well as those companies who have a significant exposure to overseas markets, like Burberry.
On the downside financials have underperformed with Royal Bank of Scotland (LON:RBS) lower after being removed from Goldman Sachs (NYSE:GS) pan-Europe buy list, on the back of concerns about future provisions as well as lower earnings forecasts. Barclays (LON:BARC) bank shares have also slipped back.
Reports that house price growth in London slowed in 2016, appears to have weighed on UK house builders today, though the overnight decline in sterling and elevated concerns about Brexit, may have also played a part with Taylor Wimpey (LON:TW) and Barratt Developments (LON:BDEV) giving back some of last week’s gains.
US
US markets are closed for Martin Luther King day.
FX
The main action today has been on the currency market with the pound sliding to its lowest levels since the October flash crash, below 1.2000 against the US dollar, as markets price in further uncertainty ahead of tomorrows scheduled speech by UK Prime Minister Theresa May about how the UK intends to conduct its Brexit negotiations.
If anything today’s decline has been quite modest, and the pound has managed to spend most of the day above the 1.2000 level, suggesting that markets reluctant to pile on extra short positions ahead of tomorrow’s speech. The pounds weakness has also been exacerbated by a rebound in the US dollar which has rallied from last week’s one month low on its trade weighted index.
While it is notable that the pound has revisited its October lows against the US dollar, against the euro it hasn’t come anywhere near close to them, reflecting perhaps the increased risks to Europe from upcoming political uncertainty in the coming months.
The pound may well have also been helped by a further U-turn by the IMF as they upgraded their growth forecasts for the UK economy for 2017 from 1.1% to 1.5%.
The Japanese yen has been the only currency to outperform the greenback pushing higher on the back of slightly higher levels of risk aversion.
Commodities
Oil prices have post another negative day, this time on reports that Saudi Arabia didn’t see the need to extend its current supply cuts beyond the middle of this year. That and a firmer US dollar have weighed on the upside, despite a drop in the US rig count on Friday.
The cautious buying of gold that has been taking place over the last three weeks has continued today as uncertainty over US foreign policy towards China, and other political risk has seen the yellow metal hit its highest levels since November last year.
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